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Sunday, May 26, 2024

Bank Check

The worst seems to be over for banks but they’re not out of the woods yet, according to bankers surveyed by the Business Journal.

Problem loans have been identified and dealt with by most banks. Many have boosted reserves by raising cash from investors or selling off assets.

That’s made banks a lot healthier than a year ago.

But they still face a tough economy that’s made lending riskier and harder to come by. They also face heightened scrutiny from regulators and the commercial real estate lending mess remains unsettled with loans coming due in the next few years.

The Business Journal’s Chris Casacchia queried a handful of bankers to get their thoughts on where banks stand now. He asked them this question: Is the worst over for banks and thrifts in terms of troubled loans and having adequate capital reserves?

Here are their responses.

JP Gough
Chief Executive
Orange County Business Bank

I would say, yes, the worst is over.

Banks already were slowing down in their lending three years ago, so problem loans have pretty much shown up and been identified by now.

In this current Wall Street crisis (unlike the crisis of 1989 to 1992), regular banks were much more heavily capitalized, so more of them withstood this traumatic turn of events—even though it was more severe, or at least that is the public’s perception.

The Federal Deposit Insurance Corp. estimated more failures among banks than have actually occurred.

The fact that bigger ones failed this time simply highlights the fact that the big banks operate on lower capital levels than the small banks. Had the bigger banks not been operating on such thin capital levels, the government would never have thought of intervening.

We’re seeing some economic activity starting to pick up, but certain sectors, such as real estate, are going to remain in the doldrums for quite some time.

I do not see development lending picking up for many years. Banks are going to be wary of lending on developments of any kind. So developers are going to need to find private sources of money for their projects.

Where banks might lend, the formula will be based on actual costs not estimated value at finish. And the percentage of the project cost that the bank will lend (the loan-to-value) will be at or less than 50% as the norm.

Gray: “difficult for some banks to be profitable”

Glenn E. Gray
Chief Executive
Sunwest Bank

The vast majority of banks in Orange County appear to have the worst behind them, but that does not mean that all will have adequate capital reserves.

Some will need to replenish their capital as a result of writing off or writing down loans. Some will continue to have a drain on capital, not necessarily from bad loans, but because they have not reached a point yet where they are profitable.

Banking is a business of scale, and as more regulatory burdens are placed on banks—especially at a time when loan demand is soft—it will be difficult for some banks to be profitable.

John W. DeCero
Vice Chairman
California Republic Bank

I think the banks are better prepared to handle the capital problems. But I don’t think those issues are nearly close to over. There are a lot of issues with banks and their balance sheets.

Tom Meyer
Fullerton Community Bank

The deep black holes for banks and thrifts were concentrated in subprime and stated income mortgage lending, land development and construction lending.

For the most part, those loans have been properly recognized, reserved for and hopefully disposed of.

In fact, we hear stories from certified public accountants and bankers that many institutions have written down some of their remaining development loans to 10% to 20% of the original value of the real estate.

Commercial real estate conditions remain weak, and banks will absorb additional losses. For the most part, however, the bankers in our region have steered clear of the most troubled sectors such as hotels and shopping centers.

We see small businesses stabilizing and beginning to turn the corner and believe that many businesses are poised to increase their capital investment and hiring as the overall economy improves during 2011.

Scott Connella
Executive Vice President, Southern California Commercial Banking
Union Bank

I do believe that the worst is behind banks for problem loans. I think you can see that in the third-quarter results where most banks have reduced their loss provision substantially.

Banks also have improved their capital ratios, either through additional infusions of equity or improved earnings.

The most significant headwinds facing banks are the $1 trillion-plus of commercial real estate loans that will be maturing in the next three years. In my estimation many of these loans will have to be restructured as the appraised value of the underlying real estate may be less than the outstanding debt.

Steven Gardner
President and Chief Executive
Pacific Premier Bank

Generally, yes, many of the most severe asset quality issues are behind banks. However, the overall weak economic environment coupled with the high unemployment rate will continue to place adverse pressure on asset quality.

Additionally, those banks that have exposure to the riskiest commercial real estate property types will continue to have challenges in 2011.

Most economists and market professionals do not expect a bottoming of the commercial real estate markets until late 2011 or early 2012.

There are still billions of dollars of commercial real estate loans that mature in the next couple of years and many of those properties will require equity infusions from their owners to allow them to refinance.

We still have many banks that need to raise capital and investors are becom-ing much more discerning in those banks they are willing to provide capital to. Several investors have been burned by the first round of capital raises, where- in some management teams were not forthcoming with the challenges they faced and thus investors are more cautious today.

Given these factors, bank failures will continue throughout the remainder of this year and 2011.

Ultimately, this process will lead to a strong industry that will be well positioned to support economic expansion in the coming years.

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