Chief executives of banks with headquarters and large bases of operations in Orange County are eyeing this coming year as an economic storm and are starting to batten down the hatches.
“If you see a hurricane, you don’t want to speed up from 55 mph to 90 mph,”
CommerceWest Bank Chief Executive Ivo Tjan told the Business Journal. “Running into a hurricane is crazy.”
Rising interest rates have created a challenging operating environment that’s negatively impacting key areas such as commercial real estate, OC bankers have reported in recent weeks.
Even though there’s been plenty of debate whether the economy is already in a recession, the bankers said they are preparing for one in 2023.
While the Business Journal’s annual list of locally headquartered banks show their assets climbed 10% to $38.2 billion, that list is for the year ended June 30 (see list, page 30).
Since then, interest rates have climbed and deposits that don’t pay interest are harder to come by, they said.
“Four percent Treasuries are offering more compelling rates than community banks,”
Commercial Bank of California CEO Ash Patel said. “As a result, liquidity has been challenging. We’re having a hard time competing with the Treasury market.
“Every bank will have liquidity problems,” he predicted.
What follows are short summaries of what chief executives at OC-based banks are saying.
Pacific Premier: New Loans Fall in Half
Pacific Premier Bancorp Inc. CEO Steven Gardner warned on Oct. 20 that rising interest rates “negatively impacted commercial real estate acquisition and refinancing activity.”
Hence, its new loan fundings in the third quarter fell more than half to $450.7 million, compared with $1.12 billion in the second quarter.
The bank, the largest with headquarters in Orange County, on Oct. 20 reported third-quarter earnings climbed 5.1% to $73.4 million. Its earnings of 77 cents a share topped the average analyst estimate for 76 cents. Gardner said the third quarter “produced solid results.”
The Irvine-based bank affirmed its 33 cents a quarter dividend, which represents a 3.9% yield. Shares at press time traded around $36, around 20% below their 52-week high last November.
Banc of California: Challenging Environment
Santa Ana-based Banc of California Inc., the second-largest bank based in
Orange County, reported third-quarter net income increased 4.2% to $24.2 million.
Its earnings per share of 44 cents per share lagged the consensus 49 cents. After the report, the stock price fell 8.9% to a 52-week low of $15.50; since then, it’s rebounded to about $17 and a $1 billion market cap.
“Our core earnings power remained consistent in a challenging operating environment, and we expect our asset sensitivity to support earnings growth going forward,” CEO Jared Wolff said in a statement.
Commercial Bank of California: Slowing Deposit Growth
Commercial Bank of California CEO Ash Patel said he anticipates two more interest rate hikes.
“The problems we’re facing today are only going to get worse,” he said.
With mortgage residential rates topping 7%, housing has “slowed down tremendously.”
The Irvine-based bank currently has 198 employees, including 110 locally. Patel’s implemented a “soft” hiring freeze to only replace departing employees and is focused on earnings.
Sunwest Bank: New Base, Opportunities
Sunwest Bank moved its headquarters from Irvine to Utah in the past year.
A year ago, Sunwest Bank reported the biggest employment drop on the Business Journal’s list of OC-based banks, 27% to 97 workers, because it moved some back-office functions to Utah and Idaho.
The bank then decided to move its headquarters as well to Sandy, a suburb of Salt Lake City, for a variety of reasons, said Sunwest President Carson Lappetito, who plans to spend much time in Orange County.
“The business climate in California is becoming increasingly difficult to operate,” he noted. “California is still a significant part of our overall bank. We’ve become more of a regional bank over the last few years.”
About 100 of Sunwest’s 260 employees are in California, he said.
Complicated Environment
“The past year in banking has been a very complicated environment,” Lappetito told the Business Journal.
“You’ve had the most significant increase in interest rates in a very short period of time. It has caused complications in the bond market. It’s creating complications in the real estate market.
“Those not prepared for it are navigating a difficult environment. For those who sat on liquidity, it’s an environment where there are lots of opportunities emerging.
“Large banks are continuing to frustrate their clients, so it’s created an opportunity for smaller and midsize banks,” he said.
Partners Bank of California: Cash Hoarders
Now that rates are clearly rising, it’s becoming tougher with a recession more likely, according to Partners Bank of California CEO Chris Walsh.
“Wealthy investors now hoarding cash for distressed properties” for early next year, he said.
“A lot of people are sitting on the sidelines.”
CommerceWest: Focus on Productivity
Commerce-West CEO Ivo Tjan said this coming year will be “really challenging.”
Industries hurt the most include automotive, housing and manufacturing, he said.
“We expect layoffs to increase over next 12 to 18 months,” he said.
He’s planning on a potential recession in the first half of 2023 and is advising companies to not hire and instead focus on improving productivity such as installing new software.
“Companies can take market share at the tail end of a recession. We see some opportunities at end of 2023 or beginning 2024.”
Genesis Bank: A New Beginning
Genesis Bank founder and CEO Stephen Gordon, who has previously started and successfully sold two banks, said demand hasn’t slowed despite the increase in interest rates.
“Even though we’re heading into a recession and rates are much higher, we’re now making loans 275 basis points higher than when we launched the company a year ago. Yet, that hasn’t changed the demand at all,” Gordon said.
The bank’s been busy on several fronts. In June, it raised another $25 million of additional capital. In July, it launched a new escrow division. This month, it became the exclusive national banking partner of Excess Telecom, an officially licensed nationwide provider of free internet access and low-cost tablets to low- and moderate-income communities.
Gordon sees opportunities because larger banks have legacy issues such as being stuck with loans with low interest rates or too many branches.
“Whenever this country heads into some sort of adverse cycle, banks are needed more than ever by all the businesses and by our communities,” Gordon said. “At the time they’re needed the most, banks tend to pull away, tighten up.
“The demand is greater than ever. I’m excited. We don’t have any of the balance sheet legacy issues that are becoming a drag.”
