Orange County commercial banks continue to lend in the wake of the recent recession, according to bank executives surveyed by the Business Journal—but not as much as they’d like amid the spotty recovery.
Are banks feeling a balance-sheet hangover from the downturn? Or is this a case of soft demand as local businesses remain uncertain about the economy?
Jane Yu asked a number of bank executives for their outlooks on lending.
Kevin Dunigan
Executive vice president
City National Bank
Irvine office
City National Bank remained profitable through the recession. Loan growth was modest during the recession, but it has picked up in the past two quarters. In the third quarter, City National’s average loan balances were up 3% compared with the same time last year. Our commercial and industrial loans grew 15% year over year.
We took our first provision of the year during the third quarter, mainly because of the growth in loans.
We continue to make loans to small businesses, where our loans are up around 70% from last year. The bank has made 45 Small Business Administration 504 loans this year, totaling more than $60 million.
Henry Walker
Chief executive officer
Farmers & Merchants Bank
Laguna Hills office
Farmers & Merchants Bank has money to lend. There’s a lot of talk in the marketplace asking, “When will banks start lending?”
The problem is that we’re reflective of the entire economy; we don’t drive it, we reflect.
Businesses need orders and people to buy their products. But until that happens, banks can’t lend. We and the overall industry have a pent up demand for loans—and good loans.
We have been a commercial real estate lender with a very conservative tilt. We’ve had very few problems in terms of bad loans.
The loan portfolio in terms of dollars has been flat since 2008.
Farmers & Merchants Bank had $2 million for provision for loan losses in the third quarter, compared with $4 million in the same quarter last year.
Stephen Gordon
Chief executive officer
Opus Bank
Irvine
The economy is still bouncing around and still sitting at relatively low levels in terms of economic vibrancy. But there are a lot of business owners, real estate investors, families and professionals who are doing fine. They do have a vision to expand. We’re banking a lot of those clients.
We don’t have any nonperforming loans. We have loans that we acquired through the acquisition of banks—Fullerton-based RMG Capital Corp. and its Fullerton Com-munity Bank, and Everett, Wash.-based Cascade Financial Corp. and its Cascade Bank.
We’re sitting on a significant loan pipeline. We expect strong loan funding in the fourth quarter.
Now is exactly the right time for a bank to be growing and expanding its client base. Clients really need the banking industry to be there right now.
Russ Smith
Chief credit officer
Pacific Enterprise Bank
Irvine
The impact of the significant decline in property values and property income, along with lower economic activity and employment, continues to impact the loan portfolio, although we are confident of the quality and performance of our loan portfolio.
After carefully analyzing the contributing factors, every quarter we continue to make provisions for loan loss on a fairly consistent basis. Even though we feel our reserves are more than sufficient, we are not ready to reduce our base loss reserve rate, due to general economic conditions.
Our provision, measured variously against total loans, collateral, capital and net loss history, is abundant. A large portion of our portfolio is covered by CalCAP, the off-balance-sheet government loan insurance reserve. An even larger portion of our portfolio is covered by the Small Business Administration loan guaranty. Both of these loan segments in our bank have experienced nearly all of their growth since the beginning of the recession and presently comprise 50% of our loans outstanding.
Glenn Gray
Chief executive officer
Sunwest Bank
Tustin
In our view, the recession is not over. We don’t expect it to be over for several more years. Fundamentally, the country and OC need to re-employ a lot of people before the economy fully recovers. This time around, that’s simply going to take time.
We’re very much lending, except that the conservative nature of potential borrowers is dampening loan demand.
In terms of provisions, we didn’t have to build up that much, and it’s a steady number as a percentage of total loans. We’ve maintained a steady loan loss reserve over the last five years. We increased reserves in the core bank in anticipation of possible problems. Fortunately, those haven’t materialized.
In 2009, the bank grew through acquisitions. The acquired loans were heavily real estate-oriented. In our core bank, we’re more balanced between real-estate loans and commercial and industrial loans.
This year, we grew substantially through organic growth, which came from a couple of different ways: Entrepreneurs are being opportunistic and people have gone back to the real-estate market.
We haven’t seen much of what we did years ago—people who were borrowing to build inventories to support sales.
There are credit-worthy borrowers out there. We feel like they’re being cautious.
Scott Connella
Executive vice president
Union Bank
Irvine office
We continued to lend in the middle of the downturn. Our credit quality has certainly improved year over year.
We did not have any subprime loans, so our mortgage portfolio held up pretty well.
Our provision was a negative in the third quarter. We’re reducing some of our provisions, and it was a benefit of $13 million. We’ve been conservative, so we had more than adequate provision, which allowed us at a later point to reduce the amount.
We’re aggressively trying to grow, but the overall market is not growing rapidly. It’s certainly improved since the bottom of the downturn, but it’s still not growing rapidly. There’s not as much demand for credit as there was back in 2006 or 2007.
Most companies right now have fairly flat revenues. There’s not much need for additional financing for working capital. Not many are buying more equipment or expanding into larger facilities right now.
Patty Juarez
Regional vice president
Wells Fargo Bank
Anaheim
Paul O’Mara
Regional vice president
Wells Fargo Bank
Irvine
Wells Fargo has not had any “hangover” in our commercial banking loan portfolio. We prudently managed our commercial lending business and are banking the strongest companies in our commercial bank locally and throughout the country. This has allowed us to operate “business as usual” during the economic downturn. Specifically, our OC offices, located in Anaheim and Irvine, have earned dozens of new relationships resulting in several hundred million dollars in commitments over the past 18 months. We are seeing many opportunities due to our consistent marketing efforts and, to some degree, continued financial stress with some of our competitors.
In terms of the health of the bank’s overall portfolio, we are experiencing improved credit quality. As announced in our recent earnings release, net loan charge-offs declined to $2.6 billion, down $227 million from prior quarter and down $1.5 billion from prior year. Nonperforming assets declined to $26.8 billion, down $1.1 billion from prior quarter and down $7.6 billion from prior year. We released reserves of $800 million (pre-tax) given the improved portfolio performance.
