Many hope the local financial industry will get better by the second half of next year. But few are confidently saying so.
The hangover from the financial crisis and fallout from the recession are expected to last at least for the next couple of quarters.
Finance jobs are expected to fall by almost 4,000 in Orange County next year to 111,785, a 3% drop, according to an estimate from Chapman University.
At the heart of the economy’s problems, banks are set to see weaker profits as tighter credit and weakened demand for loans drags out.
Banks traditionally have served a key role in the economy by helping businesses grow with loans. Until banks resolve their own problems, the economy is likely to continue to struggle.
Acquisitions could bring a reshaping of the banking landscape as larger, healthier banks look to buy smaller, struggling ones.
Local banks generally have sidestepped the problems in subprime mortgages that have crippled larger banks. Now they’re hoping to escape the worst of a feared uptick in bad commercial loans next year.
“There’s a lot of unknowns right now,” said Scott Connella, OC market president of Union Bank of California NA, part of Mitsubishi UFJ Financial Group Inc. “Most companies aren’t having a good fourth quarter.”
Connella said he’s looking for the revenue of smaller companies to be a leading indicator for when the market might bottom.
Unlike larger companies with bigger balance sheets that can cushion them for a couple of quarters, smaller companies tend to show instant reactions to what’s going on in the economy.
Less demand for loans will likely occur in the first half of the year as companies spend less on equipment.
There also may be fewer lenders, as non-financial companies that ventured into the business go away.
At the core of the economy’s problems are companies with too much debt, according to Murray Rudin, who heads the Irvine office for Los Angeles-based private equity firm Riordan, Lewis & Haden Inc.
OC, which suffered hits in the subprime and housing markets before most, hopefully already has seen the worst from debt problems, he said.
Like many, Rudin fears commercial real estate to be the next area of weakness that banks will have to deal with.
The economy could turn better at the end of the year, but Rudin said he’s not banking on it.
“It’s an exceptionally hard time to predict things,” he said.
Rudin said he’s looking for a stock market rebound as a leading indicator.
A lowering of the Federal Reserve’s target interest rate for overnight lending, now at 1%, probably wouldn’t do much good, according to Rudin.
Lower interest rate payments won’t have an impact when the bigger problem is with banks being fearful of borrowers, he said.
The success of the government’s $700 billion bailout plan, as well as a number of other programs to stimulate the economy, could have a bearing on what happens in 2009.
The Troubled Asset Relief Program could give local banks a lift as it’s already done with a $1.2 million investment in Westminster-based Saigon National Bank and a $5 million investment in Newport Beach-based Com-merce National Bank.
The idea is the banks will use the money to make loans to help the economy.
Chapman economists think it’s too late for any government action to stimulate overall spending for the first half of next year.
Less action on mergers and acquisitions also is expected as a weak economy dampens the appetite of private equity investors.
Excessive debt from previous private equity deals and less money to invest from pension funds are feared to compound the situation next year.
PERSON TO WATCH: ED CARPENTER
We’re watching Ed Carpenter of Irvine-based Carpenter & Co. to continue his streak of investments in small banks.
The longtime bank consultant known for advising startups has an estimated $200 million from investors to target banks, according Investment Management Weekly.
Small community banks in the Western U.S. are his focus.
A tight credit market and an ailing economy are spurring bank consolidation. To many in the industry, consolidation is a natural part of the banking industry whose time has come.
Carpenter made a number of investments in 2008, many of which are pending regulatory approval.
In November, his company said it would invest $30 million in San Jose-based Bridge Capital Holdings and its Bridge Bank.
In October, it promised $15 million to PB Holdings Inc. of Delaware for 54% of the voting shares of its Irvine-based Plaza Bank.
That same month, Carpenter said it would buy 15% of Heritage Bank, a New York startup.
In September, a deal to pay $6 million for nearly 25% of San Luis Obispo-based Mis-sion Community Bancorp was struck.
In May, Carpenter said it would invest $15 million for shares of El Segundo-based Manhattan Bancorp and its Bank of Manhattan, which opened in 2007.
It also invested an undisclosed amount in CG Holdings Inc. of Delaware for 80% of the voting shares of Pasadena-based California General Bank.
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Dan Beighley
COMPANY TO WATCH: BANK OF AMERICA
Major acquisitions will reshape the size and reach of Bank of America Corp. here next year.
The Charlotte, N.C.-based bank, which already has a strong hand in just about every aspect of finance in the county, is set to build on its dominance here.
With 20% of the county’s deposits at $13.7 billion, BofA also stands to become the biggest investment services company here with the closing of its deal for New York-based Merrill Lynch & Co.
Its $4 billion purchase of Cala-basas-based home lender Countrywide Financial Corp. will make it big in mortgages as that business rebounds.
“Our focus will be making the new integrations work and managing through the challenging economic environment,” a BofA spokeswoman said.
It’s estimated as many as 30,000 jobs, or 10% of the bank’s total workforce, could be shed in the next three years.
But layoffs aren’t expected to be a big part of Merrill’s wealth management division, which is mostly what it has in Orange County.
Part of the challenge for Bank of America will be in bringing Merrill’s roughly 250 brokers on board as it handles the different cultures of the two companies.
Dan Beighley
