When John Clarey tried to get a loan to combine two of his companies, he got a last-minute surprise: The bank wanted him to put more money down.
“It killed the deal,” said Clarey, who heads up Irvine-based Clarey Capital Group, which invests in technology companies.
Clarey, who uses credit to fund most of his deals, started Irvine-based DSL equipment provider TeleCore Inc. in 1993 before selling it to Florida’s Viasource Communications Inc. in 2000 for $154 million.
His timing of the TeleCore deal put him just ahead of the collapse of the technology bubble that left Viasource bankrupt within a couple of years.
Clarey now owns stakes in 10 tech companies, including Irvine-based wireless technology company RF Comsites.
Like many borrowers, Clarey’s unsure of what to expect from banks these days.
Competition among banks to get customers has been fierce in the past five years. But the credit crunch brought on by last year’s mortgage collapse has rippled through just about all aspects of banking, including commercial loans.
Some have speculated that banks might pull back from some commercial loans in a bid to bolster their ratios that measure the amount of cash they have in relation to loans.
Local bankers say loans to businesses are holding up, though some are concerned about how borrowers’ businesses are slowing with the economy.
Meanwhile, the cost of borrowing has increased for many deals. Whether banks have made it harder to borrow depends on who you ask.
Many smaller banks have remained insulated from the subprime problems and freezing of credit that larger banks have struggled with. But they too have a slowing economy to deal with.
Many agree that larger deals are harder to finance.
Banks are starting to see year-end reports from borrowers that show many companies losing revenue.
Continued revenue losses could strain borrowers in paying their debts and make banks reluctant to lend.
Some local bankers say they haven’t had to cut back.
“We haven’t seen anything to disturb us,” said Alan Epperson, a senior vice president in Irvine with San Francisco-based Wells Fargo & Co., the second biggest bank in the county behind Bank of America Corp.
Epperson, whose small business unit caters to companies with yearly revenue of less than $20 million, said his loan volume is up 15% in the past 12 months.
Wells Fargo has struggled with home foreclosures. But it hasn’t tightened credit for commercial lending, Epperson said.
A recent earnings report from Wells Fargo showing record revenue of $10.6 billion quelled some fears that the bank might have to curtail its commercial lending.
Rate cuts from the Federal Reserve have spurred borrowing by companies, according to Epperson.
Loans for equipment have been the most common, especially with tax incentives from this year’s economic stimulus package, he said.
“We’re starting to see a definite uptick,” he said.
The limit for equipment purchases that can be deducted from taxable earnings was raised to $800,000 from $510,000, according to Ham Homan, senior sales manager for commercial equipment financing in Irvine for Wells Fargo.
Companies also are allowed to deduct half of purchases in the first year rather than spread it over several years as before, Hamon said.
Businesses have been buying everything from drill presses for manufacturing to planes that save time for traveling, according to Epperson.
Competition to win deals remains fierce, Epperson said.
“We’re not winning as many deals,” he said.
Smaller banks such as Costa Mesa-based Commercial Bank of California say the troubled credit market has given them a chance to take business from larger banks.
As larger banks go into “maintenance mode” to handle the problem areas in their portfolios, it opens the door to go in and gain customers, said Mark Dumas, chief operating officer with the bank.
“This is when community banks can excel,” he said.
Commercial Bank also is hoping to take advantage of the market by buying another bank within the next year and half, Dumas said.
It got its start in a similar environment in 2003 when bigger banks also were on the defensive after coming out of the recession.
Commercial Bank currently has about $235 million in assets.
Less Demand
Dumas said he’s seeing less demand from borrowers who are being defensive as the economy softens.
Earnings reports from business borrowers are starting to show some weakness, according to Scott Connella, Orange County market president of Union Bank of California, part of Bank of Tokyo-Mitsubishi Ltd.
“Quite a few companies have seen a drop in revenue,” he said.
But Connella said his bank isn’t seeing any trouble with its loans and hasn’t slowed the pace of lending.
For the first quarter, Union Bank’s local operation took on seven companies as customers, the same pace as last year and considered strong by Connella.
Union Bank is the fourth largest in the county with about $3 billion in deposits.
Other banks having problems have put less competition on his deals, he said.
A year ago he would see an average of five banks looking to sign the same deal. Now it’s three.
Less competition from banks makes it harder on the borrower, he said.
The cost of borrowing is up at many banks, according to Connella.
Banks base their lending on the London Interbank Offered Rate, the rate at which banks borrow their money at.
A year ago, rates were set at about 1% above Libor. Many banks now are asking for 1.5%.
Newer banks trying to break into the market have been the most aggressive, according to John Grauten, local president of Clayton, Mo.-based First Bank, which has about $900 million worth of loans in the county.
First Bank hasn’t had to deal with business loan defaults but has had to drop a couple of customers because their credit didn’t measure up, according to Grauten.
“It would probably take another six quarters of declining revenue before we see any problems,” he said.
Average loan size has been down for Grauten as customers have shown less interest in borrowing. First Bank lends in the $20 million to $200 million range.
Industries suffering the most have been tied into real estate. Some retail businesses also have shown weakness, he said.
But manufacturers that sell overseas have been benefiting from a weak dollar, he said.
Grauten, like other bankers, hopes to gain market share from other banks struggling with real estate lending problems.
“Some banks may be stupid enough to lose focus on their commercial clients,” he said.
This year First Bank has brought in one new customer locally. The bank has double-digit growth in its local commercial lending since entering the market 11 years ago.
