Economists see recent job gains as a sign that the national economy is moving ahead after hitting a soft patch in the summer.
The Federal Reserve is likely to continue its pace of interest rate increases, including last week’s 25 basis point increase, to keep inflation at bay.
The improving economy is good news for banks. Business lending should rise and offset an expected decline in mortgage lending after years of gains in the housing market.
Banks, flush with strong deposit growth in the past few years, also could gain from a rebound in the commercial real estate market. With office rents increasing and vacancy decreasing, the office market,hard hit here by the dot-com blowup,already is on the recovery track.
Meanwhile, several Orange County banks have boosted Small Business Administration lending.
One negative: banks will have to pay higher interest rates on their deposits, which will put pressure on net income.
For a more in-depth look at the local banking sector, the Business Journal spoke with top officials at a sampling of Orange County banks and a banking consultant.
Executives were asked: Where do you see interest rates at the end of 2005? How will this impact business lending? What types of lending will key growth in the next year? How will deposit growth change in the coming year? Is Orange County an under-banked area and why?
Following are their edited responses. All forecasts were made prior to Nov. 10.
Chief Executive
Premier Commercial Bank
Anaheim
Where do you see interest rates at the end of 2005?
Premier Commercial Bank anticipates interest rates continuing to rise during 2005 with an approximate 150 basis point (1.50%) increase in the discount rate and prime rate. Fixed and long term rates will be commensurately impacted.
Although this will have a cooling affect on some types of business borrowing, it should not be overly detrimental. Those who have a justified economic purpose to borrow will not be deterred from proceeding. Remember, rates remain at historic low levels.
What types of lending will key growth in the next year?
Business lending in general will fuel Premier Commercial Bank’s loan growth during the next year.
More specifically, commercial and industrial loans, commercial real estate, hospitality financing, SBA lending and construction will be our emphasis. Businesses requiring these types of loans are plentiful in OC.
What types of businesses will drive OC bank growth?
As has been the case historically, all aspects of the real estate industry will be major components to impact OC bank growth.
The ancillary activities,contracting, building materials, financing, appraisal services and property management,remain integral factors to such growth. Additionally, we see education and health services, leisure and hospitality, and other services being major drivers to economic and bank expansion.
How do you see deposit growth changing in the coming year?
We anticipate deposit growth to continue a similar, escalating pattern as we have experienced during the past three years.
This is due largely to the growth and expansion that our existing client base is generally projecting. Couple that with the continuation of aggressive new business initiatives and a strong local economy and we see solid double-digit growth at our institution.
Is Orange County under-banked?
OC is not under-banked for several reasons. First, the county has such a vibrant economy that all of the major players in the financial services sector are either here already, or plan to have a presence soon. Second, the financial institutions in the market provide the highest levels and sophistication of financial products available. Third, after the merger and acquisition frenzy of the late 1990s, numerous de novo (newly formed startup) banks entered the market bringing with them energy, expertise, quality service and the desire to put recently raised capital to good use.
Chief Executive
Tustin Community Bank
Tustin
Where do you see interest rates at the end of 2005?
Short term rates will move up 125 to 175 basis points, long term rates will move higher at a larger pace, especially if the economy and the federal deficit continue to grow.
What types of lending will key growth in the next year?
We are projecting growth in commercial real estate, equipment and indirect auto loans.
Indirect auto loans have been a profitable line of business for the past eight years. Recently we’ve augmented this lending with increased marketing for commercial real estate and equipment lending.
What types of businesses will drive OC bank growth?
Real estate development, service and technology-related companies.
How do you see deposit growth changing in the coming year?
We will be marketing interest bearing checking accounts and are projecting minimal overall deposit growth this next year.
The addition of interest bearing checking accounts will reduce the bank’s interest costs.
Is Orange County under-banked?
No, new banks and out of state banks opening up in OC are keeping up with current demand. OC is home to several new banks each with capital in excess of $20 million. Some wonder if there are enough quality assets to achieve a suitable return to the new shareholders of these de novo banks.
ED CARPENTER
Chief Executive
Carpenter & Co.
Irvine
Where do you see interest rates at the end of 2005?
We see interest rates rising 150 basis points by the end of 2005. This environment should be positive for OC banks in terms of aggregate business loans.
If the local economy continues to improve and interest rates continue to rise, OC banks will see higher levels of draw down against existing bank commitments (already up to 42% overall at the end of the third quarter).
What types of lending will key growth in the next year?
Most OC banks will continue to have the majority of their total loan growth in real estate, even though the rate of growth will be far less than in the past two years.
The increasing growth rates will be in business loans, SBA loans and accounts receivable financing. Consumer credit growth in OC will remain at about the same levels as the past two years.
What types of businesses will drive OC bank growth?
Driving bank growth will be professional service companies and partnerships, followed by family owned businesses (97% of OC businesses by number), manufacturing growth and a modest expansion of technology support companies.
How do you see deposit growth changing in the coming year?
U.S. deposit growth was 7.3% for the past year. California deposit growth was 20%. OC deposit growth was 22%.
Deposit growth will slow to 12% in OC during the next year. The Asia sector, increasing family wealth, “flight to safety” in the U.S. and an unpredictable stock market spurred growth in the past year.
Is Orange County under-banked?
Yes. The population per banking company headquartered in the nation’s 3,151 counties is 38,000 per bank. In California, the population per bank is 128,000. That ranks California as the least saturated of U.S. states. In OC the population per headquartered bank is 214,000, ranking it among the 10 least saturated counties in the nation.
The same ratios hold true for branches. California’s population per bank branch of 6,310 ranks it as the least saturated of the 50 states. The average U.S. state has 3,313 people per branch. OC has 7,450 people per branch.
This high number is really even higher given that 20% of the county’s branches are in supermarkets. These branches are not conducive to business transactions.
BALA BALKRISHNA
Chief Executive
Commercial Bank of California
Costa Mesa
Where do you see interest rates at the end of 2005?
Interest rates will gradually increase in 2005, with maybe four or five rises of 25 basis points. The increase in interest rates will not adversely affect business lending.
What types of lending will key growth in the next year?
Commercial Bank of California will focus on commercial and real estate lending next year.
What types of businesses will drive OC bank growth?
Service, manufacturing, technology and biotech companies will drive OC bank growth. Real estate lending always will be there though banks will be more cautious than before.
How do you see deposit growth changing in the coming year?
Commercial Bank will grow deposits by developing relationships with businesses and wealthy individuals,a continuation of the bank’s existing plan. The bank might consider acquiring a deposit-rich community bank or branches from larger banks after a big merger.
Is Orange County under-banked?
OC is not an under-banked area. The county has 14 community banks headquartered here, in addition to all the national and regional banks. These banks should be able to service the needs of all people and businesses.
RAY DELLERBA
Chief Executive
Pacific Mercantile Bank
Costa Mesa
Where do you see interest rates at the end of 2005?
Interest rates will depend on the economy and employment. You’ll probably see the federal funds rate go up another 75 to 100 basis points.
What types of lending will key growth in the next year?
For us, it will be mortgage banking in multifamily homes and lending to wholesale manufacturing distribution companies.
What types of businesses will drive OC bank growth?
The service industry has been growing nationwide and it continues to be that way in Southern California.
How do you see deposit growth changing in the coming year?
I think deposits will go up. But you will also see cost of deposits rise because the fed has increased interest rates in the past year. You’ll see a higher cost of deposits.
