When bankers look into their crystal balls for 2007, they see more consolidation in store for the sector.
“Yes, this will be a tough year for banks and those not doing well or growing will probably have to sell,” says Donald Johnson, president of the Orange County region for American Business Bank in Irvine.
Meanwhile, banks and thrifts are dealing with regulations, including those designed to combat terrorism to those geared to preventing defaults. But local banking executives say they’re not planning to tighten their credit lending practices.
Banks are feeling the effects of a low unemployment rate, the Federal Reserve’s holding pattern on interest rates and the continued demand for loans.
And they’re looking to keep growing in several areas. That includes tapping small business owners, credit cards, retail business,helping people open stores,mergers and acquisitions, international banking services and expanding the products current customers use.
The Business Journal’s Sarah Tolkoff recently spoke to bank executives about issues they face. Following are some of their comments.
Do you see more banking
consolidation this year?
Kim Young
President,
Orange County,
Wells Fargo Bank
Irvine
We wouldn’t speculate on what might happen in the industry. What I can tell you is that in terms of our own merger and acquisition activity, our strategy hasn’t changed. Although most of our growth comes from earning more business from current customers,that’s certainly our largest revenue-growth opportunity,we continue to search across the financial services industry for acquisition opportunities that meet our disciplined rate of return hurdles. In the banking segment, we continue to focus on fill-in opportunities in our 23 banking states that have customer bases similar to our banking states. Our pending acquisition of (Sacramento-based Placer Sierra Bancshares, parent of Bank of Orange County) is exactly the kind of banking acquisition we like to make.
Betty Mower Potalivo
Orange County region,
Northern Trust Bank
Newport Beach
Yes, we expect to see more banking consolidation this year. Large bank consolidation of late has been fueled by a combination of factors including market domination, expense synergies and diversification of revenue stream.
Banks are making acquisitions and emphasizing fee growth after a succession of interest-rate hikes. This has boosted borrowing costs, crimped lending margins and dampened consumer loan demand. However, through large mergers and acquisitions, there is a risk and cost associated with combining technology platforms.
For example, Bank of America recently announced it will postpone the acquisition of US Trust citing certain issues with “system conversion.”
In contrast to bank consolidation, Northern Trust is committed to remaining independent.
The company has grown organically by building a well-diversified revenue stream over 117 years, serving institutional clients, affluent individuals and their businesses.
Northern Trust’s revenue is comprised of 33% fees from institutional business; 26% fees from managing investments for wealthy individuals, families, businesses, foundations and endowments; 31% from banking revenue, and the balance from earnings in foreign exchange, brokerage and investment security.
Steven Gardner
Chief executive and president,
Pacific Premier Bank
Costa Mesa
I expect continued consolidation in 2007 for two primary reasons. The (Southern California) market continues to be one of the best banking markets in the country.
Thus, both midsize and national banks will seek to expand their businesses through acquisitions.
Secondly, market competition for deposits and loans is fierce and some newer, smaller banks may find the environment challenging and will seek to exit the market through merging with larger, more established banks.
Raymond Dellerba
Pacific Mercantile Bank
The consolidation of banking will continue depending on the major banks’ stock values, which tend to be the currency utilized to acquire the smaller banks.
Major banks tend to acquire smaller institutions to fill void market areas or expand earning asset bases that tend to shift with demographic tre-nds. Be assured the consolidation will continue.
Thomas B. Rogers
Executive vice president,
region manager Orange County and San Diego commercial
and private banking services,
City National Bank
There have been a number of bank startups in recent years, and many of them start with the goal of being acquired. Last year, in fact, there were more banks launched nationwide than any year since 2000. It would be no surprise to see some consolidation, particularly among the new banks.
The financial services industry is healthy, but so competitive. Many of the startups that remain independent will face some serious challenges during the next few years.
George Kaye
Senior vice
president,
group manager of retail banking,
Washington Mutual Bank
Irvine
The industry will continue to see consolidation, in one form or another, from the small community banks on up to the large financial companies. Greater efficiency is a significant driving force and underlies some of the consolidations we have seen.
Donald P. Johnson
President,
American Business Bank
Yes, this will be a tough year for banks and those not doing well or growing will probably have to sell.
Vernon Aguirre
California regional executive,
Banco Popular North America
Anaheim
Yes, large banks will continue to seek increased market share for their businesses and smaller banks will seek to expand beyond their local communities.
Scott R. Connella
Market president,
Union Bank of California
Irvine
I expect a continuation of banking consolidation this year, especially of large banks acquiring community banks to fill-in their branch networks.
How is your bank handling regulations, including those designed to combat terrorism and those designed to prevent defaults and other banking issues? Are you tightening credit?
Potalivo of Northern Trust
Deregulation and globalization of financial services, together with the growing sophistication of financial technology, are making the activities of banks and thus their risk profiles more complex.
Banks implement security measures, some driven by regulations from various government oversight agencies, such as the USA Patriot Act, which became effective in 2003.
An increasing number of organizations have concluded that a comprehensive operational risk management program provides for bank safety and soundness, and are therefore making progress in addressing operational risk as a distinct class of risk, similar to the treatment of credit and market risk.
At Northern Trust, we are committed to continuous investment in core technologies and global operational and security models.
An example of this is that we have developed business and continuity plans. These are designed to protect our clients from exposure to system error, natural or man-made disasters, and fraud.
To have duality and redundancy of critical data, so if anything were to happen, there will be minimal if any loss of data, and business can continue with minimal interruption.
A security feature is real-time data backup for critical applications and production environments.
The goal is to provide business continuity with minimal downtime.
We have found this to be a necessary and worthwhile investment in the integrity of our systems and the security of our clients. Our challenge as an industry is to educate the public, be diligent on their behalf and find ways to continue to manage our compliance activities.
In the pursuit of scale, the banking industry has become incredibly competitive, with pressure on lending rates and terms.
The economy has proven to be very strong, though we are seeing increasing pressure on the consumer as they manage their household debt level, rising home mortgage expenses and employment uncertainty in different industries across the nation.
Credit quality in the consumer areas such as credit cards, equity credit lines and other consumer products will continue to warrant diligence.
Historically, Northern Trust has low credit risk relative to banks of similar size. Conservative risk management practices have helped reduce loss exposure. We have not tightened our credit granting process. We believe a consistent sound policy insulates our institution from swings in credit quality. The businesses and individuals we to lend to are typically highly successful.
Kaye of Washington Mutual
Of course we follow and are supportive of all regulatory requirements, taking proactive steps by consistently auditing our processes to make sure we are in compliance. We use a very consistent approach in our standards and it has proven us well,after all this is our bread and butter. Obviously the landscape changes and we continue to review and make adjustments as necessary.
With that said I don’t see us changing much from the approach that has served us so well during the different economic cycles.
Dellerba of Pacific Mercantile
First of all, our credit criteria have never changed from the bank’s inception. Credit is not a style or fad but an evaluation of numerous facts supplied by the client to determine sources of repayment within a reasonable period of time.
Commercial loans supplied by banks are not meant to be permanent capital, but rather a temporary support to purchase equipment or finance account receivables and seasonal fluctuations in inventory or during periods of expansion. We have never tightened or degraded our credit standards. The regulations to combat terrorism are very strict and have no tolerance for exceptions. We have rigorously adhered to these regulations.
Connella of Union Bank
Like most banks, Union Bank is very focused on Bank Secrecy Act/Anti-Money Laundering regulatory compliance. This requires us to have a clear understanding of our customers and their business practices, which we do.
I have not seen a noticeable tightening of credit in the past year and I am not sure that today’s competitive environment would allow it. We continue to be very supportive of our business clients’ growth strategies.
Aguirre of Banco Popular
All of our employees are trained and tested on their knowledge of the Bank Secrecy Act. Our Bank uses multiple evaluation systems to review large transactions. We pride ourselves on knowing our clients and understanding their businesses.
We have always maintained high credit quality standards and will continue to work hard to make sound loans in those communities that we serve.
Young of Wells Fargo
Wells Fargo works very hard to fulfill our obligations and cooperate with our regulators. In terms of Bank Secrecy Act regulations specifically, Wells Fargo takes its policies and compliance very seriously. We have practices and systems in place to detect potential suspicious activity and to bring such activity to the attention of the appropriate authorities.
Rogers of City National
City National’s credit standards have remained the same during the past few years,solid enough to keep the bank healthy but flexible enough to allow us to help our clients grow. In fact, City National’s average loan balances grew 12% in 2006, reaching an all-time high of $10.2 billion in the fourth quarter.
We continue to see a demand for commercial and residential lending, and despite the condition of the housing market, did not see a decline in construction lending during the year. As for regulations, they’ve definitely become more numerous. The additional information required from clients often helps us better meet their needs.
Gardner of Pacific Premier
Regulations and laws such as the USA Patriot Act are just a reality of doing business for bankers. Of course they present challenges to us all, but they were designed to assist our government in combating another terrorist attack.
Johnson of American Business
There are tremendous regulations concerning currency transactions, monitoring myriad activities that did not exist before. We are conforming to all mandated oversight.
Where do you see your growth this year coming from?
Kaye of Washington Mutual
First and foremost, I think our small business banking initiatives will really take off this year as we continue to focus our efforts on growing that business. We have been, and continue to ramp up in that area, with competitive products and services, as well as great business specialists that we have brought on board.
In recent months we have seen a significant increase in our number of new small business customers, and as awareness grows, I think that segment will continue its growth.
Our credit card business will also continue its impressive growth as it has been well received by our new and existing customers.
I attribute much of that growth, once again to awareness, but more importantly to the product features, one of which is free monthly access to their Fico scores.
And of course, there will continue to be growth in our retail store network. We are always looking at expansion opportunities so that we may best serve our customers. What that means is that we will be seeing continued retail store growth in our footprint markets, such as Orange County. In 2006 the company opened 141 stores nationwide, and we expect similar results for 2007.
Dellerba of Pacific Mercantile
The future growth for a bank like ours is created by experienced bankers, knowledgeable in the professional service industry as well as in the manufacturing, wholesale, retail, distribution, and international business arenas. Additionally, we assist in financing our major customer’s construction projects throughout Southern California and some bordering states.
Potalivo of Northern Trust
Northern Trust’s growth in the Western region will benefit from several factors. Bank consolidation disrupts markets and provides greater opportunity for financial providers such as Northern Trust that provide comprehensive personal financial services to affluent clients. We believe that many clients can distinguish the difference between convenience and service, and are seeking personalized attention to more complex financial matters. We believe that we are uniquely positioned to provide these solutions to individuals and families through a formula that no other company has. It’s the combination of highly respected people, innovative technology, the array of wealth management services, customized personal service and the highest level of integrity.
The current surge in merger and acquisition activity will continue to benefit both areas of our revenue stream in 2007 as it did in 2006: fee income and net interest income from banking.
Fee income because many family-owned businesses are being sold, converting wealth in the form of closely held assets to liquid assets. Many of these families have never been exposed to investing in the market and need help with their long term needs for wealth preservation, lifestyle dreams, and creating their legacy.
Net interest income because we have an interesting dynamic fueled by merger and acquisition activity. While we have been hired to manage assets of the selling family, we are also providing financing to the buying entities. We are providing financing as well as all other banking services to the company and its new principals.
Aguirre of Banco Popular
Our bank will continue to seek business opportunities with a primary focus on providing lines and loans to small business owners.
Young of Wells Fargo
We expect most of our growth to come from earning more business from current customers.
By intensifying our focus on our customers’ experience, we aim to make banking at Wells Fargo even more convenient and more customized. Ultimately, we want our customers to view us as satisfying all of their financial needs and becoming their financial partner for life. I’m very proud of how far we’ve come. Our average retail customer now has 5.1 products with us, compared with 3.8 five years ago and our average commercial/corporate banking customer has almost six products with us, compared to 4.9 four years ago. I expect to see those trends to continue.
In particular, I’m very excited about how we are expanding our financial services network across Orange County. This year alone, we anticipate opening five new full service banking offices.
We opened our first exclusive Private Bank office earlier this year in Corona del Mar to provide teams of sophisticated advisers with vast financial expertise for Orange County’s wealthy clientele.
We also launched the growth technology group late last year and opened offices in Irvine to serve the growing financial needs of Orange County’s rapidly growing technology, biopharmaceutical and medical devices companies. We’ll continue to focus on the engine that drives Orange County’s economy, small businesses, through our small business banking group with hub offices located in central and north Orange County.
Rogers of City National
Our clients are healthy and commercial borrowing remains on the rise. Orange County’s economy remains strong. We can see that in the historically low unemployment rate and in the continued demand for lending.
Growing Orange County businesses are increasingly coming to us for cash management services, such as remote deposit capture (what we call City National E-Deposit) and, for those that do business overseas, for international banking services, particularly foreign exchange and export financing.
Moreover, successful entrepreneurs, professionals and investors are coming to City National in greater numbers to help them manage their wealth through our top-performing investment management strategies. All of that growth was reflected in our record noninterest income in 2006, and we expect to top that this year.
Connella of Union Bank
We see continued commercial loan growth as most of our customers are expanding their operations. Other areas of expected growth are foreign exchange, owner occupied real estate and cash management services.
Gardner of Pacific Premier
Our growth will continue to come from business owners throughout Southern California and in particular Orange County.
Johnson of America Business
We continue to grow organically by bringing in 80 new companies every year.
