COUNTING ON THE ECONOMY
Home Loans Could Slow, But Banks Look for Pickup in Business Lending
By ANDREW SIMONS
Will 2004 be a wash or a windfall for banks in Orange County?
After three years of big deposit gains and a surge in home loans, local and national banks operating here could see both segments slowing this year. Banks hope to offset those losses by boosting lending to businesses for equipment, real estate and other needs spurred by a growing economy.
But will businesses borrow more money this year? Some say companies, after tightening expenses and reducing debt in the past few years, might be wary of leveraging their assets to expand.
Others say that the economy is in full recovery and businesses must seek loans for new buildings, computers and other expansion-needed expenses.
Meanwhile, rising interest rates loom,a mixed bag for banks. Higher rates mean banks must pay more to lure and keep deposits. And they carry a big threat to lucrative mortgage lending business. The good news on higher rates: banks can charge more to lend borrowers money.
For an outlook in the banking sector, the Business Journal spoke with top Orange County officials at the three biggest commercial banks operating here,Bank of America Corp., Wells Fargo & Co. and Union Bank of California.
MARY CURRAN
Senior vice president
Union Bank of California
What’s going to be the big battle this year in commercial banking in Orange County?
The big battle is for commercial assets.
Banks are commercial asset hungry. It’s been a battle to keep any loan growth going. After several years of low loan demand because of the sluggish economy, people aren’t using their lines of credit as much. There haven’t been many acquisition loans. So, while the economy is a little soft, you’re seeing the competition for those few good loans out there heat up.
Our customers are benefiting from a pricing standpoint. And while I think commercial banks still are very focused on loan quality,we’re trying not to make mistakes like we made in the past. We’re very competitive.
Who’s taking out loans right now?
As a result of a pickup in the economy, we’re seeing more demand for expansion capital. We’re definitely seeing more activity in the mergers and acquisitions area, which is nice to see.
We’ve had very strong loan demand for owner-occupied real estate. Lower rates have made it a very attractive option for people to buy their buildings or expand. We see that trend continuing to be strong.
In general though, I’d say loan demand still is somewhat soft. It’s the economy. People are just being cautious. Companies have worked very hard to make themselves more efficient. And they’re not very anxious to take on a lot of risk until they’re sure which way things are going. And increasing their leverage certainly increases their risk profile.
It sounds like the 2004 outlook for business lending is better than it was last year.
We are forecasting modest growth. In the stronger years, we would anticipate 8% to 10% loan growth. But our forecasts are much more moderate this year.
And with interest rates still low?
We do forecast continued strong demand for owner-occupied commercial mortgages. That isn’t something that’s softened. But acquisition financing, capital expansion, all the things that would skew commercial borrowing demand, still are somewhat cautious.
We think 2004 will be better than 2003, but it’s not going to be a huge year.
So you’re looking toward 2005 for big growth then?
I think so. I think if the economy continues to recover this year, you’re going to see the numbers get better.
Anything that could make 2004 a bigger year?
An economy that strengthens more than we anticipate. It’s going to be fueled by the economy.
And from an interest rate perspective, low interest rates, while they may be a reflection of a slow economy, do help with loan demand. Certainly on the mortgage side.
What is the outlook for consumer banking? Obviously deposits have grown.
Oh, very much so. And that’s very true for commercial banking, too. We’ve had very strong deposit growth, particularly in the demand deposit area.
Union Bank has had large net new consumer growth. A lot of increase in the draft deposit and money market accounts,they’re at an all-time high.
From the standpoint of loan demand among consumers, it’s really home equity loans. That’s the highest demand product. 2002 was a huge year for us. 2003 continued strong. We’re forecasting it to remain flat for 2004.
Auto loans go a lot to captive lenders and credit unions rather than to commercial banks. And particularly the captive lenders with the zero interest rate financing. So we’re focused on home equity loans and personal loans secured by home loans.
But, by far, home equity loans are our largest product. And that will continue strong.
What’s going to happen to mortgage lending this year?
The yield curve is steep right now. In other words, short-term rates are a lot lower than long-term rates relative to historical levels.
So even if interest rates increase 50 basis points, which a lot of people think they will over the course of the year, fixed rates may or may not increase. The yield curve could flatten out. Rates still are attractive by historical perspective.
We don’t think demand for mortgages, particularly on a consumer basis, will be what it was in 2004. We expect the volume to drop 25% to 30% because the refinance business has slowed down. But the purchase business still is very strong.
In Orange County, what are you doing to attract consumer customers?
We are keeping our loan rates very attractive to continue to grow our consumer book. Mortgages have been a huge growth area for us. We continue to offer very attractive options for mortgages.
We launched a new advertising campaign last year. That will continue to grow our consumer business. We’re a half-wholesale, half-retail bank. Both are very strong growth areas for us.
Our branch expansion is partly through acquisitions, and we’ll continue to look for acquisitions that enhance areas where we don’t have good branch coverage.
The other area where we’ve done a lot of acquisitions is insurance. We’ve acquired three insurance agencies over the last couple of years.
Our first was one here in Orange County: Armstrong/Robitaille. Another was in John Burnham in San Diego and a third in Northern California, Tanner Insurance. That’s been a really nice area, a synergistic area of growth for us.
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KIM BURDICK
President, Bank of America Orange County Region and Premier Banking Executive for Southern California
Bank of America
What’s going to be the big battle this year in commercial banking in Orange County?
You’ll get a couple of themes across multiple lines of business.
We expect to compete effectively in commercial banking. We expect to increase our loans outstanding this year. Further, we expect to increase the number of relationships we have. Not only going deep with the ones that we have, but acquiring new ones.
As far as key industries: commercial real estate, homebuilders,we’ve built a successful segment here in Orange County,as well as retail and manufacturing. Those are key industries in Orange County.
What are you doing to attract business borrowing?
We already bank so many of them, but we bank them partially. We’re recognizing that small businesses need to be moved into commercial banking for more complete service.
We have personal relationships with the executives of nearly every company in Orange County, and we are going to look to expand in the personal side and get access to the business side.
What kinds of loans does Bank of America make?
We can take a company from their very first startup loan all the way through capital markets access. Mergers and acquisitions,you don’t have to go to another bank.
But big banks are accused of not giving enough attention to smaller clients.
I point to our No. 1 SBA lender status (in U.S.). I think that’s the best expression of our ability to serve the smaller business as well as the larger.
What’s the outlook for business lending?
Overall, I think the commercial area of our business is going to be growing.
In some of the higher-end commercial banking, there’s been some evaluation about the hold positions we carry. And so as we start to make sure our hold positions are well managed, we end up shrinking loans outstanding because we are revising those positions.
Now, we want to grow loans, so that means doing more loans to more companies. We’ve gone through that evaluation of the balance sheet, we have the platform in place and this year it’s more loans to more companies rather than just increasing position with (existing) companies.
Are you looking at 2004 to be a comeback year for business lending?
We’re hearing from our customers that they’re interested in making the kinds of capital investments and expansion that is quite encouraging.
How is consumer banking?
We began an expansion of our consumer banking franchise last year. We increased the number of locations with three new banking centers last year. And we’re expanding the number of banking centers with three (OC) locations this year.
That means about 70 new jobs in our consumer banking franchise. That’s because OC is growing, there’s new real estate development and new households.
Will deposit growth slow this year?
Last year was extraordinary. Some of the deposit grow slowed as money left the market for safer (investments). As of this moment we are not seeing any slowdown in that deposit growth.
I think some of this is share growth as well as customers not just parking money. As the equity markets take shape, we’ll play in that. These deposits are sticking.
How are mortgages?
Last year was an extraordinary market. We expect the refinancing market to continue, but at a lesser extent. We’re placing more focus on purchase money and building referral-based business.
We’re No. 3 in market share (in California) and expect to move up, we’re increasing our number of people and relationships to grow that business as his market.
Orange County is a great market,a lot of homes are being built, there’s a lot of growth in the community. We’re going to focus on the core market, which is providing purchase money financing.
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KIM YOUNG
Executive vice president and regional president for Orange County Community Bank Wells Fargo & Co.
What’s going to be the big battle this year in commercial banking in Orange County?
I really don’t see us having a particular battle or challenge this year. We continue to maintain our lending practices and we want to lend money to good companies. We’re going to try to take on new relationships and deepen existing relationships.
What are you doing to attract business borrowing?
Right now we have a high percent of market share,one of four transactions for small business are processed through Wells Fargo. So we’re already seeing these people, and we have the opportunity to expand.
We are doing a couple of things that are very specific in Orange County. We have named a division manager as our small business division manager here and are specifically creating strategies particular to Orange County. Another thing we’re doing is adding relationship managers for small businesses so that we don’t bring them in, sell them products and then forget them. We bring them in and assign them to a relationship manager who can be their financial adviser.
Is that something bank-wide?
I think that is something the bank is looking at. I think we’re fortunate (to be doing that) here in Orange County
What’s your outlook for commercial loans this year?
We’ve seen our pipeline of commercial loan activity building. There are some promising signs.
Such as?
Purchasing of equipment and that type of thing. Once you start seeing people’s confidence rise, that would typically indicate more confidence.
What’s your outlook for 2004?
We’re very optimistic about this year. We have had record revenue and record profits for 10 consecutive quarters. And OC specifically has been a top-performing region for the bank,we achieved record revenue growth last year.
So most of our growth has come from deposits and loans and the momentum has continued into this year.
We are focused on increasing the number of retail and mortgage stores. We’re putting more bankers in our branches. You’ll see us adding stores as we reach out and create more revenue opportunities.
Where are you expanding?
Well, some expansion is replacement stores in locations that have grown to capacity like in Garden Grove and newer developments. We have one that is planned to open mid-year in Mission Viejo. We plan to open about five new branches (in OC) this year. We’re doing a little bit of fill-in and trying capture the market.
In the home mortgage area, we’re looking to expand in places like Anaheim and Westminster. There are good opportunities in the Hispanic and Vietnamese communities. The (mortgage) business will grow by about four stores this year.
What’s the outlook for consumer banking?
We’re ahead of our January projections. We see the community bank and consumer bank business ahead in both deposits and borrowing.
Since we’re diversified, if the economy softens, then we have the retail banking that backs up other groups of the bank. We are starting to put private bankers in the affluent stores so we’ll be prepared to give sound financial advice if the stock market ends up being the place where money is moving.
What’s your outlook for mortgage lending this year?
We see mortgage lending fluctuating with interest rates. We see the mortgage industry being a growth industry for the next 20 years. But that growth is going to be cyclical, so as rates rise and fall, so will production.
We plan to focus on our new homebuyers, the purchase transactions. Wells Fargo in Orange County has partnered with neighborhood housing services to support homebuyer seminars in Anaheim and Santa Ana. We’re reaching out to different population to give them home-buying opportunities.
