With the world watching if the U.S. economy is going to fall into a recession, local financial players have a more optimistic view of how the slowing economy will affect their businesses. The Business Journal’s Dan Beighley recently chatted with local banking executives. Here are their edited comments.
What does a slower economy mean for your business?
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BURDICK |
KIM BURDICK
President, California Premier Banking
Bank of America
Newport Beach
We’ll see some disruption, but we have a diversified business model, so for the most part our strengths offset our weaknesses. We expect stable job numbers in Orange County; our 5,000 associates working will remain constant. Our business focus on quality and client strength helps us survive a declining economy.
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CONNELLA |
SCOTT CONNELLA
Market president
Union Bank of California
Irvine
With any bank, the performance of its customer base is key. When customers start to struggle, it affects the bank’s risk of default and we have to take bigger provisions for potential credit losses. We increased the provisions in the fourth quarter to protect against future charge offs. But we’ve got a very clean portfolio and haven’t had to deal with many losses.
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FOLEY |
SEAN FOLEY
Executive vice president,
Mellon 1st Business Bank
Newport Beach
Our results for the past year were very strong, and we plan to build on that momentum in the coming year. We are very fortunate to have clients who are considered the best of the best in their respective industries. While they are concerned about a slowing economy, we expect, and they are confirming, that their businesses will remain strong and begin to opportunistically gain market share from their competitors. That said, the “R” word (recession) is brought up by our clients in every conversation of late.
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KAVANAUGH |
SCOTT KAVANAUGH
Chairman and chief executive
First Foundation Bank
Newport Beach
From my perspective, a slower economy means the Fed will continue to lean toward an easier monetary policy (lower interest rates). Recently, rates on deposits have fallen sharply as a result of the Fed’s aggressive stance in its attempt to thwart a recession. Although loan demand appears to be falling slightly, margins on our existing balance sheet will continue to increase as long as the yield curve continues to steepen.
How will a slower economy affect OC?
Burdick of Bank of America:
OC will be assisted through diversification, but on a personal level individuals will lose jobs and need to seek employment elsewhere. People are and will (continue to) lose homeownership. Industries that will be challenged are mostly real estate, finance, the sales and brokerage trades, manufacturing and sellers of household goods. We expect to see biotech, health industries, education, hospitality and export businesses hold up.
Connella of Union Bank of California:
As the economy slows there will be less demand for credit. People won’t need as much financing; there will be less buying and less merger and acquisition activity. When people read news that’s negative they delay their decisions. Maybe they’ll wait six months before going forward with something. A slower economy also affects jobs. OC specifically is exposed with real estate and construction activity.
Foley of Mellon 1st Business Bank:
Our bank continues to seek out talented bankers. However some of our clients are looking more closely at their staffing levels. While we haven’t heard them say that they will layoff employees to any degree, we are hearing that there is slowdown in the hiring of incremental people. Some clients are looking to their competitors for top talent as companies that aren’t as strong begin to feel the effects of a slowing economy.
Kavanaugh of First Foundation Bank:
It appears to me that the OC economy has already been impacted by the difficulties that so many OC financial firms have experienced with subprime lending. In particular, class A commercial office space appears to be more impacted here than in other regions of the country. Also, although I believe single-family housing has been hit harder in other counties in California, OC will continue to experience a decline in housing values.
How will lower interest rates affect your business, the economy?
Burdick of Bank of America:
We expect to pick up loan volume as lower rates attract borrowers. The volume should make up for any margin compression that we’ll lose from lower rates. Our business model focuses on quality; we’re not at the volatile end of the tail. 0
Quality borrowers with equity can and should look to restructure their debt or take advantage of lower interest rates. The tougher story is for the saver. Traditional deposit based rates will be down and markets will be volatile. This environment should cause savers to look at their content and placements of investments, particularly retirement. Most have scattered savings and are not well planned for.
Connella of Union Bank of California:
Lower rates won’t do much for the bank’s balance sheet, but it helps our clients. We will take in less money on loan interest, and with a good number of our deposits in non-interest bearing accounts the margins should shrink. For our clients lower rates allow them to borrow at lower rates, with many refinancing. It should help in a slowing economy.
Foley of Mellon 1st Business Bank:
While we, along with our clients, are feeling the effects of the rapid pace of lowered deposit rates, we do expect to benefit from a steepening yield curve. Our clients rely on us to manage many traditional and nontraditional investment vehicles for their excess cash and in times like these they become even more aware of how important it is for them to have a banker who can act like a financial adviser and partner.
Kavanaugh of First Foundation Bank
Lower rates have been translating to deposit rates going down, but credit markets have not eased enough to have corresponding housing rates fall substantially. This is a bit of a predicament for those who still qualify to refinance. It has not really translated into lower mortgage payments for OC residents.
Banks Tighten Standards As Loan Defaults Surge
Easy credit no more.
In the aftermath of the credit market collapse, lenders have made things a lot tougher for borrowers.
The days of inflated loans and stated income are long gone as realistic home price appraisals and verified borrower income are required again.
Banks have tightened credit to protect themselves against an upsurge in defaults and the falling value of homes.
“We’re taking a closer look and evaluating everything very carefully,” said George Kaye, a senior vice president at Washington Mutual Bank.
Washington Mutual Inc. is requiring higher credit ratings from its borrowers and has stopped accepting stated income loans, where applicants didn’t have to prove their income.
It is also requiring borrowers to put down larger amounts of cash as a down payment when buying homes to make sure they are committed to and can afford the property.
In the heyday of the latest housing boom, some speculative homebuyers were known to borrow more than they could afford in hopes of making money in equity as home prices continued to climb. Some even committed fraud to get loans to be able to break into the market.
But when prices began to go south, the borrowers ended up with loads of debt they couldn’t pay off.
Like Washington Mutual, Bank of America Corp. is requiring borrowers to put down at least 10% of the sale price when qualifying for loans.
“We started to anticipate the downturn two years ago and have been advising clients to increase liquidity for better protection,” said Kim Burdick, local market president for Bank of America.
While nearly all home lenders have tightened, the situation for business lending hasn’t changed for many banks.
Union Bank of California says it continues to make the same amount of loans as it did a year ago, but moves a little slower.
“We’re not participating in aggressive deals,” said Scott Connella, market president of Union Bank.
Other banks see the mess some lenders are dealing with as an opportunity to grow market share.
“Our bank had little to no exposure to the subprime mortgage markets, so we expect to continue to benefit from a tightening credit market environment as other banks change their lending philosophy,” said Sean Foley, executive vice president of Mellon 1st Business Bank.
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Dan Beighley
