Federal money has made its way to local banks and is starting to spur lending. The sticking point, according to local bankers: finding loans to make.
The recession, declining revenue at businesses looking to borrow or companies’ reluctance to take on more debt have resulted in little lending in recent months, according to bankers.
“We are lending every bit of (federal money) that we can, but we’re not seeing much demand for it,” said Mark Simmons, chief executive of Newport Beach-based Commerce National Bank, which received a $5 million federal investment in January.
Commerce National, Pacific Coast National Bancorp in San Clemente, Garden Grove-based US Metro Bank and Saigon National Bank in Westminster have received $13.5 million in total federal money since October.
The largest bank based here, Costa Mesa’s Pacific Mercantile Bancorp, has been approved for $25.5 million in federal money but hasn’t decided whether it will take the government investment.
Banks based elsewhere that do business here also have gotten federal money. They include Beverly Hills-based City National Corp., which received $400 million.
Most of the banks have used federal money to shore up their cash reserves or to help with expansion, which has led to some lending,the goal of the federal investments.
But demand for loans is down, said John Kennedy, chief executive of Saigon National Bank, which got $1.5 million in federal money in October.
In the past two weeks, Saigon National found eight small businesses it felt comfortable lending to, Kennedy said.
“That’s a big number for a small bank like us,” he said.
Saigon National had nearly $65 million in assets at the end of 2008 and lends to small businesses in the Little Saigon area covering parts of Westminster, Garden Grove, Fountain Valley and Santa Ana.
The bank made loans of $200,000 to $7 million in the past couple of weeks, Kennedy said.
Banks that have taken federal investments are in a tough spot.
The idea behind the investments is to spur healthy banks to keep lending and stimulate the economy. The effort first was part of the Troubled Assets Relief Program, which last fall allotted $700 billion to buy up bad loans from banks.
The Bush administration soon switched gears to investing in healthy banks. Many still refer to the program as TARP, although the focus no longer is on troubled assets.
Banks that have received money face political and public expectations to make loans with it. But they also face a deteriorating economy that makes lending riskier.
At the same time, federal regulators have pressured banks to be more prudent in their lending and to shore up cash reserves to guard against existing loans going bad.
City National, which has seven Orange County branches and $1.7 billion in local deposits as of June 30, has seen federal money bolster cash to handle potential loan losses, according to Chief Executive Russell Goldsmith.
The bank’s ratio of shareholder equity to assets improved from 10.4% to 12.4% with the addition of federal money, Goldsmith said.
At the end of December, City National had more than $16 billion in assets. About 1.3% of its assets, which mostly are loans, were considered bad at the time.
The bank’s improved balance sheet has led to more loans. City National made $340 million in loans and renewed another $1 billion worth in the fourth quarter, Goldsmith said.
At the end of 2008, City National held $12.4 billion in loans, up from $11.6 billion a year earlier.
While City National is lending more, Goldsmith said he has doubts about the economy.
“This is the worst economy since World War II,” he said. “We’re going to see pressure on almost every business.”
Commerce National, which lends to local businesses with yearly sales of $2 million to $50 million, saw little demand for loans in the fourth quarter, according to Chief Executive Simmons.
But he said he’s encouraged by a recent uptick in business, including applications for loans for business equipment.
Commerce National had about $220 million in assets at the end of last year.
For Saigon National, federal money is sort of like venture capital. The bank, which had $65 million in assets at the end of 2008, now is in a better position to grow, Chief Executive Kennedy said.
The federal money allows regulators to feel comfortable with Saigon National making more loans, he said.
Saigon National’s core capital ratio, which measures the amount of cushion it has against loan losses, has gone from about 18% to nearly 20%, Kennedy said.
With bigger banks struggling with bad mortgages or investments in mortgage-backed bonds, Kennedy said he’s seen interest from potential borrowers that he didn’t before.
Last week, someone came to Saigon National looking for a real estate loan, he said. A year or so ago, the same loan likely would have gone to a bigger bank that would have bundled it with others and sold them to Wall Street, according to Kennedy.
But that market “has dried up and now opportunities abound for community banks,” he said.
