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Sunday, Oct 2, 2022


Homegrown banks in Orange County are flush with cash. Deposit and loan growth is strong, and profits have hit record levels during the past few years.

Startup banks also have flourished during this period. Some cater to the county’s growing Chinese, Vietnamese and Korean populations, while others focus on a healthy crop of small- and midsize- businesses here.

“We have a very healthy loan pipeline,” said Robert E. Hildt, chief executive of MetroPacific Bank of Irvine. It’s a refrain heard from most local bank executives (see related story, page 48).

The business bank, less than a year old, is readying to expand its small business lending group next month.

In October, MetroPacific’s deposits grew by $5 million compared to the previous month. The bank’s growth is spurred in part by an advertising campaign to draw customers with certificate of deposit rates above 4%.

“Things are terrific right now for most institutions, but I do see some building up of risks, and I see greater appetite for risk in commercial lending,” said Richard Brown, chief economist of the Federal Deposit Insurance Corp.

A big factor: Interest rates, which are a key factor in the health of banks, have been on the rise for more than a year.

The Federal Reserve Bank has boosted its key fed funds rate by 12 quarter-point increases since June 2004. The central bank’s federal funds rate of 4% is the highest since June 2001.

Raising rates is a strategy used by the Fed to curb inflation. But while rate hikes lead to higher interest earned by banks from the loans they make, they also can cause an economic slowdown.

Higher rates can cut businesses’ demand for loans, increase delinquencies on existing loans and force banks to pay customers more on short-term investments to attract deposits.

“We’ve been expecting a downturn that hasn’t happened,” said JP Gough, chairman and chief executive of Newport Beach-based Orange County Business Bank.

Orange County Business Bank is nearing its three-year anniversary. It had assets of about $168 million at the end of September.

Gough said that homeowners’ penchant for adjustable rate, interest-only mortgages during the past few years could come back to haunt the housing industry and cause ripple effects throughout the economy.

“Next summer should be stressful when interest-only loans have to be refinanced into permanent (fixed-rate) loans,” Gough said.

But business banks are in much better shape than they have been in the past, Gough said. Loan standards have been tightened from past downturns, particularly the debacle that savaged the savings and loan industry during the 1980s.

“So when there is a downturn, the banks in the county will be able to handle it,” Gough said.

Construction lending is one area to watch on the national level, according to L. William Seidman, who oversaw the bank bailout during the late 1980s and early 1990s as the former chairman of the Federal Deposit Insurance Corp.

Seidman warns that construction lending may turn risky for smaller banks if the economy were to weaken.

Locally, the amount of construction and land development lending by OC banks has nearly returned to its level of 15 years ago, according to Irvine-based bank consultancy Carpenter & Co.

In 1990, more than 60 commercial banks and thrifts based in OC provided more than $1.6 billion in construction and land development loans, according to Carpenter. Construction lending fell to a low of $158 million in 1995, but rebounded to $1.6 billion last year, when fewer than 20 banks accounted for the total.

Certainly the risks don’t portend disaster along the lines of the savings and loan crisis of the 1980s.

Former FDIC chairman Seidman said the financial system is in better shape this time around. Two decades ago, Seidman watched as more than a 1,000 banks and savings and loans slipped into insolvency.

Those days still are fresh in the mind of the 84-year-old.

“There was a conglomeration of errors that came into a perfect storm,” Seidman said.

One of the biggest disasters was Lincoln Savings & Loan Association, an Irvine-based thrift owned by Arizona developer Charles Keating Jr.

The Lincoln bailout eventually cost taxpayers $2.6 billion.

While Seidman has praise for today’s banks, he said many are taking on more risk than they should, either by making interest-only mortgage loans or ones tied to adjustable rates.

With an interest-only mortgage, monthly payments are lower because the borrower is only paying off interest,not the principal during the early years of the loan. So homeowners don’t build up equity in their house and are at more risk if prices decline and they need to sell.

Interest-only loans can come in different forms. Usually they are attached to an adjustable rate mortgage, which means the mortgage starts with a lower introductory rate that expires and eventually ties to the prevailing rate.

“I’d tell banks just what the regulators are telling them today, that the risk in housing is increasing,” Seidman said. “They ought to be prepared for housing prices to either stop increasing in value or go down.”

While that could be a big problem for national home lenders such as Washington Mutual Inc. or Wells Fargo & Co., it doesn’t stand to have a direct impact on most OC-based banks.

Homegrown banks in OC are largely concentrated on business lending, not mortgages or other consumer loans.

“The key to ensuring safety from rapid rises in rates is to avoid speculation on interest rates,” said Gough of Orange County Business Bank.

Like other local banks, Orange County Business Bank is relying on adjustable rate loans,not for homeowners, but rather for its business customers.


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