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OUTLOOK FOR BANKS



Commercial banks and thrifts operating in Orange County continue to see growth amid a strong local economy, despite the challenges of a rising interest rate environment.

Financial executives surveyed here see 2006 gains coming from branch expansion, growth in deposits and loans, and a bullish outlook on commercial and real estate lending.

One key issue: how to offset shrinking net interest margins, which measures the difference between what a bank earns on its loans and what it pays out in interest to attract deposits.

Net interest margin, which is a measure of the profitability of a bank, tends to shrink when short-term interest rates are rising while long-term rates are steady,exactly what’s been happening during the past two years.

To attract customers, banks have been increasing the rate of interest they pay on certificates of deposit, which are used as one way to attract deposits that are, in turn, used as the source for lending to businesses and consumers.

But banks can offset higher costs by charging more on the loans they make for everything from construction to equipment investment, though rising rates can increase loan delinquencies.

Last month, the Federal Reserve raised its benchmark short-term interest rate 25 basis points for the 14th time since June 2004.

The Fed hinted that there might be another hike or two in the works as it tries to ward off inflation.

The central bank’s federal funds rate of 4.5% is the highest since before the 2001 terrorist attacks and up from 1% before the Fed starting raising rates.

Local banking executives for the most part said that OC’s solid economy should help them weather the effect of rising rates. Variable rate lending also should help offset rate increases, they say.

The Business Journal contacted several local banking executives to gauge their outlook on rising rates, the direction of OC’s economy, employment challenges, and competition from financial service giants competing for customers and their investment dollars.

Following are their edited responses.


Where will your Orange County growth come from this year?


MARY CURRAN

Orange County market president,

Union Bank of California

Irvine

We expect our bank’s OC expansion will come from our commercial banking,small business, middle market and corporate banking,our private banking and retail banking groups as well as our real estate industries group.


KIM YOUNG

President, Orange County

Wells Fargo & Co.

We plan to expand locations, services and the number of team members in our stores and across business lines in three areas:

Add new stores in high growth areas, expand smaller stores in mature markets and continue to increase the number of personal bankers.

Respond to the complex financial needs of our affluent, business owner and baby boomer (retiree) customers, by placing more highly skilled licensed and private bankers in branches.

Put more business bankers, commercial loan officers and relationship managers in the marketplace to respond to the demands of our growing numbers of businesses and owners.


MARSHALL V. LAITSCH

President of Southern California division,

Placer Sierra Bank

Bank of Orange County unit,

Anaheim

Our expansion plans in OC and contiguous markets will be through branch openings and available acquisitions of banks that possess branches that increase our footprint in Southern California.

We will also continue to hire experienced bankers who will help us increase our market share by attracting their existing client base to our bank.


VERNON AGUIRRE

California regional executive,

Banco Popular North America

Our new corporate building in Anaheim at 888 Disneyland Drive will be strategically located to service small to medium size businesses when it opens in March.

Business services such as cash management, construction loans and commercial financing will be among our commercial banking offerings.

It is here where we see much of the growth and convenience for our customers.

Our bank is very committed to expanding in OC, specifically in Anaheim and Santa Ana.


GEORGE KAYE

Senior vice president,

group manager of retail banking,

Washington Mutual Inc.

Irvine

Our retail banking network represents an important business segment and in 2006 we plan to continue our “in market” financial center expansion targeting between 150 and 200 new offices nationwide for the year.

We currently have 58 Washington Mutual financial centers in OC, with five offices opened in 2005.

We plan to stay on course for our growth in OC in 2006.


THOMAS B. ROGERS

Executive vice president,

Region manager Orange County and San Diego

Commercial & Private Banking Services,

City National Bank

We recently opened three branches in Newport Beach, Anaheim and at the Irvine Spectrum. That gives us a total of seven in OC.

City National is a private and business bank. We help clients with everything from credit and cash management to trust and estate planning. With a bigger presence this year, we’re going to work at developing relationships with the entrepreneurs, professionals and small to midsize businesses that give this community its unique economic vitality.


STEVEN R. GARDNER

Chief executive,

Pacific Premier Bank

Costa Mesa

We will be opening branches in Costa Mesa at the corner of Sunflower and Hyland, in Los Alamitos along the border of Cypress on Katella and in Newport Beach at the Airport Center building on MacArthur.

Thus we will be undergoing a very significant expansion within OC. We also are relocating our Huntington Beach branch to a new facility at the corner of Magnolia and Garfield.

We continue to have success recruiting talented business bankers from some of the large national institutions to staff the branches. With the addition of the new facilities and experienced bankers, we will continue our focus on servicing the banking and credit needs on business owners and consumers throughout Southern California.


What’s your outlook for 2006?


Curran of Union Bank

Our outlook is reasonably upbeat. We are looking forward to a good year in OC, assuming the employment side holds up.

We expect continued growth in all our core markets for both loans (commercial, consumer and real estate) and deposits. One caveat may be if interest rates move up too fast, which could impact the anticipated growth in the real estate market (but we do not expect this is a likely scenario).

Union Bank has had very strong loan growth. In 2005, average loans across the markets we serve grew 21%.

The OC community continues to perform well from an economic standpoint and the business community is becoming more broad and diverse. The community is developing groups to be more supportive of new business and growing business, through programs such as Octane, programs at the University of California, Irvine, and the California State University, Fullerton Family Business Council.

We also have seen strong growth in our foreign exchange business as well as trade opportunities as OC companies expand internationally.

On the real estate side, we expect the region will probably see more office space and condominium growth rather than single-family residential homes.

Young of Wells Fargo

As OC enjoys steady economic growth, we also expect to generate solid revenue results.

We plan to grow across several business lines to meet all the needs of our customers and help them succeed financially while continuing to invest in our communities philanthropically and through volunteerism.


Laitsch of Bank of Orange County

With an expected ongoing strong economy in OC and the Inland Empire, our outlook is for continued growth in our loans and deposits.

We remain bullish on commercial and real estate lending and have kept our deposit and lending rates competitive in order to attract high quality clients.


Kaye of Washington Mutual

We saw growth in all our business segments in OC in 2005. Of note were strong deposit growth and the proliferation of small-business banking.

Our focus is on providing personalized service, competitive products and convenient locations to the broad middle market consumer segment and to small business customers. We look forward to the same strong growth in 2006 as we saw in 2005.


Rogers of City National Bank

Business is good. Our clients are healthy, and commercial borrowing is clearly on the rise.

And of course OC’s economy is strong. People in other parts of the nation are sometimes surprised to learn just how strong.

The 3 million people who live here produce about $154 billion in goods and services. That’s more than 26 other states. This is a great place to be.


Gardner of Pacific Premier Bank

I remain very optimistic about the future of OC and our continued expansion. There are large numbers of businesses and consumers that need the level of service and expertise that a locally owned and managed bank such as Pacific Premier can deliver.


What are the challenges amid rising interest rates for your bank and the industry? Are you seeing a slowdown in any kinds of lending?


Curran of Union Bank

Our core bank is naturally asset-sensitive, so we use interest rate swaps and options to manage our risk and hold hybrid adjustable rate mortgage securities and fixed rate securities to help moderate overall risk.

Our risk management choices are quite conservative. We maintain a less volatile, more granular balance sheet,with no large rate bets.

One of our greatest strengths is our deposit gathering expertise. Our proportion of non-interest bearing deposits to total deposits is among the industry’s highest.

That drives down the average in our cost of funds, supporting our net interest margin and allowing for flexibility in loan pricing without succumbing to overly aggressive lending practices.

The banking industry in California faces several challenges. They are: increased competition from banks (startups and out-of-state competitors moving into California) and non-banks; the possibility of a slower economy, which can impact business conditions and add challenges for our customers; and increased compliance issues, particularly related to the nation’s anti-terrorism programs.

One example of the terrorism issue is that there is a heightened “know your customer” requirements being placed on all banks.


Young at Wells Fargo

We expect a decline in mortgage refinancing activity as interest rates on home equity lines increase. People will begin putting off home improvements or scaling down projects to limit interest expense.

We’re also seeing fewer home purchases and an increase in the amount of time homes aren’t sold, which could weaken prices.

We do see good news for commercial lending and expect an increase in commercial construction and lending.

With corporate profits and cash-flows at near record highs, and debts at low levels, we expect businesses to be able to increase spending on equipment and expansions.

This typically translates to businesses needing to borrow more to keep up with the demand.

Challenges facing the industry include:

Identity theft. The hard cost to customers and financial institutions is steep. While we work with our customers to inform them on how to avoid identity theft, we aim to offer them the right products and services that would minimize the risk of becoming victims. Bankers need to collaborate with law enforcement and the legislature to ensure cases are investigated, criminals prosecuted and consequences are tough enough to deter this crime.

Home ownership. OC’s housing affordability gap grows because of a lack of affordably-priced homes. State and local government policies need to be changed so that reasonable and smart growth takes place to meet demands. Increasing home ownership will remain one of our top priorities for our corporate giving and community development.

Compliance. Bankers constantly have to balance customers’ needs and their privacy with complex time-consuming and costly requirements put on us with regulatory and legislative mandates to meet the Bank Security Act and Patriot Act.


Laitsch of Bank of Orange County

The challenge in our business continues to be attracting and retaining outstanding bankers to service our customers.

With the continued expansion of banks in OC, including many startup banks, there is always pressure to retain your existing staff.

Maintaining a healthy net interest margin is an additional challenge in a rising interest rate environment, but we have done so by closely monitoring our asset and liability rates.

Our loan portfolio quality has remained excellent as with most banks the past several years, but we must remain vigilant in a rising interest rate market.


Aguirre of Banco Popular

One of our challenges is to generate additional fee income to offset the shrinking net interest margin.

Our commercial lending side continues to show strong growth in all sectors. We also capitalize on the fact that we are more than a century old, which has given us a strong track record of supporting the communities we serve, and helping customers reach their financial goals with the wide array of products we offer.

Our challenge is the aggressive rates being paid on deposits by non-banks (credit unions, online banks, among others).

However, the bank differentiates itself by providing “high-touch” customer service to our clientele.


Kaye of Washington Mutual

We are facing the same challenges as everyone else, in terms of interest rates being raised. However, we are still in an environment of relatively low rates.

Our multi-family, small-business and residential lending have seen steady growth in 2005. I believe we will continue to see consistent growth in lending in 2006.

I believe the industry is seeing a couple of challenges.

The flat yield curve is currently the biggest and is one reason why so many financial service companies are trying to diversify.

In OC, as with many California communities, home affordability is posing a problem, creating challenges and opportunities for the industry. We try to provide customers with education, opportunities and products to help get them into a home.

Identity theft also is a problem for the entire industry.

Customers enjoy convenience afforded by technology. Unfortunately, technology is also affording criminals opportunities to commit crimes. In addition to installing various internal and external warning systems, our goal is to keep customers educated about how they can work with us to protect their financial assets from criminals.

We also work closely with other financial institutions and government entities to stop criminal activity.


Rogers of City National Bank

Residential lending is continuing to grow, and demand for business loans has been growing steadily, as well. We expect that to continue this year.

From the viewpoint of our business clients, we’re not anywhere near interest rate levels that would curtail the borrowing needed to finance growth. If a business can buy a machine that will produce a 20% to 30% return on investment, then they can pay 6% or 7% interest and still have a positive return.

So we see the current environment as more of an opportunity for savvy entrepreneurs than a challenge.

Attracting and retaining good people is a challenge for any organization that has grown as fast as we have.

Talent drives corporate performance,now and over the long term,and companies have to compete for a limited supply.

We’ve been fortunate. We have attracted some very good people,seasoned bankers and wealth managers,who really like our commitment to service and relationship banking.


Gardner of Pacific Premier Bank

Our challenges are similar to those of many institutions. We remain optimistic regardless of the interest rate environment because of the quality of our bankers as well as products such as ATM fee reimbursement and “Totally Free Checking.”

Key issues for the industry this year include reducing regulatory burden; deposit insurance reform; relief from the onerous provisions of Sarbanes-Oxley on our public companies; the fight against Wal-Mart’s push to mix commerce and banking; and regulatory reform of the government-sponsored enterprises (Fannie Mae and Freddie Mac).

We anticipate a very challenging interest rate environment.


How is your bank reaching the growing ethnic population in OC?


Curran of Union Bank

Union Bank established an agreement with Moneygram several years ago to help us better serve our ethnic client base by making it easier to transfer money to foreign countries. It can be done in their native language in a safe, secure and economical way.

Our Asian (Vietnamese, Japanese and Chinese) clients as well as our Hispanic clients also are served by offices that are staffed with employees and managers skilled in the language and the culture of our customers.

We are coming out very shortly with additional small-business materials targeted specifically for these markets in their native language.


Young of Wells Fargo

We’re committed to meeting the financial needs of our diverse residents and business owners. We’ve focused on in-language and culturally appropriate communications, innovative products and services, strategic advertising, and community outreach.

We’ll continue to increase the number of bilingual, bicultural team members hired from within our communities; we will participate in cultural events in a major way; we’ll provide innovative services, such as our six international teller sites where customers can buy or sell nearly 100 types of foreign currency.

Our ATMs now offer instructions in Spanish, Vietnamese, Korean, and Chinese.

We were the first major bank to begin offering a remittance account to El Salvador and Guatemala and, through a new partnership, we increased the number of banking locations in Mexico that receive consumer remittances.

Wells Fargo offers special programs that help low- to moderate-income and minority customers qualify for a mortgage, such as our National Homeownership Program and Celebrate Home Mortgage Pilot.

We’ll support all these efforts by teaching financial literacy, business seminars and first-time homebuyer workshops in English, Spanish, Vietnamese, Chinese and Korean and by increasing our volunteerism and philanthropic outreach to organizations.


Laitsch of Bank of Orange County

Our bank and its nine branches are located in many diverse ethnic markets, and we draw a great deal of good business, both commercial and consumer, from our presence in these markets.

We also provide employment opportunities in each of these markets and donate time and resources as an additional outreach in these communities.


Aguirre of Banco Popular

We reach out to minority organizations through our participation in nonprofit Chamber of Commerce organizations that support these minorities.

One of the many ways is to deploy programs that address financial literacy, Small Business Administration seminars for small businesses, and affordable housing seminars for first-time homebuyers.

We also continue to participate in sponsorships through the local Orange County Affordable Housing Authority.


Kaye of Washington Mutual

Our outreach to ethnic cultures includes and stretches beyond product benefits. Washington Mutual believes in locating our financial centers in ethnic growth areas and, more importantly, staff those centers with people that live in, understand and speak the language of the local community.

We want to make sure our employees can relate to their customers.


Rogers of City National

Our goal is to provide entrepreneurs, professionals and business owners with a complete set of personal and professional financial solutions.

These entrepreneurs and business owners are becoming increasingly diverse, and one of the things that sets our company apart is its ability to develop strategies tailored around each client’s needs.

How is your bank stemming the flow of deposits to other investments such as mutual funds or stocks?


Curran of Union Bank

Wealth Management, including investment services and private banking, is one of our core strengths and we see continued opportunities to grow in this sector despite competition from other non-bank financial providers.

Additionally, we offer many of the same investment opportunities as those non-bank competitors through our investment services capabilities.

Naturally, we are always looking to adapt to our customer’s changing needs or the changing market dynamics with the investment products we offer.


Young of Wells Fargo

Our business model is built around 80-plus diverse businesses designed to ‘follow the money.’ We can offer all customers, consumers and businesses, every product they need at every stage of their life and in any economic cycle.

We have plans to redesign our private banking program to ensure everyone has access to highly skilled bankers and great investment advice.

We will be adding bankers located inside our branch offices and opening specialized branches to help affluent residents and business owners with financial planning and customized financial solutions when, where and how they want it.


Laitsch of Bank of Orange County

This issue continues to pose challenges as our business and consumer clients have many alternatives for investment.

We focus a great deal of energy to providing competitively priced deposit products along with a level of customer service that we believe allows us to stand out among the banks with which we compete.

We use specialists on our staff who are able to attract deposit rich customers by understanding their needs and finding solutions for them.


Aguirre of Banco Popular

We currently have a program in place specifically designed to acquire core deposits: Totally Free Checking, and Totally Free Business Checking for businesses.

These products are attractive and continue to bring customers to our branches and our commercial businesses.

We are constantly evaluating new and creative ways to keep our customers engaged and reach their financial goals.


Kaye of Washington Mutual

I believe that disintermediation presents us with opportunities to help our customers. We believe it is all about educating the customers and doing what’s right for them.

We are fortunate enough to have WM Financial Group, our broker dealer affiliate, associated with our company and have financial consultants at our financial centers to provide guidance to our customers.

Once again, it comes back to educating customers and providing them with the products and services that make their financial decisions easier.


Rogers of City National Bank

City National’s commitment to personal service and our strong cash management capabilities have helped to produce an exceptional deposit base.

Our deposits continue to grow. But we also provide investment alternatives and help clients manage their liquidity and wealth.

In fact, through City National Asset Management and 11 investment affiliates, we manage or administer assets of nearly $40 billion.

This is a fast-growing part of our business, and our investment advisers have delivered excellent results for their clients.

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