Banking Buzz

Orange County Business Journal, Nov 12-Nov 18, 2007 by Park, Carol

Bankers Lend Thoughts on Credit Crunch, Possibility of a Recession and Strategies for 2008

Banks are riding out the subprime meltdown and Federal Reserve short-term interest rate cuts.

Overall, bankers acknowledge there is a credit crunch but say it 's having a softer effect on local lending. Still, banks are taking safer bets, especially among concerns over inflation and a possible recession,

The Business Journal's Carol Park sat down with a few local bankers to get their input on interest rate cuts, credit tightening, their strategies for next year and if there will be a recession. Following are their edited comments.

How did the latest interest rate cut affect your bank?

TOM MEYER

President and chief operating officer,

Fullerton Community Bank

Fullerton

The recent lowering of interest rates by the Federal Reserve has resulted in a 75 basis point decline of the cost of loans to small businesses, contractors and developers and consumer home equity loans. This reduction in costs of the home equity loan, in particular, will provide some degree of relief to the burdened consumer.

Fullerton Community Bank's profit margin has been pinched somewhat, since the banks and savings and loans that originate mortgages are competing vigorously for deposits and are paying premiums to attract deposits. Thus the overall cost of our funding is not declining as rapidly as the yields on our loans.

JP GOUGH

Chairman and chief executive.

Orange County Business Bank

Newport Beach

Interest rate changes don't tend to affect us as a business bank because of our floating rates on both sides of the ledger.

RAYMOND DELLERBA

President and chief executive,

Pacific Mercantile Bank

Costa Mesa

An interest rate cut by the Federal Reserve eventually affects everyone and all financial institutions. As a consequence, we are forced to lower our loan and deposit rates, which can result in a temporary decline in our earnings.

WALTER HANNEN

Chief executive.

First Vietnamese American Bank

Westminster

First Vietnamese American Bank is generally balanced so that increases and decreases in interest rates affect the bank almost equally from an earnings perspective. From a lending perspective, we are seeking creative ways to meet our clients' credit needs.

RUDY HANLEY

President and chief executive,

Orange County Teachers Federal

Credit Union

Santa Ana

As a credit union for school employees, our first concern is return to our members, followed by ongoing financial viability. Given our concerns, we immediately reduced all prime-based loans and services (our home equity line of credit and Visa Rewards Card)-a move which benefited members participating in these products. We also aligned our share/savings rates with adjustments made in the market. However, the credit union still continues to be in the upper quartile of deposit pricing.

Have you tightened credit or lending policies?

Meyer of Fullerton Community Bank:

We have always been conservative in our underwriting standards. For example, we reduced the size of our mortgage-banking department in 2004 when it became apparent that borrowers' "actuai" income was clearly less than their "stated" income. This meant that many borrowers could not afford the monthly payments for which they had contractually obligated themselves. Sadly, we were correct in our assumption.

We continue to underwrite construction loans that make sense. For the past two years, we have required larger interest reserves by our borrowers in response to the longer lead times in obtaining entitlements and approvals from municipalities, and the longer absorption time required to market and sell a new project. The net effect of this adjustment in underwriting is that we fund construction loans that require larger down payments by the developer.

Cough of Orange County Business Bank:

No. We've maintained our credit culture, based on relationships of knowing our clients. Our clients (who are both owners and managers of their businesses) do not have the characteristic of betting the farm when they do business, so we're fine.

Hannen of First Vietnamese American Bank:

No, but we recognize that many banks have done that and some banks have completely eliminated certain loan products. A good customer is a good loan in any economic environment-we will make loans to them.

Delierba of Pacific Mercantile Bank:

Our credit lending policies have not changed since the inception of the bank in March 1999. The economy is never a reason for us to change our lending standards and criteria, although one might be wise to exit certain industries, as we did when we closed our mortgage division in 2005, thereby maintaining our strong and diversified commercial loan portfolio.

Hartley of Orange County Teachers Federal Credit Union:

We serve a membership base that is very supportive of our credit union, which ultimately results in the repayment of loans. While we have slightly tightened credit criteria, we continue to be a character-based lender that does not rely solely upon automated underwriting systems, but the character and circumstances of our members applying for loans.