While Congress dithers over a $700 billion bailout for America’s beleaguered financial markets, what’s going on with credit and liquidity on Main Street in Orange County? Small banks and local lenders say they see opportunities in the national crisis.
Scott Kavanaugh, chairman and CEO of First Foundation Bank, a year-old Irvine bank with $80 million in assets, said the tough times have actually provided an opportunity for his company to grow. He’s been able to hire good people from troubled companies like First American Corp. and Lehman Bros. “We’re finding a pool of talent that a year ago didn’t present itself,” Kavanaugh said.
Also, because First Foundation is new, it has no problem loans in its portfolio. “We have no bad assets. We have zero delinquencies and zero defaults.”
Because First Foundation is small, it relies on personal relationships and intensive underwriting of all loans. “We drive by every piece of real estate we loan on. If it’s income-producing property, we make sure the income coming in is adequate. We don’t do computer scoring on anything.”
New customers are arriving because other lenders are making it harder to borrow. “Standards in the industry are tightening. I’m finding a lot more clients are dissatisfied. We’ve seen a lot of very good businesses come our way and say they’d like to have a line of credit.”
New customers also are coming from other institutions because they are concerned about the soundness of their current lender. “People are waking up and seeing institutions like WaMu and Wachovia no longer here and so they’re securing banking relations elsewhere. For a business, losing a line of credit is as bad as losing a your deposit in a bank.”
Laura Pephens, a San Clemente consultant for mortgage bankers and other lenders, says there is still money out there for small-business loans but the banks are often driving a harder bargain when lending the money.
“When it comes to consumer lending, there are huge cutbacks because of defaults in credit cards and auto loans. It’s not a problem of liquidity. It’s a problem of the underwriting criteria being stricter. I’ve heard some larger banks are cutting on home equity lines of credit. That could be an indication of a liquidity problem. It could also be that there’s no more equity in the homes to borrow against. When they talk about the $700 billion bailout, it’s not about small business or HELOC loans. It’s about big banks lending to each other.
“Here’s what I’d do if I needed to borrow for a small business. If I had a business with four or five employees, I’d try to raise money through a HELOC. An alternative is to work with a Small Business Administration specialist if my company is larger. Those loans cap out at about $1 million. If I’m larger, I’d go to a regional bank, such as City National, Farmers & Merchants or Bank of the West. If I need $50 million in loans or credit, I’d go to something like Bank of America and negotiate a participation agreement. It’s the larger banks that aren’t doing business these days.”
Tom Rogers, executive vice president at City National Bank’s Orange, San Diego and Riverside County region, said the crisis has not changed the way his bank loans money. City National has $16 billion in assets and 62 branches. Their loans typically range from $250,000 to $50 million, mostly for small businesses needing cash for operations and capital expenditures.
“We are picking up new business. People are coming to us because of trouble at other banks. My observation is that other banks have tightened their underwriting standards and so people are coming to us.”
Rogers said his bank loans money only after building a relationship with companies and getting a good look at their finances. “During stressful times, good relations pay off. Do we do a prudent analysis and say this isn’t the thing to do? Yes, but it’s not happening any more than it did three years ago. Has our view of the market changed? You’d have to be an idiot not to.
“It’s not one of our businesses, but if an auto dealer came to us today and said he’d like to expand a showroom for selling SUVs, we’d probably turn him down.”
Customers are also changing their borrowing. “In general, they’re moving to a more conservative position and that’d be reducing debt.”
Bailout news …
- Fed makes billions available to battle crisis
- Fannie, Freddie disclose subpoenas, investigations
- Oil sinks below $100 as US bailout plan voted down
- Consumer spending weakens as stimulus fades
- O.C. Realtors say bailout key to restoring housing market
Other small business news…
- U.S. small-business confidence plunges in the West
- Small business owners are the hardest workers
- Entrepreneurs sacrifice homes to save business
- August sales of O.C. businesses plummet
- Unpaid payroll taxes total $58 billion
- No new jobs at California small businesses
- Small-business jobs growth shows weakness
- O.C. handbag designer vies for national makeover prize
- Energy storage for hybrid cars wins Fast Pitch competitio
Of course it effects them. Even if all their loans are great, the property values have dropped a ton, thus whatever those loans were for are not what they were worth before. IE their asset to loan ratio is going down.
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