Ask the Experts: Commercial Banking Trends

california bank & trust story

“While the immediate threat of systemic failure among financial institutions has been lifted, the banking industry will never be the same,” says Gary Green ’80, left, with Sergio Alfonso ’88.

By: Laurie McLaughlin

Gary Green ’80 is the executive vice president and manager of the Orange County commercial banking region for California Bank & Trust, and Sergio Alfonso ’88 leads California Bank & Trust’s commercial lending group in Costa Mesa as vice president and commercial banking manager.

While the economy and the banking industry have seen some rough seas in the last six years, both Green and Alfonso share some optimism. The downturn did not impact the commercial banking business in the same way it did other banking sectors, but it has affected the way all banks approach the future. Together, they share their observations on commercial banking trends:

What does the future of commercial banking look like?

Green: The future will be dependent on multiple competing factors. Many local businesses have begun to grow again after simply surviving the past few years. Often, this growth is fueled by debt from banks. They have spent the last several years cutting back on expenses and getting by with old and outdated equipment. Now that the economy is on more stable footing, those same companies are reinvesting in their operations by using debt to replace and improve their fixed assets. The industry also looks to continue to capitalize on the low interest rate environment through commercial and residential real estate refinances. While rates do look to stay low in the short-term, as rates begin to rise, overall lending from businesses may be throttled back.

Alfonso: Banks in general help boost the economy by making loans, and that’s what we’re here to do. The economy has improved, albeit at a slow pace, and employment is still an issue. But, as Gary says, our customers are doing better than they were several years ago. However, the slow economic improvement is supported in part by government action, so once that support goes away, we’ll see whether the economy will drag a little bit or if the economy is self sustaining and will continue to grow.

Credit tightened immensely during the recession, and this caution may linger for the foreseeable future. What do we need to know about interest rates?

Alfonso: Yes, commercial lending did tighten during the recession, and rightfully so. As a bank, we’re working on very thin margins, which are not like a typical business. So you can’t afford to make a wrong decision very often. It takes many good loans to make up the loss from a bad decision, so we have to be right more than 98% of the time. But credit is becoming more available today than it was even a year ago. It’s a delicate balance: In order to grow a bank, you have to be somewhat aggressive, but you have to mitigate those risks. Fortunately, our bank in particular does a good job of that.

Green: Interest rates began to tick upward after the Federal Reserve’s statement at the end of May proclaiming they are going to slow their support of the nation’s economy. This meant they are winding down their purchase of mortgage-backed securities, which would then lead to higher interest rates, because, as we know, bond prices and interest rates are inversely related. An increase in interest rates will most certainly be categorically positive. While it may seem counter-intuitive that higher rates will be a good thing, it means that the economy will be humming along and hundreds of thousands of new jobs have been created.

What’s the current health of commercial banking in Orange County?

Green: The Orange County banking industry has rebounded on the heels of a reinvigorated housing market and increased lending to small and mid-sized businesses. While the general economy is still facing some headwinds in the form of decreased government spending, legislative uncertainty and stubborn unemployment rates, the overall sentiment is that banks in the region are ready and willing to lend.

With all that has transpired over the last several years, how will the banking industry change?

Green: While the immediate threat of systemic failure among financial institutions has been lifted, the banking industry will never be the same. The amount of legislation that has been levied onto financial institutions is cumbersome and has created entire departments within banks in order to deal with the interpretation and implementation of the new laws and regulation. The overhead related to the new laws not only imposes an increased cost to banks, but portions of the laws themselves are aimed at reducing the amount of fee income that banks can collect. All of this combined with historically low interest rates leads to extremely low profits across the industry. So while the banking industry has stabilized from the volatile heights of the Great Recession, business is anything but usual.

The controversy surrounding the giant mortgage-lending and investment banks has led to a negative perception of banking as a whole. While the commercial banking sector was not directly responsible for much of the crisis, how have you had to combat these negative images?

Green: More often than not, the largest financial institutions comprise all three main sectors of the banking industry: commercial, investment and retail. Because the biggest and most publicized banks are structured this way, the general public sometimes has the misconception that all banks are structured in a similar fashion. This is why smaller regional banks still have to combat some of the public’s angst and resentment stemming from the actions of the largest financial institutions. California Bank & Trust is a regional bank, and like many regional banks, we have put more emphasis on already robust community activities by participating in programs, like financial literacy, and highlighting a more educated approach to major financial decisions. This has helped the reputation of commercial banks in good standing with local customers and business leaders.

There are plenty of job opportunities in commercial banking. What type of employees are you looking for?

Alfonso: Yes, there is a shortage of commercial bankers, and we have a hard time finding people. We are looking for employees who have several skill sets, including finance, accounting and marketing. Commercial lending requires not only an analytical talent – the underwriting work along with understanding financial statements and accounting concepts – but it also requires you to manage a portfolio of customers successfully and bring in new business. Doing all of these things is not easy, but there is great opportunity for people who can do these three things: the analytics, the portfolio management and the sales.

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