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Roundtable discussion

Reluctant borrowers, pending regulations keep lending down

Qualified borrowers remain scarce, consolidation continues among the largest banks and new regulations promise to put increased pressure on even the institutions they were meant to help.

According to a recent executive roundtable on banking and finance hosted by The Daily Transcript, that’s the present state of the community banking industry.

The business owners that have survived through the recession have done so through struggle and caution, and aren’t exactly in a hurry to bring on more debt, according to Scott Parker, president and CEO of Vibra Bank.

Or, as Wendell Daniel, partner at Squar Milner, put it, people are “preparing for the past,” and potentially missing the opportunities that are out there.

Others said banks were beginning to lend, just not uniformly.

Commercial real estate lending is a bifurcated market, for example, according to Silvergate Bank executive vice president and CEO Derek Eisele.

Financing has returned in primary markets like New York and Washington, D.C., with leasing on the rise and incomes improving. But lenders, particularly those from Wall Street, won’t step foot into tertiary markets. As a result, values and income streams are falling in those areas, and industry professionals are stalled in a wait-and-see position.

But a closer look at the deals that are taking place in those top tier markets shows that they’re frothy, liquidity-driven transactions from funds with commitments to deploy capital somewhere, according to Greg Garrabrants, Bank of Internet president and CEO, who says his bank finances many such deals.

“I don’t think it’s that fundamentally driven,” he said.

“I’m not sure it’s not driven by the institutional need to deploy money somewhere, so they’re pushing it into markets where they say, ‘Fine, I won’t be accused of doing something stupid, so I’ll buy that trophy property and jam the cap rates back down to where they were without the fundamental economics associated with it.”

On the general resistance to take on debt, Michael Perry, chairman, president and CEO of San Diego Trust Bank reminded that businesses and consumers are still undergoing a great deal of de-leveraging.

“You don’t accumulate debt over 15 years and get rid of it in two,” he said.

There was little optimism that the Dodd-Frank Wall Street Reform and Consumer Protection Act would have its desired effect of protecting consumers. Regulations from the bill are beginning to come into effect, and rules from the Consumer Financial Protection Bureau, which the act created, are still being finalized.

Garrabrants said banks of all sizes would now need more employees in on non-revenue-generating positions.

Big banks are increasing their ATM fees and discussing putting an end to free checking, but all banks are being forced to staff up to ensure they’re in compliance with the law, Perry said.

Daniel said he can’t help but be reminded of the Sarbanes-Oxley Act.

“It’s a knee jerk reaction by Congress,” he said. For the consumer, the bill means higher costs and less availability of credit, Perry said.

One of the most discussed pieces of the bill is its handling of debit interchange fees. Ben Bernanke, chairman of the Federal Reserve, has said the provision will include an exception for banks below a certain size threshold. Community bankers have argued that a so-called carve out isn’t capable of functioning in the marketplace.

But Perry said the question isn’t all that meaningful to most small banking institutions, since most aren’t making much money on debit card fees.

Small Business Association (SBA) loans, previously guaranteed at 90 percent, but since reduced to the still-competitive 75 percent rate, are a loan bright spot in loan growth for Security Business Bank, according to Steve Espino, executive vice president and senior lending officer.

Roundtable Participants

James Burgess, Chief Financial Officer Bank of Southern California

Wendell Daniel, Partner Squar Milner (sponsor)

Derek Eisele,Executive Vice President & Chief Loan Officer, Silvergate Bank

Chaf Ensz, Partner Luce Forward Hamilton Scripps

Steve Espino, Executive Vice President & Senior Lending Officer Security Business Bank

Greg Garrabrants, President & CEO Bank of Internet

Scott Parker, Vibra Bank President & CEO

Michael Perry, Chairman, President & CEO San Diego Trust Bank

Byron Webb, Chairman & President California Home Bank

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