Lending: Low Rates, Low Turnout Equal Low Profits By SHELLY GARCIA Senior Reporter A year and a half after the Fed began slashing the prime rate as an incentive to boost borrowing, lenders are taking matters into their own hands. With little net effect on loan portfolios as a result of rate cuts at many of the local banks around the greater San Fernando Valley, lenders are stepping up marketing, lowering or eliminating minimum interest rate levels on floating loans and adding fees for other services in an effort to boost lending activity and profits. The prime rate, which now stands at 4.75 percent, has proven to be a flimsy line of defense against an economy that’s reduced the numbers of new borrowers. And low interest rates are fostering a comparison shopping frenzy for refinancing that’s making it hard for some banks to maintain their existing loan portfolio levels. Local banks are not exactly bleeding. But some are reporting that growth has slowed considerably compared to last year and, with less income from each loan they do write, it is becoming harder and harder to meet profit goals. “Second-quarter numbers weren’t anything to write home about,” said Gary Wehrle, chairman and CEO of Pacific Crest Capital Inc. Agoura Hills-based Pacific Crest wrote $5.6 million in new SBA loans in the second quarter of this year, compared to $8.9 million for the comparable quarter last year. The reasons had more to do with internal management changes than the environment, Wehrle said, but even its income property lending, the larger portion of the bank’s business, has been lackluster. “As I talk to lenders across the city, everybody is a little bit below budget in terms of income property lending,” said Wehrle. Income property, real estate like apartment complexes and strip centers bought by individuals and small companies for investment purposes, has become an especially hot commodity as the stock market has plummeted. But the same reasons leading buyers to seek those properties are keeping sellers from parting with them. With fewer buyers, Pacific Crest and others are facing a smaller pool of borrowers. The story is a little different depending on the particular bank and the sector it serves, but for most, the supply of borrowers has narrowed. When the Fed began slashing the prime rate, it expected to spur the economy by offering companies an incentive to borrow and expand. Instead, many potential borrowers are standing on the sidelines, trying to wait out the economic downturn before incurring additional debt. Others have been so battered by the shutdown in capital spending, they no longer pose acceptable risks to lenders. “There are companies, well-known companies, who a year ago you would have financed their capital equipment needs, that you wouldn’t get near with a 10-foot pole these days,” said Charlie Lombardo, national account manager for Relational Funding Corp., which finances leases on technology, networking and studio production equipment. A few banks report that their new loan volume is up considerably compared to last year. Verdugo Banking Co. in Glendale has seen its loan portfolio grow by 20 percent, according to Chuck Fenton, executive vice president and chief credit officer at the bank. And Silicon Valley Bank in Westlake Village, which specializes in small tech startups, has been able to take advantage of the downturn in venture funding and the dearth of takers for initial public offerings. “There’s less equity and capital coming into these companies, either in the form of IPOs or venture capital investments, and there’s other lenders that are pulling out of the market,” said Mark Turk, senior vice president at Silicon Valley Bank, “and we’re picking up market share as well.” But even these companies are having a hard time matching last year’s profit levels on interest rates that have been cut virtually in half. “Nine percent prime was kind of nice,” said Chuck Fenton, executive vice president and chief credit officer at Verdugo. “But at 4 3/4, it’s taken our net interest margin and cut it significantly. With the growth in our loan portfolio, we’ll beat last year’s earnings, but not by much.” For most banks, the margin percentage between the rate at which they can get money and the rate they charge customers remains constant regardless of how actual market interest rates fluctuate. But because rates have slipped so dramatically, what banks earn on these loans has decreased considerably. “What’s interesting is there’s a lot of fixed costs that don’t change,” said Turk. “So as rates come down, we actually have less net interest income to cover fixed charges. So lower interest rates can be challenging for a bank.” To some extent, banks can compensate for lower interest rates on loans with lower interest rates paid on deposits. But many banks are also having to take additional measures. To make up the difference, Verdugo in the past year has begun applying various fees for other services on a case-by-case basis. “We look at what it’s costing us to keep these accounts and provide the services, and then we have to evaluate whether we can do it and not make money or collect some of the money back,” said Fenton. Others are moving to try and boost the volume of their lending in hopes that larger portfolios will compensate for reduced income on each loan. Pacific Crest, for example, has removed the loan floor it used to impose on floating rate loans. Officials figured that the floors, ceilings below which the bank would not pass interest rate decreases along to borrowers with floating rates, was a deterrent to new borrowers and those in the market to refinance. “We thought, it’s a little competitive out there, the market is a little flat,” said Wehrle. “For anybody who wants to get a loan, let’s give them the advantage of riding this down as low as it goes.” Still others are stepping up their marketing efforts hoping to attract new customers. “We may not be able to do business (with past customers) for another year or year and a half,” said Lombardo. “You have to find other opportunities out there. That’s why I call and pester these people. “I’m smiling and dialing.”
