Prime Rate Cut Welcomed by Independent Bankers

The decision by Bankers Trust New York to drop its prime lending rate Wednesday to 10% was greeted by Orange County’s independent banking communtity as a welcome event that should help improve the local economy and perk up lagging loan demand.

But like their counterparts in major banking circles, the county’s independent bankers are not racing to follow Bankers Trust’s lead.

At most local banks, as at most major institutions, the prime--a measuring stick from which banks figure interest rates for the best commercial customers--currently is 10.5%

And the county’s independents are waiting to see what the major West Coast banks do before adjusting their own prime rates.

“We are extremely pleased to see it happen because you increase confidence in the economy and it increases our loan demand,” said Lance Blue, chief executive officer of CommerceBank in Newport Beach.

“The economy has slowed down considerably, and having a reduction in rates tends to get things going again,” said Blue.

“My personal opinion is that we’ll see rates staying at this reduced level till year-end, and maybe into the first quarter of 1986, then a gradual upswing and money might get a little tight,” said Blue.

“If you’d asked me six months ago if I expected the prime rate to decline, I’d have said no. I expected the prime rate to gradually increase through 1985, mainly due to the federal deficit problems,” Blue added.

Blue said CommerceBank’s rate still is 10.5%. The bank will follow the action taken by Bank of America, which Blue said is expected to drop its own prime rate within the next few days.

Paige Simpson, president and chief executive officer of Citizens Bank of Costa Mesa, said he had expected the rate to drop, but only to 10.25%.

“I was more pleased to see it drop to 10%,” said Simpson. “I think the prime rate has been held up artificially the last few months, compared to the rate of inflation.”

Simpson said Citizens Bank would wait to see what Security Pacific and First Interstate banks would do, but he expected that “by Friday most of the banks will be down to 10%.” Citizens’ prime rate is now at 10.5%.

“This may be short-term,” cautioned Simpson, adding that long-term mortgage rates would not be significantly affected in that case.

“This applies a lot more to business and industry” than to consumers, said Simpson. “You’ll be seeing more expansion, which doesn’t happen with high interest rates. Overall it’s a very good sign.”

Richard Cordova, president and chief executive officer of California City Bank in Orange, called the move “a good stabilizing factor for the economy.”

“Things have been a little sluggish,” said Cordova. “I do think it’s going to have an effect on long-term real estate rates, and it will definitely help the small businessman carry his bank debt.”

Cordova said California City Bank does not tie its prime rate, currently 10.5%, to any other bank’s, but will be considering a change tomorrow during its weekly strategy meeting.

“The timing couldn’t have been better for the real estate market, with their peak period coming up,” said Cordova, referring to the traditional increase of real estate sales during the summer months.

He added a note of caution, however, in case loan demand increases sharply. “If it overheats too soon, we could have those interest rates moving up very quickly, but I hope that doesn’t happen.”

At Eldorado Bank in Tustin, President and Chief Executive Officer J.B. Crowell said he was not surprised by the rate drop.

“The loan demand is falling off on a national basis,” said Crowell. “Our loan rate has been level this year, but it had been growing from 10 to 30% the last few years.”

Eldorado’s prime rate is currently 11%, and Crowell said he expects it will drop by half a percentage point, to 10.5%.

“We change according to what the major New York banks do,” said Crowell. “If loan demand remains soft, I could see that we’d have cuts before year end because the economy is not growing as rapidly as it has been in the past.”

“I don’t think a half-percent change is suddenly going to rejuvenate the economy at all,” continued Crowell. “I think it will take an 8% or 9% prime rate and a mortgage rate of 11% or 12%.”

Stan Pawlowski, chairman of the board at El Camino Bank in Anaheim, said the rate change “should really help all business.”

Pawlowski said he was expecting the move because “we didn’t have that much of a loan demand, the economy was very slow, and people were reluctant to borrow.”

El Camino’s prime rate is now 10.5%, and he said that the bank--like CommerceBank--will follow Bank of America’s lead.

“Being the largest, they kind of control the industry,” said Pawlowski. “You’ll probably see it within five to seven days.”

He predicted that small and medium-sized companies will increase inventories, and more people will be spending money on entertainment and eating out.

“For banks and financial institutions it will mean a bigger flow of cash into the organizations and bigger profits,” said Pawlowski. “That will also help the real estate market . . . the rate will come down and more people will be able to buy a home if you get it down below the 13% rate.”