For some local banks, 2009 was a turning point. For others, it was the end of the line.
Looking back on a year of tremendous upheaval, one in which some local banks faced nine-digit losses, one thing is certain: The L.A. banking industry was dramatically reshaped.
East West Bank, despite incurring substantial losses, became Southern California’s largest indigenous bank, ending City National’s seven-year reign. Hanmi Bank, under pressure from regulators, began to lose its grip on the local Korean-American bank industry. And one of the area’s largest institutions, California National Bank, was shut down entirely.
“You’d have to go back at least to the early 1990s to see a year that has been as difficult for banks,” said Wade Francis, president of Unicon Financial Services Inc., a bank consulting firm in Long Beach.
With the recession, lots of loans to businesses soured. With the housing market in the dumps and new construction at a standstill by early this year, many of the bread-and-butter residential real estate loans of community and regional banks began going bad in large numbers. In just the first three quarters, banks headquartered in the county tightened lending practices and set aside $2 billion to cover expected losses.
“Many banks are having problems with asset quality,” said economist Sung Won Sohn, a director of First California Financial Group Inc. in Westlake Village. As a result, he added, “lending is not the top priority for many banks.”
By the middle of the year, a potentially bigger problem began to emerge as signs of stress became clear in Southern California’s commercial real estate market, with office and industrial vacancy rates rising to their highest levels in years. According to a recent Business Journal analysis, 40 percent of all the loans held by L.A. banks are in commercial real estate, roughly three times the national average.
“The next shoe to fall is commercial real estate,” said Sohn, the former chief executive of Hanmi Bank.
For some, the shoes have already fallen.
Besides Cal National, which was closed Oct. 30, First Bank of Beverly Hills, Alliance Bank and Mirae Bank were seized by regulators this year. And with L.A.’s banking community contracting, a number of larger institutions, including US Bank, have expanded in the area, concerning some local bankers.
“The banking industry is migrating toward large banks,” said Babette Heimbuch, who recently stepped down as chief executive of FirstFed Financial Corp., the holding company for troubled First Federal Bank of California. “Consumers lost a lot of personal-touch institutions.”
The 80-year-old L.A. savings and loan lost more than $300 million over the past year due to its heavy origination of adjustable-rate mortgages during the housing boom, and the thrift received a cease-and-desist order in January. The bank announced Heimbuch’s resignation Dec. 11 after failing repeatedly to raise its capital levels.
But the industry turmoil has been good for some local banks.
East West, for instance, recently became the largest bank in Southern California and the nation’s largest Chinese-American institution by acquiring the assets of United Commercial Bank, a San Francisco bank shuttered in November.
Before its blockbuster acquisition, though, East West was arguably one of the losers of 2009. The Pasadena bank lost close to $200 million during the first nine months of the year and set aside an additional $388 million to cover future loan losses, more than any other local bank.
To pull off the acquisition, Chief Executive Dominic Ng reached out to investors, who forked over $500 million in just days.
“We have very supportive shareholders,” he said.
The bank passed City National, which had been the largest in Southern California since 2002.
Russell Goldsmith, chief executive of City National Corp., said being No. 1 is unimportant and instead pointed to the institution’s relatively strong performance. The bank was profitable in 2009, earning $22 million through the first three quarters, though the earnings were down significantly.
“All things considered, City National has navigated very turbulent waters quite successfully,” said Goldsmith. “In my 14-year tenure as CEO, (2009 was) certainly the most challenging.”
Like most bankers, Goldsmith was cautious about his 2010 predictions. While he expects unemployment to peak and the economy to begin to rebound, he believes bad commercial real estate loans could still pull some local banks under.
“You’re going to see continued turmoil and the disappearance of the weakest financial institutions,” he said.
