During the development boom when some banks gorged themselves on profit from commercial real estate loans, Alan Rothenberg hesitated.
Concerned about the risk, the chief executive of 1st Century Bancshares Inc. in Century City had decided his bank would refrain from getting too deep into commercial real estate. But as competitors raked in money, Rothenberg couldn’t help but wonder if he had made the right decision.
“We were tempted many times on commercial real estate and also residential real estate,” Rothenberg said. “Thank God we had the discipline to stick to our initial business plan.”
Thank God, indeed. The implosion of the real estate market almost certainly has vindicated Rothenberg’s stay-the-course strategy.
After being battered by trillions of dollars in losses from defaulting home loans, banks across the country are now realizing that commercial real estate loans are their next challenge. But a handful of local banks such as 1st Century reduced the threat such loans posed to their balance sheets by either making few of the loans or scaling back on them before the real estate markets collapsed.
Two small L.A. County banks, in particular, kept their commercial real estate portfolios in the single-digit percentages, according to an analysis by the Business Journal. They are Citibank Banamex USA in Century City, with assets of $1.28 billion, and Mizuho Corporate Bank Ltd. in downtown Los Angeles, with assets of $430 million.
At others, such as 1st Century, commercial real estate loans make up around 25 percent of the bank’s total loan volume. Though that figure is higher than the national average, it compares favorably with the 41.5 percent average of all L.A. County-based banks as of the end of the first quarter. It’s also far below the levels of some local banks with commercial real estate loans that comprise upwards of 70 percent of their portfolio.
Rothenberg and the few banks that didn’t indulge were in the minority for a good reason. During the boom, large nationwide banks largely cornered the market on residential real estate loans. That left smaller banks with few ways to grow, so they often turned to loans for resorts, office buildings and shopping malls.
“In order to meet this expectation of growth, the only things left for small community banks to grow were CRE and construction loans,” said Julianna Balicka, an analyst with Keefe Bruyette & Woods Inc. in San Francisco who follows several L.A.-area banks.
Dramatic reduction
Among the small cadre of local banks that reduced the amount of its commercial real estate loans before the downturn hit was East West Bancorp Inc. The Pasadena-based Chinese American bank has more than $12 billion in assets, which makes it the second largest bank in L.A. County.
While commercial real estate loans still make up 40 percent of the bank’s current loan portfolio, East West dramatically scaled back the amount of new loans it made after 2003. Annual loan originations in the category dropped from almost $1 billion to $213 million the following year and continued to slide, according to data from Keefe Bruyette & Woods Inc.
East West Chief Executive Dominic Ng attributed the decline to the fact that the bank refused to relax its standards even when the real estate market caught fire. Some lenders leaned on Ng to do so, but he said he refused.
“It’s not like we had this incredible vision that the real estate market was suddenly going to slow down,” Ng said. “We just felt in that kind of market that it wouldn’t be prudent for us to step up and take those additional risks.”
Its tighter commercial real estate lending practices haven’t prevented East West from slipping into the red in the first quarter this year, when it chalked up a $22.5 million loss mostly because of money it set aside to cover anticipated loan losses. And, like other banks, East West’s shares have taken a hit; even after a spring rebound, its stock trades at less than $8 a share, a fraction of its $40-plus value during the boom.
But its commercial real estate loans, in contrast to its residential and construction loans, have not performed as poorly, Ng said.
With $259 million in assets, 1st Century has managed to stay in the black in the first quarter when other banks experienced losses, turning a modest $130,000 profit. And its stock reflects that. It was trading last week around $4 a share, about 60 percent off from its $10 trading range during the boom.
At times, Rothenberg said, the bank simply ceded riskier but more profitable loans to larger competitors.
“We looked at what was happening out there and it would have been pretty difficult for us to compete with some of the banks with more resources, more experience and more depth in terms of management,” Rothenberg said. “For us to pick a fight, if you will, with the bullies on the block just didn’t seem to make any sense.”
