Not Ready for More Construction Lending – Yet

0

Executives at International City Bank in Long Beach pulled way back on construction lending in 2007 after housing prices started falling.

It was a good move – but too late. The bank still had to write down $10 million in construction loans gone bad. It also closed two of its four branches and saw its assets shrink by 40 percent in the years since.

Now, as other banks get back into construction lending, International City represents the naysayers. Its new chief executive still wants no part of it.

“We’ve fundamentally gone in a different direction,” said Michael Miller, who took over as chief executive in January. “We’re fortunate we’re still around.”

During the boom, construction lending represented about one-third of its portfolio. International City did much of that lending through its two San Diego branches, now closed. Bankers there lent money to developers who were turning apartments into entry-level condominiums.

Housing prices were on the rise, anyone could get a mortgage and, by the end of that year, 46 percent of the bank’s loans were for construction and land development.

When the bubble was about to burst, the bank stopped issuing loans. But developers completed projects that were already under way, and many condos hit the market well after housing prices had started to slide.

By the first quarter of 2008, more than half of the bank’s outstanding construction loans were at least three months overdue. In 2009, regulators ordered the bank to strengthen its balance sheet, in part by limiting its exposure to construction and other commercial real estate loans.

Since then, the bank has focused on meeting regulators’ demands and dealing with bad loans. Regulators lifted their enforcement order this year, but Miller said he’s still working to sell a few buildings taken back from borrowers.

Still, things could have been worse. The bank had already cut back in 2007, the year local community banks reached the peak of their construction lending.

“If we would have continued to generate new loans in addition to what we already had on the books, who knows,” he said. “We probably wouldn’t be here today.”

Miller knows the bank likely won’t be able to predict the next real estate downturn any better than the last one. And even as other small lenders creep back into the market, financing the construction of houses, condos and retail centers, Miller said he’s not looking for construction clients.

Instead, he wants International City Bank to focus on commercial and industrial loans, which provide businesses with working capital or money for expansion. Those loans aren’t tied to the real estate market or any single industry, helping the bank spread risk more evenly.

But more than that, Miller said commercial and industrial loans bring business customers and, more importantly, deposits to the bank in a way construction lending doesn’t.

Low-interest deposits from local customers are key for banks, providing them with a cheap source of funds to lend out. Community banks often ask developers to open a deposit account as a condition of offering a construction loan, but those accounts can easily disappear once a developer moves on to another project.

“Construction lending, even when it’s tied to relationships, you’re not typically going to get new deposits from that,” Miller said. “We want to become a little more relationship focused. I think that’s ultimately what builds franchise value for the bank.”

To be sure, Miller said International City Bank will still lend for construction projects. But he doesn’t plan to chase construction deals as the bank did in years past.

In fact, Miller said at this point he’d only consider a construction loan in very particular circumstances – perhaps if an existing business client wanted to remodel his offices or construct a new building for his own use. Still, he’s not sure he’d go ahead.

But even considering such deals is a big shift from this time last year.

“A year ago, if you’d asked me that, I’d say we’re not going to do construction lending for the foreseeable future,” he said. “Today, I’d say we’d entertain it.”

No posts to display