Daniel Walker at Farmers & Merchants Bank in Long Beach in an April 2013 photo.

Daniel Walker at Farmers & Merchants Bank in Long Beach in an April 2013 photo. Photo by Ringo Chiu.

City National Bank’s recent sale to Toronto’s Royal Bank of Canada caught nearly everyone by surprise. But maybe it shouldn’t have.

Since the financial crisis, several institutions have decided to team up and merge rather than brave the waters alone, and a tough economic environment for banks continues to put pressure on the holdouts. As a result, the number of banks headquartered in Los Angeles County has dwindled from more than 80 a decade ago to only about 60 today.

In that light, City National’s decision to sell looks less like a seismic shift than just the latest wave in a local banking sea change, driven by rock-bottom interest rates, dramatically higher compliance costs and other forces that continue to squeeze lenders.

And as banks big and small consider selling, buyers see opportunity here. Los Angeles keeps humming along with a diversity of business that’s the envy of much of the nation. The aerospace industry largely left the South Bay in the ’90s and the entertainment business has been dwindling in more recent years, but Silicon Beach and biotech came in to help replace those industries with billion-dollar companies of their own. Downtown L.A.’s apparel industry might be on the ropes, but its real estate market most assuredly isn’t – and a few miles east, millionaire Chinese investors are swooping in to buy properties and start businesses.

The economic and regulatory forces driving banks toward considering a sale set against the backdrop of a booming region that seemingly everyone wants a part of has resulted in Los Angeles becoming fertile soil for bank deals of all kinds.

In this special report, six local bank bosses walked the Business Journal through their analysis of L.A.’s banking scene, focusing on the factors that have primed it for the recent flurry of deals and pointing toward where dealmakers might be looking next.

Regulatory overhang

New reporting requirements put in place after the financial meltdown of 2008 have been wildly successful in creating jobs for bank compliance officers. That’s been especially hard on L.A.’s small and midsize lenders, giving them a good reason to seek out deals.

In one recent example, Covina savings and loan Simplicity Bancorp Inc. was seeking a sale mainly because of higher regulatory costs, its chief executive told the Business Journal. Seattle thrift HomeStreet Inc. closed its acquisition of Simplicity this month.

After the 2010 Dodd-Frank Act, banks have not only needed to hold on to more capital when making loans, but they’ve had to hire more compliance workers to handle a growing volume of required documentation.

“It’s like the government came to us one day and put on the sheriff badge,” said Daniel Walker, chief executive of Farmers & Merchants Bank in Long Beach.

Dunson Cheng, chief executive of Chinatown’s Cathay General Bancorp, said he has grown his compliance team by 50 percent since the financial crisis, and that’s forced the bank to look for cost savings in other areas.

“We simply have to reduce some of the resources that we have to take care of the regulatory burden,” he said. “We just have to grow our business and be much more efficient in our backroom.”

For smaller banks, though, it’s hard to find those efficiencies. That’s why many small and midsize lenders have sought to either grow through acquisition, spreading compliance costs over a larger balance sheet or to sell out.

Dominic Ng, chief executive of Pasadena’s East West Bancorp Inc., said the compliance-cost pressures that have been driving smaller banks to merge are self-evident.

“If you are a $500 million bank, you absolutely should be thinking about merging to a bigger size,” he said. “That bank needs a compliance officer, an internal auditor and a chief financial officer. And then a $5 billion bank needs the same. The expenses are not proportionally bigger.”

Still, though, Ng said some bankers tend to overstate the effect and costs of new regulations – something he said has happened before.

“I remember back in the early 1990s, there were a lot of additional requirements for the Community Reinvestment Act,” he said. “Everyone said it’s driving us crazy. But after a while, you get used to it.”

Low rates

New regulations have also made banks more cautious. Nationwide, banks are sitting on trillions of dollars in cash because many would-be borrowers are still bruised from the recession and are not good candidates for bank loans.

But for those firms that emerged from the carnage with good credit, it’s a borrower’s market.

“Banks are awash with money, so it’s very competitive on the lending side,” said Alan Rothenberg, chief executive of Century City’s 1st Century Bank. “Rates are very low and we’re always in there duking it out with somebody.”

That fierce competition for high-quality borrowers has slimmed down banks’ profit margins and that’s made the potential to cash out in a sale all the more enticing.

Many banks are betting that a rate raise is only a matter of time – especially given the rebound in the economy. Cheng and City National Chief Executive Russell Goldsmith both said their banks are positioned to capitalize on an increase in rates.

“With the prospect of interest rates going up, that will be a little bit of wind at our earnings back probably in the second half of the year,” Goldsmith said.

But plenty of high-profile economists and fund managers have been wrong as of late when predicting an imminent rise, and the uncertainty over when rates will rise is likely one of the reasons City National opted to sell to Royal Bank of Canada, said Matthew Clark, an analyst who covers City National for the New York office of Birmingham, Ala., investment bank Sterne Agee & Leach Inc.

“I think what this says is, one, the board must not have believed that rates were going up any time soon,” Clark said.

Tinseltown shines

It takes two to make a deal. Just because some L.A.-area banks might want to sell, that’s no guarantee there will be willing buyers. But the buzzing economy in many L.A. submarkets, and the wealth of specialty industries to serve – from film to private equity to biotech – have made the city a place where acquisition-minded banks are doing plenty of shopping.

RBC paid a premium price in its recent proposed acquisition of City National for several reasons, but access to City National’s high-end L.A. customer base was certainly one. Commercial lender CIT Group Inc. of Livingston, N.J., was attracted to Pasadena’s OneWest Bank in part because of its presence in high-quality, wealthy submarkets – not to mention OneWest’s lucrative loss-sharing agreement with the Federal Deposit Insurance Corp.

Those sales, by far the two biggest recent deals, have kept the bosses of other local banks busy as other institutions looked for other opportunities to gain a foothold in Los Angeles.

“For five business days following the City National transaction, the phone was ringing frequently,” 1st Century’s Rothenberg said.

He said he’s been able to build a thriving community bank – at a time when many similar institutions have struggled – just by focusing on L.A.’s prosperous Westside.

“We have this unique submarket on the Westside of Los Angeles that’s always been strong, but it’s booming now,” he said. “People are just doing deals now in a way that warms your heart. And so many of them are our size deals. We’re not going to finance a 40-story office building, but we sure as heck can finance an eight-unit apartment building, and they’re just popping up everywhere.”

And L.A. isn’t just wealthy. It’s diverse, with a vast array of middle-market businesses across a wide range of industries. From finance to biotech to old-line manufacturing, there are opportunities for banks with all sorts of niche expertise.

For instance, Rothenberg, who began his career as a lawyer for the late former Lakers and Kings owner Jack Kent Cooke, has provided loans to help attorneys break away from big firms and start their own.

“We know that business, and they know we know that business,” he said.

Banks also see opportunity in L.A.’s finance and biotech industries. East West’s Ng said he is focused on growing his bank’s life-science and private-equity business.

“We just started not that long ago in the life-science area,” he said. “We want to expand on that. Also, our private-equity banking service team just started and is doing really well. These are areas where we see a lot of potential.”

He sees that type of niche business as key to the success of East West and other banks, as it is less commoditized – and, therefore, more profitable – than basic business or mortgage lending.

“We are trying to get ourselves as much as possible into specific niche areas that allow us to be the expert in that area,” he said.

Community service

Despite a regulatory climate that some bank chiefs say is stacked against small community banks, others see the recent exodus of so many banks as an opportunity in itself. They expect outside investors to take notice of what they see is an obvious opening in the market, and what might possibly be the next target for the deep pockets circling L.A.’s banking scene.

“Big banks just keep getting bigger and banks like ours are disappearing,” Rothenberg said. “And I don’t think the demand for our kind of services is shrinking. I think it’s bigger than ever, frankly.”

That’s why Steve Sugarman decided to lead the recapitalization of First PacTrust Bancorp Inc. in 2010 and reconstitute it as Banc of California Inc., a community business bank headquartered in Irvine and with executive offices in Beverly Hills. Thirty-eight California banks failed between 2008 and 2011, and many of them served the kind of customers Rothenberg and Sugarman are now after.

“The banking market in Southern California is void of community-focused institutions that are large enough to finance meaningful private businesses but small enough to focus on California,” Sugarman said. “With the last recession, most of those banks either failed or got subsumed into larger banks.”

Community bankers believe they continue to have some advantages over bigger banks. Farmers & Merchants’ Walker said his main competitors, which he identified as national banks Citi, Chase, Wells Fargo and Bank of America, often don’t have key decision-makers in California. That doesn’t matter to people who use banks mainly for a checking account and an ATM card, but business owners who need a line of credit don’t want to swim up a salmon ladder of executives just to get approval.

“To get it up the chain to a higher level, it’s a bothersome event in many occasions,” he said.

Of course, bankers at national institutions say otherwise. Raul Anaya, Bank of America’s president for the greater L.A. region, said his commercial customers can have big loans approved in hours, not days.

“At Bank of America, our key executives are right here in Los Angeles, with the authority they need to handle all of our clients’ financial needs,” he said.

Green China

Sugarman and Rothenberg aren’t the only ones still betting on community banking in Los Angeles. Just last month, private investment group SunPac, led by a team of former L.A.-area community bankers, acquired small Fresno lender Security First Bank with plans to turn the institution into a commercial bank serving Southern California.

But another prong of SunPac’s plan is to focus on L.A.’s large and growing Chinese community, a strategy that has been critical to the success of some of the region’s biggest banks. Chinese emigrants are bringing serious money to the region, and that’s bound to pique the interest of potential bank acquirers.

Ng’s East West has become the city’s second largest – with more than $27 billion in assets – by focusing on business flowing between China and the West. And Ng said that’s the main reason why his bank has historically been more profitable than many of its competitors.

“I think the reason we are able to perform above our peers is because we have that one additional element, that special value proposition of being the connector between the United States and China,” he said.

While East West wants to be that link, Cathay, which was the United States’ first Chinese-American bank when it was founded in 1962, sees itself as an anchor for Chinese emigrants who want to put down financial roots in Los Angeles. And the recent surge in Chinese money coming to Los Angeles has provided a healthy amount of organic growth.

“That continues to be our niche,” Cathay’s Cheng said. “Obviously, our niche has expanded tremendously.”

He points at the recent influx of wealthy mainland Chinese scooping up luxury homes, often in the San Gabriel Valley, as a phenomenon that’s created streams of revenue for the bank.

“When they come over here, they buy houses in cash,” he said. “We’re able to capture their deposits. And we are able to offer wealth management opportunities for their investments.”

While Cathay maintains its historic Chinatown headquarters, it recently moved the bulk of its operations to El Monte in the San Gabriel Valley, a region that has become the beating heart of Southern California’s Chinese population.

“That has been a great move, because it’s closer to our customer base,” Cheng said. “The San Gabriel Valley is now the center of the Chinese community.”


As Cathay and East West’s old niche has grown, other “mainstream” banks have taken notice. Bigger, national players now want a piece of L.A.’s sizzling Chinese economic activity and are aggressively trying to take it.

“Wells Fargo, especially, is quite focused,” Cheng said. “We get a couple of Chinese newspapers and we see their full-page ads.”

But penetrating that market isn’t as simple as a few fancy fliers, Farmers and Merchants’ Walker said.

“It’s a market that is very difficult to get into,” he said. “We continue to try to focus and accomplish that, and I can tell you we have not had great success.”

That difficulty could make Cathay and East West attractive acquisition targets for big mainstream banks that want to break into the growing Chinese market. But good luck getting Ng or Cheng to sell. Ng, a youthful 55, is already planning his succession.

“The organization going forward will need new blood,” he said. “I’m very much looking forward to grooming our next generation of leaders at East West Bank.”

For him, the keys to staying independent are performing well and knowing what kind of bank you want to be. Institutions that have carved out specialty areas and worked to develop real expertise in them have figured out how to stick around, he said, while banks that tried to do everything have not or have seen their customers lured away by other lenders.

“If you can’t differentiate from others, then you will be commoditized,” he said. “And once you’re commoditized, the likelihood of high performance above your peers will be low. And once you’re not performing better than someone else, most likely you’ll get gobbled up.”

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