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Friday, Aug 19, 2022

Conservative Tactics Help Bank Escape Subprime Toll

In the early 1990s, Community Bank was struggling with an overly ambitious growth plan that took a toll on the company’s finances. It suffered some of the worst losses among banks nationwide and was on the verge of a takeover.

Today, while many peers are still reeling from the subprime mortgage meltdown, the Pasadena bank is riding high.

Drawing upon lessons from a decade ago, the bank has employed a conservative strategy to outpace many of its competitors during the current tough times.

Community Bank had a 30 percent increase in its return on assets in the first quarter to 1.08, the best year-over-year improvement among L.A. County’s large community banks, according to an analysis by the Business Journal and Carpenter & Co.; Investment Bankers of Irvine.

“This bank will outperform many of its peers,” said Community Bank Chief Executive Francis Shanahan. “When markets correct, as they do predictably in our business, we’re in a position to absorb any dislocation.”

The bank, which has $2.2 billion in assets and offices in Los Angeles, Orange and San Bernardino counties, offers business loans and international trade financing as well as personal banking services.

It has steered clear of mortgage lending, however, even as seemingly profitable subprime loans gained in popularity. And though the bank does dabble in commercial real estate lending, Shanahan said it takes a conservative approach to its underwriting, focusing mostly on middle market manufacturers, an industry the bank understands.

“We’re not making loans to restaurants, gas stations and other enterprises that we don’t understand,” he said. “We’re not in the high-risk activities that a lot of other banks got into.”

That strategy has paid off.

While many banks have been taking large losses as customer defaults increase, in the first quarter of 2008, Community Bank had $16.5 million in nonperforming assets, accounting for roughly 1 percent of its $1.6 billion loan portfolio not a bad figure considering how other banks are performing.

The company’s reserve for loan losses, meanwhile, was $21.6 million, or about 1.4 percent of total loans down from the same period last year.

Indeed, in the current environment, the bank’s 1.08 percent return on assets is “outstanding,” and reflects a moderate lending strategy, said Wade Francis, president of Long Beach-based bank consulting firm Unicon Financial Services.

“In banking, you really do better when you are steady,” Francis said. “Any time you take a lot of risk, in good times you have a chance at making a lot of money, and in bad times you have a chance at going broke.”

‘Machinery man’s bank’

One of Southern California’s oldest banks, Community Bank was founded by two brothers just before the end of World War II. In August 1945, Charlie and Howard Cook opened Huntington Park Bank, named for the city where it was headquartered. The bank changed its name to Community Bank in 1950 and eventually moved its headquarters to Pasadena.

All along, financing industrial clients through construction and bridge loans was its bread and butter. At one time, the bank even billed itself as “the machinery man’s bank.” Over the decades, the bank expanded into new sectors, including foreign trade financing and correspondence banking. By the 1980s, the bank topped $1 billion in assets.

But after Charlie Cook died in 1987, the bank moved away from its conservative business model to grow faster. It acquired a string of smaller local institutions, including Pasadena First National Bank and Bank of Redlands.

In 1989, then-Chief Executive Kraig Westra told American Banker magazine that Community Bank was “more in an acquisition mode than a selling mode.”

“With a few acquisitions, we can build a very good, strong bank and reach the $2 billion to $3 billion range in a few years and stay independent,” he said.

Shanahan said Community Bank worked with other banks to do what he termed “joint venture” real estate loans. But in the early 1990s the real estate market crashed, and by 1993 the bank’s assets had shrunk to just over $700 million. That year, the bank hired Merrill Lynch & Co. Inc. to look into selling the company.

A sale was never completed. Instead, new management was brought in, returning the bank to its conservative practices.

“We don’t have any subprime loans. We don’t make residential loans,” Shanahan said. “When other competitors were reducing their pricing and relaxing underwriting standards, we were not.”

Community Bank


CEO: Francis Shanahan

Assets: $2.15 billion

Return on Assets: 1.08 percent*

Profile: State-chartered bank specializing in small- and mid-size business financing, international trade and personal banking services. Also writes commercial real estate loans.

*As of March 31, 2008.

Source: Business Journal research


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