Banks headquartered in Orange County survived last March’s run on regional banks.
Nowadays, they are faced with investors and depositors worried if they are susceptible to losses for loans for commercial real estate offices, which are struggling with lower occupancy rates after the pandemic.
Executives at Orange County-based banks told the Business Journal that they have minimal risk to this asset class, particularly Class A buildings.
“We have zero exposure to it whatsoever,” said Stephen Gordon, founder, chairman and chief executive of Newport Beach-based Genesis Bank.
“We haven’t felt good about Class A office space since COVID,” which has prompted the bank to steer clear of troubled properties within the asset class.
Several buildings in Orange County have taken steep discounts in recent months. For example, local real estate investor Greenlaw Partners recently paid $57.5 million for a 13-story building in Irvine’s airport area, about 47% below the $108.5 million price the seller paid for it in 2011.
Shares of OC-based publicly traded banks like Pacific Premier Bancorp Inc. (Nasdaq: PPBI) and Banc of California Inc. (NYSE: BANC) are down 40% and 32% this year, in line with the 30% drop of the KBW Nasdaq Bank Index (BKX).
“As a sector, office is going to be a problem nationwide,” Banc of California CEO Jared Wolff told the Business Journal.
The following are comments from bank executives with headquarters in Orange County about loans for office buildings.
Pacific Premier
CEO Steven Gardner is known for rescuing Pacific Premier Bancorp Inc. from bankruptcy when he took it over in 2000 and then navigating it successfully through the 2008 financial crisis and building the bank to the largest with headquarters in Orange County through acquisitions and organic growth.
Gardner last week said the bank’s loans are in good shape, pointing out that its total delinquencies decreased to 0.08% of its loans and its non-performing assets were just 0.13%. It has total assets of $20.3 billion.
“Our asset quality remained solid during the quarter,” Gardner said in a statement.
“Our teams continue to deliver solid results in a challenging economic and interest rate environment. We maintained our disciplined focus on prudent and proactive risk, liquidity, and capital management during the quarter.”
Its commercial real estate non-owner-occupied loans fell 9.3% to $2.5 billion from the same quarter a year ago. Altogether, the bank has $13.3 billion in loans, an 11% decrease from a year ago.
In the third quarter, Pacific Premier dramatically reduced its new loan funding to $25.6 million, a 94% drop from $450.7 million in the same quarter in 2022.
“New origination activity remained muted given the uncertain economic and interest rate compared to the production levels seen in the third quarter of 2022,” the bank said in its quarterly statement issued Oct. 24.
In the trading session after the release, the shares declined 8% to $18.83 and a $1.8 billion market cap as the company’s adjusted net income in the third quarter missed analysts’ expectations.
Banc of California
After three regional banks collapsed in March, Santa Ana-based Banc of California Inc. tripled its cash and equivalents to $1 billion as of March 31.
The bank is now signaling that the run on the banks crisis is over, as it reported cash and equivalents of $311 million as of Sept. 30.
“We believe that the market has stabilized,” Jared Wolff said. “The risk has substantially subsided.”
As for problems with loans for Class A buildings, Wolff noted that downtown Los Angeles has a vacancy rate around 30% and its occupancy is only 40%. He’s seen some buildings in
Orange County with high vacancy rates as well.
The bank is in the middle of acquiring PacWest Bancorp., which also doesn’t have problems with loans for Class A buildings, he said.
“We have a low exposure to office and PacWest has lower exposure,” he said.
“We’re fortunate.”
CommerceWest
CEO Ivo Tjan, who founded CommerceWest in 2001 (OTC: CWBK), has successfully steered it through crises like the aftermath of 9-11 terrorist attacks and 2008 financial meltdown.
“It’s currently a tough operating environment for the banking industry, even though CommerceWest Bank continues to post strong financial results for 2023, which makes us stand out amongst our peers,” Tjan told the Business Journal.
He expects commercial office loans to be problematic in certain areas of the country.
“Our view is other commercial real estate valuation will also reset as interest rates and cap rates were abnormally low and cause those assets to increase too fast in value over the last two years,” he said.
The banking industry is expecting loan delinquencies and losses to normalize, he said.
“Residential real estate will soften, but we continue to believe that residential real estate will hold up better than commercial real estate in 2024,” Tjan said. “There is a potential of a bigger correction in residential real estate in secondary markets and market’s that were overheated during covid.”
The bank on Oct. 26 reported net income climbed 14% to $5.2 million. Tjan said in a statement, “The Bank continues to maintain a fortress balance sheet that is built to last.”
Genesis
The Federal Reserve has been “too overzealous” and should pause its rate increases, Stephen Gordon told the Business Journal. “Lending has significantly slowed down,” he said.
“The yield curve is taking care of itself, regardless of what the Fed is doing.”
Gordon, who began Genesis Bank in 2021, sees opportunities in the coming months.
“I’m glad we’re a new bank,” he said. “I don’t have all that legacy stuff from five to 10 years ago. It’s a good position to be in.”
Gordon, who has successfully built two previous banks based partly on acquisitions, foresees a period of mergers going forwards.
“We’ve put ourselves in a position where we have capital behind us and we’re going to be opportunistic,” he said. The potential targets will be “stressed institutions that don’t have a lot of options and are willing to be part of a roll-up strategy.”
Commercial Bank of California
Irvine-based Commercial Bank of California lends mostly for sectors in hospitality, health care and commercial real estate owner occupied, Chairman and CEO Ash Patel told the Business Journal.
“Our exposure is less than 1%” to Class A office buildings, Patel said. “Most small community banks don’t go into the large office buildings.
“Community and regional banks have less exposure than large national and international banks. Insurance also lends for large office buildings. “I don’t think smaller banks will have pressure in the office space.”
US Metro
Garden Grove-based US Metro Bank (OTCQX: USMT), which caters to Korean Americans, had not reported its third-quarter results at press time.
“Loan quality remains good,” the company said in its second-quarter release in July, pointing out its non-performing assets as a percentage of total assets was 0.25%. The bank had total assets of $1.16 billion as of June 30.
