According to the data filed with regulators, uncollectable commercial loans tripled at City National Corp. of Beverly Hills in the last three quarters of 2008, as did similar loans at California Bank & Trust of San Diego.
Throughout the banking sector, seriously delinquent loans for construction and land development shot up nearly ninefold over the last two years, according to the Federal Deposit Insurance Corp.
At one of the banks hit hardest by such lending, Los Angeles-based Preferred Bank, Chairman Li Yu said he was hopeful that tanking housing prices were beginning to stabilize.
"The same thing cannot be said of commercial real estate," Yu said. "That has to do with the economy and joblessness."
According to Yu and others, the troubles in commercial real estate are really just beginning. Even though the percentage of such loans that are uncollectable is way up, the overall numbers are small.
But industry watchers say the wave is building.
As commercial loans go bad, it will be particularly hard on regional banks, said Joe Morford, a San Francisco-based analyst for RBC Capital Markets, because their main customers are the small and medium-size businesses whose ranks include many developers.
"They exist for the small-business customer, the real estate developer and the entrepreneur," Morford said, a role that makes their health crucial for the greater economy. Morford has warned investors to be cautious about all three of the biggest L.A. County-based banks: East West, City National, and Cathay General Bancorp of Los Angeles.
Morford said in a report last week that commercial real estate and business lending problems are worrisome at Zions Bancorp, a Salt Lake City lender that is the parent of California Bank & Trust and operates in 10 Western states; and Umpqua Holdings Corp., an Oregon bank that operates from Napa, Calif., to Bellevue, Wash. He rates Umpqua, Zions, East West, Cathay and City National "sector perform," his middle rating, but says he is "particularly concerned" about these banks.
He recently has taken road trips to the Central Valley, Inland Empire and Orange County to show investors just how battered the California economy really is, e-mailing them photos of "for lease" signs on offices, warehouses, retail shops and condominiums.
Ng, of East West Bank, said his institution would remain solid because it had been conservative in the amount it lent on commercial properties.
