When it comes to pristine loan portfolios, Malaga Financial Corp. in Palos Verdes Estates, Calif., is among the truly elite.
It had zero nonperforming loans at the end of the third quarter, a distinction shared by only 6.5% of banks and thrifts nationwide. And the $796 million-asset Malaga has one of the largest loan portfolios of the group.
Randy Bowers, the thrift company's president and chief executive, attributed the perfect record partly to its retreat from mortgage and construction lending in the boom years.
"A few years ago, the business we saw going to our competitors were for terms that weren't safe and we didn't see as profitable," Bowers said. "The way I see it is that if you are going to chase competition when they are jumping off the cliff, you are going to fall, too."
Malaga focused instead on loans for the purchase and maintenance of apartment complexes in Southern California, steadily building this segment over the past five years to make up the bulk of its loan portfolio.
It sacrificed some growth: While many competitors increased their assets 20% annually, Malaga had 5% and 10% gains most years.
But now it is in a position to speed up. The company intends to be opportunistic, grabbing customers from hobbled competitors and possibly even doing its first acquisition, Bowers said.
With capital ratios close to 50% higher than regulatory minimums, it is on the lookout for failed banks from the Federal Deposit Insurance Corp. It also would consider buying a struggling company, for the right price.
Malaga still plans to be cautious, though.
"It's unlikely that we are going to grow rapidly," Bowers said. "Any deal would have to be a strategic fit. So far we haven't seen anything that fits our needs."
Though it has perused several failures, Malaga has not bid on any of the 20 California institutions that regulators have seized during the past two years, he said. The company would only be interested in buying within its existing market area or adjacent to it.
Industry observers said they are impressed with Malaga.
Though its loans are heavily concentrated — which can be viewed as dangerous — its strategy is paying off, said Mike Heller, the president of the bank rating firm Veribanc Inc. in Woonsocket, R.I. "From a risk management standpoint, perhaps they should be more diversified," Heller said. "But I think their results also argue that they've formulated a good model that is working for them."
Bowers, who said Malaga has not had a single nonperforming loan during his eight years there, cited conservative underwriting standards, more so than its focus on a particular type of loan, as the key to its success. "We work under the philosophy that we are willing to give up a little yield to maintain credit quality," he said. "That was given to us from the board when I came to work for the bank. They said they wanted to be able to sleep at night."
Geography also helped, said Bowers, who started at Malaga as its chief lending officer and has been at the helm since 2006.
Its lending has been concentrated in Los Angeles and Orange County, with a small presence in San Diego. However, it made a conscious effort not to do much business in the Inland Empire region, which is in the farthest eastern reaches of L.A.'s sprawling metropolis. When the housing crisis erupted, that region was among the hardest hit in the country.
"Historically, every time there is a recession, the outer-lying areas are the first to deteriorate," Bowers said. "People get all excited about the cheap housing out there, but after spending all their time commuting, begin to realize it wasn't a great idea to move to Timbuktu."
He said Malaga, which has more than 70% of its loans in multifamily residential real estate, is working to diversify its lending. That does not mean it will pull back on financing for apartment buildings; but with less competition to contend with, it is moving back into sectors such as single-family mortgages. "Regulators haven't told us specifically to reduce it, but we know to them a concentration is a concentration," Bowers said. "But we aren't only doing it because of the regulators, there are just other opportunities out there."
Ed Carpenter, the chairman and CEO of Carpenter & Co., an investment bank in Irvine, Calif., said having a small shareholder base helped Malaga sidestep the growth demands put on many publicly traded companies during the housing boom.
The shareholders are primarily from its Palos Verdes peninsula community, an affluent area nestled between Los Angeles and Orange County, Carpenter said. They are more concerned with having a healthy community bank than a fast-growing one.
"It is a good local community bank that has managed to stay conservative," said Carpenter, whose company also invests in banks and thrifts, but does not have a stake in Malaga. "The stock price has probably increased 13 or 14 times over time. It has done very well for investors."
Bowers said that the stock has had a devoted following since the company went public in 1985 and that 70% of its shares are owned by the directors. Malaga found out the extent of the shareholder loyalty when it made a tender offer last year, on the premise that it did not want investors to feel locked into the thinly traded stock.
"We were expecting a lot of shares to come in, but most of our shareholders weren't interested," Bowers said.
Malaga's shares were trading at $13 last week, up 24% over the past year.
The company is coming off its highest-earning quarter in its 25-year history. A lower cost of funds helped boost its third-quarter net interest margin 51 basis points from a year earlier, to 3.28%. Its profit jumped 40%, to $2.5 million.
Karen Dorway, the president of the bank rating agency BauerFinancial Inc. in Coral Gables, Fla., said Malaga stands out among companies with zero nonperforming loans because of the size of its portfolio — $755 million.
"It used to be said that having no nonperforming assets was a sign of being too conservative, but I would bet that they are glad they took that approach," Dorway said.
Bowers said he doubts the company will always be able to boast a clean record. "We might get out of this unscathed," he said. "But we aren't immune; we have just done well so far."