Doubling Down on California Real Estate Lending

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Farmers & Merchants Bank in Long Beach, Calif., is once again going all-in on real estate lending.

After it all but stopped making real estate and development loans following the housing crash, the $5.6 billion-asset bank over the last two years has increased its total real estate loans by more than 61%, to $3 billion as of March 31. It is a figure that is likely to keep rising as California's real estate market heats up and the bank continues to add commercial real estate, construction and mortgage lending specialists to keep pace.

"The commercial market is growing very strong here in California, more so than in other states," said Chairman and Chief Executive Daniel Walker. "You can invest in real estate and your return on real estate is still higher than what you're receiving on bonds.

"On the residential side," he added, "it seems like we still have more buyers than inventory. I'm seeing properties that would normally take months and months to sell, getting offers in the first week they're listed. Everybody is just really encouraged."

Real estate lending has always been Farmers & Merchants' bread and butter, but following the financial crisis, the bank began to ramp up its commercial and industrial lending to help offset the slowdown in real estate lending. Over the last several quarters, though, the bank has been consciously shrinking the C&I portfolio, and returning to what it does best, Walker said. Real estate loans now make up more than 98% of the bank's total loans, up from 93% three years ago, according to Federal Deposit Insurance Corp. data.

Walker said that the bank's expertise in real estate lending helped it keep losses to a minimum during the last downturn. Though past-due loans were elevated following the housing crash, its chargeoffs remained relatively low because its lenders worked with customers to help them avoid defaulting.

"In California, real estate is [what] we've dealt with our whole lives, so we have a comprehension of the market," he said.

Farmers & Merchants is doubling down on real estate at a time when many other banks — still smarting from real-estate-related losses — are deliberately scaling back while ramping up in consumer, commercial or specialty lending. Since the first quarter of 2012, real estate loans at U.S. banks have increased just 2.9%, to $4.2 trillion, according to the FDIC, while commercial and industrial have risen by 27%, to more than $1.7 trillion.

Walker and his family have been making loans in Southern California for generations. The bank, with 24 branches in Los Angeles and Orange County, was founded in 1907 by Walker's great-great-grandfather C.J. Walker and today it ranks as one of the largest family-run banks in the country. With the proposed sale of City National Bank in Los Angeles to Toronto-based Royal Bank of Canada, Farmers & Merchants is poised to become the largest family-run bank in California.

Walker expects the City National sale to drive even more business to Farmers & Merchants, which, like City National, caters to a more affluent clientele. Customer defections are not uncommon after mergers, and it is Walker's intent to try to take advantage of any disruption in the Los Angeles area.

He also points out that wealthy clients like to able to talk to the CEO directly. City National will retain its name after the sale and its chairman and CEO, Russell Goldsmith, has said he intends to remain with the bank for another five years. What happens after Goldsmith leaves, though, is unclear.

"How does a customer at a big bank call the chairman and voice their concern? They have to work through a maze of phones," Walker said. "My phone number is printed and when the phone rings at my desk, I pick it up."

Still, Farmers & Merchants' bankers seem to do a fine job of drumming up business on their own.

The 61-year-old Walker, his brother Henry Walker, who is president of the bank, and his daughter Christine Walker, a fifth-generation banker, attend a combined 300 to 400 local events every year. The events, all sponsored by the bank, ensure that the family is out in the community, meeting with clients and staying top of mind with potential customers.

Walker described the importance of associating with local leaders like Bishop Kevin Vann, of the Roman Catholic Diocese of Orange County, whom he shared the stage with at a recent ethics conference.

"The bishop asked me to speak and after I did my presentation everybody saw us shake hands, and at the end of the night, a woman came in and told us she wanted to do business," said Walker, who first began working at the bank as an elevator operator while on Christmas break when he was just 14 and joined full time as a teller in 1975. "More customers than not are won that way."

The bank has also been successful in attracting talent; Farmers has hired 19 new loan officers in the past two years, a 33% increase. That infusion of new blood is a big reason why loans, and profits, are growing at double-digit rates. The bank's earnings jumped 18% in the first quarter to $16.7 million, from a year earlier, as net interest income rose 12%, to $46.7 million.

Growth has been robust in all areas of real estate lending. Construction and development lending — practically nonexistent in the aftermath of the crisis — is up more than 600% over the last two years, to nearly $260 million at March 31, according to FDIC data. Commercial real estate loans have increased 50% since early 2013, to nearly $2 billion, and mortgage lending is up more than 60%, to $658 million.

Its mortgage borrowers tend to be higher-end, but last year the bank hired Michael McCarthy, a former general manager at, a unit of GMAC ResCap, to boost mortgage lending to less-affluent borrowers.

"I'm probably the only guy who's trying to lower our average loan amount because we want to attract the average borrower out there," said McCarthy. "Some of our customers have been an older demographic of people who see an ad

in the paper, tear it out and bring it into the branch."

The bank is also raising its profile in more visible ways. When it rebuilt a branch in Corona del Mar, at a busy intersection of MacArthur Boulevard and Pacific Coast Highway, the bank topped the two-story building with a four-foot-high clock.

"People sit in their cars at the intersection, they see the clock and they now base their directions off our bank and think about Farmers & Merchants," Walker said.

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