U.S. Slowdown Begins to Show Up in L.A. Statistics.

Growth of Commercial Lending Showing Drop

COMMERCIAL lending among local financial institutions is beginning to reflect a nationwide slowdown.

But California has been less hurt by economic conditions than the rest of the nation, said Campbell Chaney, an analyst with San Francisco-based Sutro & Co. The state's diversified industrial base and conservative approach to real estate construction has kept it from a hyper-growth pattern in recent years.

"California went through a significant structural change in the economy in the late '80s and early '90s," Chaney said. "Manufacturing jobs, aerospace manufacturing, military base closings -- all the things that identified California with a robust economy up through the 1980s were severely reduced. So California has redefined itself, and it is more diversified than before."

Even so, the state hasn't been completely immune to the past year of slower growth.

Commercial lending nationwide increased by 4.3 percent from March 2000 to March 2001, against a total asset increase of 7.4 percent. Total assets of financial institutions include commercial loans, as well as bank investments, real estate and other loans.

The rate of growth of commercial/industrial lending has declined over the past few years. In the comparable year before, commercial lending increased 7.9 percent against a 7.4 percent increase in total assets. And in the period between March 1998 and March 1999, lending increased 11.1 percent with assets increasing 5.6 percent.

The steady decline in the rate of commercial lending has been paired with a steady increase in non-performing loans -- or those that are delinquent or behind on their scheduled payments, said Ross Waldrop, senior financial analyst at the Federal Deposit Insurance Corp.

"When you see a trend like that with some deterioration, and in absence of external economic explanations like a recession, that means banks relaxed lending standards too much and were too liberal on how much they lent to whom," he said. "Their losses increased."

And that is borne out by FDIC statistics, which show California banks' noncurrent loans (those at least 90 days past due) as a percentage of total loans stood at 1.07 percent as of March 31, up sharply from 0.67 percent a year earlier.

The deterioration in the commercial/industrial (business loan) portfolios of California banks has been even more severe. The noncurrent ratio for those loans hit 2 percent as of March 31, up from 1.21 percent a year earlier.

Meanwhile, loans to construction and real estate development firms have been performing quite well. As of March 31, only 0.45 percent of such loans held by California banks were classified as noncurrent, a slight improvement from the 0.48 percent level of a year earlier and about half the national level of 0.86 percent.

Nonetheless, the overall deterioration of loans held by California banks has caused a tightening in commercial credit markets, prompting businesses statewide to adjust downward their cash flow and profit projections, as well as spending plans, which have affected the number of commercial loans.

Most of the commercial lending declines have occurred among large banks that make up one-third of all banks and two-thirds of all commercial loans. That means most of the commercial lending declines have occurred in loans to larger businesses.

The declines have been affecting certain industries more than others -- health care, movie theater chains and telecommunications -- all major industries in the Southern California market.

The pullback in commercial lending is coming from both the supply side (banks) and the demand side (businesses).

An increasing number of cash-hungry L.A. businesses that would qualify for bank loans are opting to postpone such commitments until the economic outlook becomes clearer. Other businesses are steering clear of restrictive bank loans in favor of alternative forms of financing, like junk bonds and subordinated loans, which are usually more expensive but carry more flexible terms.

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