Over the weekend, the Seattle Times published an article titled Bad real-estate loans stack up for smaller local banks, about the exposure local banks have to real estate loans. The gist of the article was that many local banks, squeezed out of the mortgage business by the likes of WaMu and Countrywide, had doubled down on lending to local developers – and thus were exposed to the real estate turn down.
Though much of the attention has focused on financial giants like Citigroup, Wachovia and Washington Mutual, many regional banks are heavily exposed to residential real estate.
For instance, construction and land-development loans make up 61 percent of the loan portfolio at Bremerton-based WSB Financial, parent of Westsound Bank. At First Financial Northwest of Renton, parent of First Savings Bank Northwest, virtually the entire billion-dollar loan portfolio is connected in some way to real estate.
For several years, that specialization proved quite profitable. Smaller regional banks often posted growth rates and earnings per share that superbanks would have envied.
But now, with home sales slowing, the regionals are seeing more developers fall behind on their loans, and are setting aside larger sums for expected future loan losses.
The article goes on to give examples of exposure at local banks, including Cascade Bank, Westsound Bank, and First Financial.
The implications of high concentrations of commercial real estate lending at small, regional banks has been a topic of discussion over at Calculated Risk for some time. And as they blogged recently, Fed Vice Chairman Donald L. Kohn has warned of the potential implications:
Concentration risk is another familiar risk that is appearing in a new form. Banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. But as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.
One thing that struck me as I read theses two pieces -just a few days apart – is the nature of our local home-building market. Unlike many of the bubblier cities, the “big” builders such as KB, Lennar, and DR Horton have had little or no presence in our market. The biggest builder around here seems to be Quadrant Homes. Yet as Tim has pointed out in previous posts, we have certainly had a something of a building boom over the past 5 or so years inasmuch as supply has outstripped demand.
Is the inference that the Seattle MSA has had more construction driven by smaller regional developers? As a follow on, what might this mean about the portfolios of our local banks in comparison to other areas? Are they even more heavily focused on real estate than say, regional banks in Southern California? It will be interesting to see what articles follow on after this one. I have a sense we may be seeing the leading edge of a new trend.