Bad Real Estate Loans Hitting Local Banks

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.

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  1. 1
    Locust says:

    I believe this report about changes in the condo lending market was also rather ominous:

    How can they sell all those Seattle and Bellevue condo tower units if nobody can get a loan?

  2. 2
    S-Crow says:

    It appeared that there was no commentary in the Seattle Times nor Puget Sound Business Journal regarding Frontier Bank.

    I did see Cascade Bank, but to leave out one of the more significant players in CRE and builder/development lending such as Frontier Bank is perplexing.

  3. 3
    Mr. Snappy says:

    Sterling is one that is in major trouble. I saw the Novemeber 07′ construction status report before I left in December. Total construction loan portfolio…. around $2.5 billion. Here’s the nasty part. They had on the books at that time over $650 million in construction loans that were 100% funds disbursed, with 100% complete projects, but only around $73 million dollars paid back. That’s really, really bad, and their increased loan loss provision should be at least $100 million. This is for both single family homes, and some multifamily homes. This doesn’t include all the condo projects, and CRE they have through their subsidiary Intervest. As far as Frontier goes, I know they are into a local builder here in Eastern Washington for about $6 million. That guy cut his staff from 150+ down to 4 people last month, and is sitting on about 100+ homes right now. Another bank that will feel some pain is Banner. Lots of SFR construction loans in the Boise area.

  4. 4
    FreedomLover says:

    Hmm apparently if you can provide 20% down, you’re just fine in getting a decent loan. That’s what I did 2 years ago on my condo.

  5. 5
    TJ_98370 says:

    Yes, Westsound Bank has been in local Kitsap County news rather often lately —

    Westsound Bank reaches agreement with feds

    Apr 09 2008


    WSB Financial Group recently reported that Westsound Bank, its sole operating subsidiary, has signed an agreement with the Federal Deposit Insurance Corporation and the Washington Department of Finance to enter into a cease and desist order which primarily addresses the bank’s past lending practices and the company is implementing a comprehensive plan to achieve full compliance……


    New Westsound CEO Ready to Put Troubled Bank Back on Track Tuesday,

    April 15, 2008


    Westsound Bank’s holding company announced Tuesday that a Bellevue banker has agreed to become its new president and chief executive officer……..


    Also, more late breaking news in the fascinating Kitsap real estate market –

    Business Spotlight: Condos Are Sold, Sold, Sold

    April 20, 2008


    All 28 of the remaining luxury condos at The 400 waterfront development sold at an auction Sunday, with none reaching the original asking price and most for not much more than the minimum bid.

    The public auction was held at the Kitsap Conference Center in downtown Bremerton on Sunday.

    And at least one buyer said his winning bid for a one-bedroom with a view of Manette didn’t meet the minimum amount the seller would accept, or the “reserve.” Although Matt Weber of Bremerton bid the highest in the call-and-response, pledging $225,000 for a unit that originally went for $337,000, it’s not certain he will actually get to buy the condo. Bidding on Weber’s unit started at $159,000.

    “There’s a lot of people walking around saying they didn’t meet the reserve,” he said. “We’ll see what happens.”…..

  6. 6
    Sniglet says:

    I’ve read a number of stories indicating how regional banks entered into riskier commercial real-estate ventures (including construction loans to developers for things like condos) over the last decade as the market for residential mortgages became far too competitive and unprofitable. These smaller banks will feel a whole world of hurt if there is a downturn in CRE.

    I just look at all the cranes towering over Bellevue and Seattle and cringe at the thought of what will happen to all the lenders when these high-priced condos go into fire-sale.

  7. 7
    Denny Retrograde says:

    I remember the Puget Sound Business Journal did good reporting of local banks’ exposure back in January. It’s online now:

    A bar chart was available in the print edition that showed reported September exposure to construction loans (home, commercial and land development) relative to average gross loans and leases:

    10%: National average of all insured commercial banks
    22%: First Savings Bank, Renton
    31%: Washington First International Bank, Seattle
    32%: Sterling Savings Bank, Spokane
    34%: Cascade Bank, Everett
    36%: Banner Bank, Walla Walla
    41%: Horizon Bank, Bellingham
    44%: HomeStreet Bank, Seattle
    45%: Venture Bank, Lacey
    48%: Frontier Bank, Everett
    and the winner:
    70%: City Bank, Lynnwood

  8. 8
    Ubersalad says:

    I remember few articles ago how people were using Homestreet and as the model lender…I guess not.

  9. 9
    Ubersalad says:

    All these condos will flop like no other…combination of low occupancy rate and mix used. There will a domino effect, and can’t wait to see the aftermath.

  10. 10
    deejayoh says:

    Denny Retrograde – good article! Thanks for pointing that out.

    Interesting to see there is a separate article about Sterling Savings Bank releasing their earnings today

    Sterling Financial Corp. of Spokane, one of Washington state’s largest community banks, reported a sharp drop in first quarter earnings reflecting a large provision for credit losses.

    Sterling Financial (NASDAQ: STSA), which operates Sterling Savings Bank, said its first quarter 2008 earnings were $2.9 million, down from $22.9 million the same quarter a year ago.

    The bank said the drop reflects a $37.1 million provision for credit losses in the first quarter of this year. By contrast, the bank set aside $4.2 million for credit losses in the first quarter of 2007.

    “The higher credit provision in the first quarter reflects the unprecedented and rapid decline in the residential real estate market that continued unfolding during the course of the first quarter,” said Sterling Chairman and CEO Harold Gilkey, in a statement.

  11. 11
    deejayoh says:

    and it looks like Frontier Bank releases their earnings tomorrow

  12. 12
    Moe Ronn - Realitor® says:

    This is off topic, but I think it’s worth a post. I’m sure several have read this already:

  13. 13
    Moe Ronn - Realitor® says:

    Things might be hard to find at a reasonable price within the city, but just go out a few miles and there’s plenty:

  14. 14
    Ubersalad says:

    Is that a subsidiary of Realtors?

  15. 15
    Moe Ronn - Realitor® says:

    No susidiary, I’m in a totally different business; Reality.

  16. 16
    bitterowner says:

    You must get 3% for every dose of reality you sell.

  17. 17
    b says:

    Moe Ronn –

    Did you even read that article? It says that the rates have surged due to condo conversions and lack of apartment building during the boom years. It also says that inventory of apartments and homes to rent is currently increasing. What do you think is going to happen to rent as inventory increases? Especially when investor/owner turned landlords flood the market even moreafter the summer selling season, condo conversions cease to occur and builders decide that apartments are better than condos for cash flow? We just peaked in housing and I think we are right around peak for rent as well.

  18. 18
    Ubersalad says:

    he is what he calls himself, moron.

    sigh, I am getting slower.

  19. 19
    Moe Ronn - Realitor® says:

    Yeah, I read the article and I’ve subscribed to the theory that once the unsold inventory of homes increases many will return to the rental market, thus increasing supply to meet demand and keeping prices in check.

    I don’t quite understand how you a)didn’t understand that I do understand the articel and b)think that I am a moron.

    I merely pointed out that rents are not skyrocketing as this article, and other articles from last year, suggest. It’s REIC hype to try to scare you into making an ill-informed purchase.

    There is no commision on Reality. It cannot be bought or sold, merely accepted.

    And finally; Ubersalad, you wanna take a standardized IQ test with me sometime?

  20. 20
    Cougar says:

    OK, bad loans, foreclosure, inventory rising. This is old news. Where is the best place to get a home loan now? Competition must be fierce for a qualified homebuyer who has a credit score of over 800 and has 20% percent down. ;) What real-estate companies will survive? In tough times there tends to be more fighting among people who are pissed off or are going through hardship. That gets old too. It doesn’t help with the rise in cost of basic needs such as gas and groceries. So where are some good deals out there?

  21. 21
    Depositor says:

    Gosh, does this mean if I have my life savings in one of these banks, I should maybe think about moving it?

  22. 22
    TJ_98370 says:

    Depositer – you’re good up to $100,000 per account because of FDIC.

  23. 23
    NotaBull says:

    “Gosh, does this mean if I have my life savings in one of these banks, I should maybe think about moving it?”

    Frankly, yes. If you have your life savings in a small bank that isn’t “too big to fail” then I would be moving it very quickly. This is not the time to have your life savings in a small bank that the government would allow to fail.

    Personally, I have my savings in WaMu, which some people on this site will tell you is doomed to fail. Well, that’s not going to happen as it’s just too big. As with Bear Stearns the fed and/or another bank would just step in and buy it for pennies. The stockholders would be screwed, but depositors would be fine, and you have FDIC insurance anyway.

    My advice:

    -Have no more than $100K in each bank ($200K for joint accounts I believe)
    -Split your savings evenly between large banks (e.g. HSBC, WaMu, Chase, Wells Fargo).

    It’s so easy to transfer money around electronically these days and you can do it online. It usually only takes 3 or 4 business days to move it. So there really is no reason to only stick with one bank, especially a small one. If any of them *do* fail, you’ll have FDIC insurance and the rest of your money available instantly.

  24. 24
    Greg M says:

    deejayoh makes a good point about how loans are different here than in Phoenix. I bought a house and lived in Phoenix for three years prior to moving here two years ago so I have a good handle on the differences in home construction.

    The #1 difference between Phoenix and Seattle is (like deejayoh mentioned) Phoenix houses are built by big builders. You don’t get a construction loan at a bank to buy a new house in Phoenix. Instead, you sign a contract, the house gets built, and you take out a plain jane regular home mortgage to purchase your house from the builder.

    Here, it seems like a lot of builders require that you take out a construction loan to finance the construction of the house. Not sure about how many but I’ve seen that advertised a lot. So the banks around here probably do a lot more construction lending than the banks in Phoenix.

  25. 25
    dan says:

    Definitely a reflection of the economy as a whole. Not only housing prices drop but the collapse of the credit markets. banks pulling back from loans. Eventually we will ride out this problem, hopefully…

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