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Small Banks' Reckoning Day Is Coming - WSJ

Small Banks' Reckoning Day Is Coming
Billions in Troubled Construction Loans
Promise to Pose Test for Regional Lenders
By MICHAEL CORKERY, JENNIFER S. FORSYTH and LINGLING WEI
July 2, 2008; Page C1

Wall Street is bracing for regional and small banks to fess up to large losses from their mounting volume of soured construction loans made primarily to home builders.

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books.

WHICH BANKS WILL FEEL THE PAIN?

See a sortable list of small and regional banks with sizable exposure to construction and land loans and with notable delinquency rates.That will put additional pressure on an already stressed financial system. Banks have begun to dump bad construction and land loans at discounts, curtail new lending and halt construction projects that are under way to preserve capital. Some analysts even see a wave of bank failures as a possibility.

"Across the industry, the second quarter is going to be a tough quarter," says Keith Maio, chief executive of the National Bank of Arizona, a unit of Zions Bancorp, which lent heavily to home builders and developers. "It's going to continue to be tough until the real-estate market hits a bottom."

Scores of banks were already suffering headaches by the end of the first quarter, according to a review by The Wall Street Journal of FDIC-filed reports by 6,919 banks that make construction loans. The smallest banks, those with total assets of less than $5 billion, faced the biggest problems. The WSJ analysis didn't include savings-and-loan institutions, or so-called thrift banks.

Nearly one in three of the banks analyzed -- or 2,182 -- had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn't mean the bank is in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

Even more alarming, 73 of those banks had construction-loan delinquency rates of more than 25%. Executives at all of the banks that responded to questions acknowledged the problems but expressed confidence they had the capital to weather the storm.

At Bremerton, Wash.-based Westsound Bank, new Chief Executive Terry Peterson agreed that his bank became "much, much too concentrated" in construction loans. About 43% of Westsound Bank's construction and land loans in the first quarter were delinquent.

Mr. Peterson was appointed CEO recently to clean up the troubled bank, after regulators issued a "cease and desist" order in March requiring the bank to change lending practices. "We are pretty much using all of our human capital to address our loan problems," he says.

Larger regional banks also face mounting construction-loan problems, but are in decent shape. Thirty-eight of them had more than 100% of their total risk-based capital in construction loans at the end of the first quarter, but only nine of those faced delinquency rates of more than 10%.

Over the next few quarters, banks are expected to begin recording much larger losses. In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects.

During the housing boom, many small and regional banks doubled down on construction loans because they were largely shut out of the home mortgage market dominated by large originators. But now the banks' difficulties are threatening to sharply shrink the home-building industry. Credit Suisse analyst Dan Oppenheim estimates that as many as 50% of the closely held builders won't survive because of the tightening lending environment and housing downturn.

Strategies for coping with the problem loans vary widely. Large banks, such as IndyMac Bancorp Inc. and KeyBank, have been trying to sell billions of dollars of construction and land loans. IndyMac said in a filing Monday that it is working with regulators to shore up its capital. (See related article.)

"The banks are running as fast as they can to get out of housing," says Tom McCormick, president of Astoria Homes, a large, closely held builder in Las Vegas.

Mr. McCormick is involved in a fight with KeyBank, which recently initiated foreclosure proceedings on a $24 million construction loan financing a Las Vegas housing project. Mr. McCormick says the bank took that action even though his company was current on debt payments. In court documents, KeyBank says the builder fell behind.

Mr. McCormick says he found investors to buy out his loans at 70 cents on the dollar, but the bank refused. He also says that KeyBank has prevented him from closing home sales. "I personally think the fact that you would punish any innocent home buyer...is shameful," Mr. McCormick wrote in an email to KeyBank executives. A spokeswoman for KeyCorp, KeyBank's parent, declined to comment.

Many smaller banks have been more willing to work with struggling builders rather than foreclose on their projects. But these banks are coming under pressure from regulators to more aggressively write down their loans, amid declining real-estate values. This process could force many more loans into default.

Some community banks are bristling under the regulatory pressure. "The federal government is being too reactionary," says Damian Kassab, chief executive of Michigan-based Warren Bank, which reported that 47% of its construction loans are delinquent. "They want to see it done as quickly as possible. I say 'can't we just relax, take a deep breath and work with the borrowers.'"

Analysts question whether some small banks are putting off foreclosures because they lack adequate capital to absorb the large losses.

Banks seeking a quick fix by selling off their troubled loans may find fewer buyers. Laurence Pelosi, an executive director of Morgan Stanley Real Estate, a major land investor, told the Pacific Coast Builders Conference last week that the appetite for distressed residential real estate may be waning among some investors. "The complexity of the business and the increasing opportunities in the commercial sector may lead to a shift away from residential," Mr. Pelosi says. "That will have a further impact on values."

By tejasmarcos on Jul 2, 2008, 07:14 in Off Topic.

tejasmarcos says on Jul 2, 2008, 07:16:

this will be the second tsunami to come crashing down on wall street and financial markets around the world. the third wave will be the commercial sector. all those who think the "bottom" of the real estate market is upon us, guess again.... we are just getting started.

trying to walk a straight line on sour mash and cheap wine...

0 funny, 0 helpful.

gringoloid says on Jul 2, 2008, 16:33:

things are tough all over...............here a prostitute is taking gas for payment for sex.

http://www.thesmokinggun.com/archive/years/2008/0702081gas1.html

all kidding aside.............it would be a strange day for a person of my age to see General Motors go bankrupt.

http://biz.yahoo.com/rb/080702/gm.html?.v=3

0 funny, 0 helpful.

gringoloid says on Jul 2, 2008, 17:29:

tj, here's another interesting statistic..............those stimulus checks don't seem to be stimulating the economy.................and here's the funny part, people seem to be spending a big chunk of the checks on porn. JaJa

http://www.huffingtonpost.com/2008/07/02/nation-buys-porn-with-sti_n_1...

0 funny, 0 helpful.

tejasmarcos says on Jul 2, 2008, 18:53:

funny! where do you dig this chit up?

trying to walk a straight line on sour mash and cheap wine...

0 funny, 0 helpful.

christobeldawg says on Jul 2, 2008, 22:07:

guess they were lookin for stimulation from the stimulous checks

admittedly, arriving can feel great too

0 funny, 0 helpful.

tejasmarcos says on Jul 7, 2008, 07:26:

and here is the followup story regarding retail centers;

Vacancies Rise at Retail Centers
Stores Being Closed,
Expansions Curbed;
Strength in Rentals
By KRIS HUDSON and NICK TIMIRAOS
July 7, 2008; Page A3

The faltering economy took a heavy toll on malls and shopping centers in the second quarter, but it didn't hurt the rental-apartment market as much as expected.

Vacancies at retail properties rose to multiyear highs in the second quarter as retailers closed stores and curtailed expansion plans. Meanwhile, apartment-complex vacancies remained unchanged and rents rose by a stronger-than-expected 1.1% in the quarter, according to real-estate research firm Reis Inc. in New York.

Getty Images
A rent sign on West Main Street in Kutztown, Pa.
The higher retail vacancy rate stems from the slowdown in consumer spending and the weak housing market, among other economic pressures. Vacancies at enclosed malls in 76 major U.S. markets rose from 5.9% in the first quarter to 6.3% in the second quarter, the highest level since early 2002, according to Reis.

Faring worse were open-air retail venues such as big-box centers and grocery-anchored strip centers. Vacancy in those formats climbed from 7.7% to 8.2% in the second quarter, the highest tally since 1995. Open-air centers tend to lose more tenants in a bad economy because they cater more to local, mom-and-pop shops. Malls, on the other hand, house more national retailers that tend to be more stable financially.

Regardless, all retail formats have lost at least some momentum. The International Council of Shopping Centers predicts 6,500 stores will close this year, the most since 2001. A slew of national retailers including Kohl's Corp., Chico's FAS Inc. and Starbucks Corp. have reined in their growth plans. Particularly draining to the confidence of retail landlords last quarter were the financial struggles of rapidly growing discount retailer Steve & Barry's LLC, which had become a go-to candidate to fill vacant anchor stores.

"We've had unprecedented growth over the last 15 or 20 years" in the U.S. retail market, said Steven Lieberman, chief executive of Retail Connection, a Dallas-based retail developer and leasing specialist. "Clearly, that is slowing down."

Some landlords anticipate a boost from the U.S. expansion of foreign retailers and offshoots of established retailers, such as American Eagle Outfitters Inc.'s new Aerie stores.

In the apartment market, the "shadow market" of unsold homes offered for rent continues to keep renters out of apartments. Otherwise it is a strong market for landlords. They continue to benefit from the housing slowdown that has created more renters and led existing renters to defer homeownership given the tightened mortgage market.

Rent growth was stronger than expected in the second quarter given the economic slowdown and weaker wage growth. "That's giving landlords more power than we'd normally expect to see in the cycle," says Sam Chandan, chief economist at Reis.

Rents climbed 1.1% in the second quarter, off the 1.3% growth in the same quarter last year, according to Reis. The apartment vacancy rate remained unchanged from the previous quarter at 5.9%. Four of 79 markets Reis tracked showed negative rent growth, all in regions hit by big home-price declines: Miami; Palm Beach, Fla.; Ventura County, Calif.; and Detroit.

"Rental demand hasn't really picked up in relation to the falling home sales, which implies that people are doubling up or tripling up or moving back with their parents," says Lawrence Yun, chief economist for the National Association of Realtors. He expects that to change in the near-term, in part because "it's not sustainable to keep adding roommates."

Analysts have been predicting the oversupply of housing will provide a shadow market into 2009 for the most overbuilt markets. But the Reis data showed signs of recovery in some of those regions: Apartment vacancies fell in Fort Lauderdale, Fla., and San Bernardino, Calif., which also posted a 1.1% increase in rent. Rents gained 1.5% in Orlando, Fla. Denver posted the strongest rent growth nationally at 1.9%.

trying to walk a straight line on sour mash and cheap wine...

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tejasmarcos says on Jul 7, 2008, 07:29:

this in effect lowers the overall value of the asset due to the decreased performance. the scary part is the fact that a percentage of these were financed with 5 year balloon notes. this will mean big losses at time of refinance and most certainly cash calls for all those that put their money into tenant in common deals.

trying to walk a straight line on sour mash and cheap wine...

0 funny, 0 helpful.