Sunday, March 29, 2009

The Financial Crisis and Washington State


It seems that there are daily reports of troubles for the big US financial giants such as Citigroup, Bank of America and AIG. But as the worst banking crisis since the Great Depression grinds on it appears several of Washington State's community banks also face looming problems.

According to the Seattle Times, at least a dozen of the 52 Washington-based banks examined are carrying heavy loads of past-due loans, defaults and foreclosed properties.

While banks big and small have been kneecapped by the collapse of the housing bubble, the crisis has played out differently for the big "money center" banks and the thousands of regional and community banks sprinkled across the country.

The main problem for the big banks and investment firms has been exotic instruments such as collateralized mortgage obligations, structured investment vehicles and credit-default swaps — all tied, one way or another, to pools of residential mortgages that were bought, sold, sliced up and repackaged like so much salami.

But at most community banks, residential mortgages were a relatively small part of their business. Instead, their troubles are tied directly to their heavy dependence on real-estate loans — mainly loans to local builders and developers.

"Many community banks found that (construction and development loans) was an area in which they could compete effectively against the big banks," said Pat Fahey, CEO of Everett-based Frontier Financial.

At Frontier Financial, for example, construction and development loans made up 44.5 percent of all assets at year's end. City Bank had 53.3 percent of its assets in such loans, and at Seattle Bank (until recently Seattle Savings Bank), they constituted a full 54.2 percent of total assets.

Meanwhile more than a third of Bremerton-based Westsound Bank's assets aren't generating any revenue.

Anchor Mutual Savings Bank, of Aberdeen, had $64.2 million in past-due loans at the end of 2008, but just $8.3 million set aside in its bad-loan fund.

Horizon Bank, of Bellingham, charged off $19.6 million in bad loans last year, more than 100 times what it charged off in 2007.

And Friday, the FDIC disclosed that it's given Venture Bank, of Lacey, a deadline to raise new capital or find a buyer.

Those banks whose situations don't soon improve may have to take steps that will hit shareholders, employees and would-be borrowers in the wallet. (Depositors, so long as their accounts are within federal insurance limits, are protected no matter what.)

To bring their capital resources back in line with their outstanding loans, industry analysts say, thinly capitalized banks can slash dividends, lay off staff or call in loans & mortgages.

Four Washington banks — Horizon, Frontier, Westsound and Bank Reale of Pasco — are operating under FDIC "corrective action plans" that place tight restrictions on their lending practices, management and overall operations.

Corrective action plans are often early steps taken by the FDIC before banks fail. It seems our weekly 'Bank Failure Friday' feature may soon take on a regional flavour.

How long before real estate values, a mere 25 minute drive to the south of Vancouver, start to experience a California-style depreciation?



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