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Housing loans bite regional banks

Thu., July 31, 2008, midnight

Statements, stocks suffer as builders, developers fail to pay

The demise of Sullivan Homes and resignation of AmericanWest Bancorporation’s CEO have brought to Spokane’s front door the housing and banking crises that are feeding off each other all over the United States.

Loans to contractors and developers are eating huge holes in the quarterly reports of many banks. Some of the problems, as is the case with Sullivan, are local. But for AmericanWest, Sterling Financial Corp., and even tiny Idaho Independent Bank, loans in Utah, Idaho’s Treasure Valley, and Southern California have done substantial damage.

The banks are foreclosing on incomplete developments, writing down loan balances, and shoring up balance sheets.

A year ago, Idaho Independent had no loans in arrears, called nonperforming assets in the industry. The bank’s total at the end of this year’s second quarter was $8.7 million, and it added $2 million to its allowance for loan losses.

“This is the worst I’ve ever seen it,” said Chairman Jack Gustavel, a banker since 1962.

Idaho Independent was forced to foreclose on a $7 million loan for a Treasure Valley development, but Gustavel said collateral backing the loan should make the bank whole.

The bank still managed a profit of nearly $1 million for the quarter. Loans and deposits were down slightly, a reflection of the real estate downturn, he said. “The community doesn’t need the kind of credit they thought they needed.”

Gustavel called the widespread industry write-downs and other adjustments for losses a “cleansing process” after a period of excess.

Idaho Independent shares are lightly traded, and at $18.59 Wednesday were down only about one-third from their 52-week high.

Some stockholders of other Spokane banks would be happy with losses that size.

From a 52-week high of $20.96, AmericanWest shares Wednesday closed at $1.39. Sterling stock traded at $7.47 compared with a high of $29.28. Walla Walla-based Banner Bank, which bought F&M Bank of Spokane Valley last year, traded at $9.88, off from a high of $36.39.

The declines, coupled with publicity over the federal takeover of Los Angeles-based IndyMac Bancorp, have unnerved some depositors, Spokane bank officials said. Reports created confusion about Federal Deposit Insurance Corp. protections.

Similar federal intervention at any local bank is unlikely, they said.

Banks like Sterling were giving tellers advice on how to respond if depositors express concern about their money. But Chairman Harold Gilkey said customers are coming in with deposits from larger banks as they spread their money around – FDIC insurance is limited to $100,000 on most accounts.

Other local banks also reported an upswing in deposits.

Sterling, by far the largest Spokane-based bank, with $12.7 billion in assets, last week reported earnings ahead of those for the first quarter but below those for the comparable 2007 quarter. Nonperforming assets have increased tenfold in the past year – to more than $300 million – because contractors who borrowed that money have been unable to sell finished homes or surplus lots.

Loan originations have slowed considerably, almost entirely because second-quarter construction loan starts were down $577 million from 2007.

But Gilkey said that, at least for Sterling, the bottom of the construction cycle is close at hand. “Money is available for qualified borrowers,” he said.

AmericanWest has been especially hard-hit by construction loan losses in Utah. The financial losses last week prompted the bank’s board of directors to ask for President and CEO Robert Daugherty’s resignation, although fellow officers and analysts said it was timing more than strategy that was his undoing.

“A lot of things went wrong at once,” said analyst Chris Stulpin, of D.A. Davidson, which is based in Great Falls.

He said AmericanWest officers are taking the appropriate actions to resolve the bank’s problems, but raising $6 million to be considered “well-capitalized” by regulators could be a challenge. The bank may have to shrink itself to get back into compliance, he said.

“That’s their only option at this point,” Stulpin said.

AmericanWest interim CEO Patrick Rusnak said officers hope to avoid those decisions as they work with potential investors to close the capital gap. In the long term, he predicted, the bank will be successful because its service territories in Washington, Idaho and Utah will thrive.

“This is still a part of the country where people are moving, where jobs are being created,” Rusnak said.

AmericanWest is among the several lenders – U.S. Bank, Washington Trust and Inland Northwest Bank included – owed more than $16 million by Sullivan Homes, which had specialized in building homes costing more than $300,000.

Analysts and bankers agree the Northwest economy has so far ridden above the nation’s, but they don’t take their position for granted.

At McAdams Wright Ragan – which has offices in Seattle, Bellevue and Portland – analyst Sara Hasan said executives watching the economy deteriorate in other parts of the country should be better prepared for the weakening she already sees in areas such as Pierce and Snohomish counties. But some news reports have exaggerated the problems banks are facing, she said.

In the Northwest, Hasan said, “I think, for the most part, these banks are going to be fine.”

One of the local winners in the industry may be Wheatland Bank, a closely held bank with $190 million in assets.

Chairwoman Susan Horton sent a letter last week reassuring customers the bank was more than well-capitalized and has not recorded any loan losses this year.

In an interview, Horton said the bank’s directors had passed on pricey acquisitions now haunting other banks, opting instead to build out its branch network internally. With the savings, and the opening of offices in Yakima, Wenatchee and Ellensburg, Wheatland expects its loan portfolio to grow by almost 40 percent this year after a 6 percent increase in 2007, she said.

Horton, noting that Wheatland has in past years had to pick its way through lean times, said the bank executed a turnaround by conserving capital and staying home. “We don’t think it’s by accident that we’re sitting where we are,” said Horton, adding she expects more reverses for the industry before it hits bottom.

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