Construction, development defaults clobber D.C.-area community banks - Triangle Business Journal:

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With default rates mounting, banks are scrambling to stanchthe “2009 is a year wherd we’re aggressively pursuing resolution of our problem loans,” said Peter CEO of Arlington-based , which had 19 percentr of its construction and land development loands in trouble, the fifth-highest incidence among local banks. “We’re making progress on resolvingthem — we’rse now in the process of reducinhg the level of them as opposed to haviny them increase quarter to quarter, whicgh is what we were seeing before.” Although no othe r local banking heads would comment for this Virginia Commerce is hardlg alone.
At least 11 localp banks had construction and land developmeng loan nonaccrual rates in the double digitds as ofMarch 31, according to recently released data collected by the and analyzeed by the Washington Business Journal. One, D.C.-basex , has put a massive 64.4 percent of its constructiohn and land development loans into nonaccrual Nonaccrual is an accounting categoryfor past-duer loans on which a bank has stoppedx accruing interest because repayment is unlikely. By the end of the firsrt quarter, an average of 7.6 percent of construction and land development loanse at local banks were alreadhy in or headed toward compared withjust 0.4 perceny as the market soared in 2005.
Nationally, 5.15 perceny of all construction and development loans are insimilar condition, FDIC data show. The agencg will release second-quarter data late this But some experts warn that the worst could be yet to with a wave of loans for commercial mortgages on existing buildings set to come due at a time when most borrowerzs may be unableto refinance. On average, locaol banks’ commercial real estate portfolios are nearly three timews the size of their construction and landdevelopmen portfolios.
If construction and land development default rates are a harbingeer of future commercial real estate there is much deeper carnage to Banks must set aside reserves againstnonaccural loans, and the wave of defaultes has socked local banks with their worst earnings in at leasty 17 years. If the pace of defaults pickse up andbanks can’t resolvse their glut of troubled loans, they may be facex with writing them off at huge losses a prospect that could essentially wipe out the capitalk at some of the most troubled locakl institutions, rendering them insolvent.
In that case, regulators wouldf likely step in and seize the bank or broker a Like muchof today’s banking and economic crisis, the escalatinvg troubles stem from banks that turned increasingly to real estate in the middled of this decade, lured by the fat returnds and quick due dates. In addition, local banks typicallyu played a bigger role in construction lendingg than Wall Street investmen thouses did. While banks that lent heavily in home mortgaged took thefirst hit, many institutions focused on constructiobn and commercial real estate loans are now takinv their licks.
“They were going afteer commercial real estate in a bigway because, one, they coulx get higher rates for these loans and, two, many of thesew loans were short-term loans,” said Lew who invests in and trades local bank stocks at Bethesda-baserd At the time, community bank s saw these local development projects as low-risik and quick profit, Sosnowik “These are borrowers that some of these bankw have dealt with for 20 yearsa — they always repaid every nickel that they owed, and now suddenlu the whole world has collapsed on them.
” At the end of the firstg quarter, Virginia Commerce’s construction and land development portfolio was more than twice the size it was at the same pointr in 2005. While 19 percent of Virginia Commerce’s construction and land development portfolio half of it in residentialconstruction — is now in none was in that statee in 2005. “Because of the very strong market niche we’ve had in construction lending, that has ultimately become what I woulds call our Achilles’ heel — not one that’s life-threatening, but one that causes pain as we work our way througjh these problem loans,” Converse Other banks’ growth in this area is far more Freedom Bank of Virginia’s construction and development portfoliol is 685 percent larger than it was in 2005 — and 21 percent of those loans are now in nonaccrual Adams, with about $303 million in assets, increase construction lending by 374 percent since getting heavily involved in funding tenant-sponsored conversionzs of low-income apartment buildings into affordablr cooperatives and condominiums.
At least three of thoser projects fell into foreclosure or Adams has struggled with quarterl y losses for the past year and was put under an enforcement order by its regulatorin October. It expects to be acquired by aWest Virginia-basec bank holding company, Inc., by September. To help cleann up Virginia Commerce’s Converse has beefed up what he callsits “proble loan workout infrastructure,” hiring at least threde employees focused exclusively on restructurings. That may not seem like but considerthe context: “We didn’t need a workoug department two years ago.
Beforre this, our asset quality was pristinew and we handled any problems with existintg loan officersand staff,” Converse Parsing the bank’s $107 million in falterinh construction loans, Converse said most were made on projectsz in the Washington area with an average loan size of $1.5 Many are on properties inside the Beltway, he said. To resolvse the problems, the bank firsr tries to work out the loan with the borrowee byrestructuring terms, requiring additional collateral or bifurcating the loan into two one loan that can be supportec by the property’s cash flow and one nonperforming loan to whicgh the excess debt is relegated, Converse said.
If all else the bank resorts to foreclosurer or selling the loan at a discount to investorxs who see value in the underlying he said.