Credit crunch takes its toll on small banks
http://online.wsj.com/article/SB1215...od=wsj_article
Loan revenue wanes in once-hot bastions of a real-estate boom
By SARA SCHAEFER MUÑOZ
THE WALL STREET JOURNAL EUROPE
July 9, 2008
BRADENTON, Fla. -- The future looked bright when several small banks decided to open in this city along the Gulf of Mexico. Property values in southwestern Florida were surging, and older start-up banks had sold themselves for handsome profits after just a few years in business.
Now, though, for-sale signs dot shopping centers, offices and vacant lots. Developers are desperately hawking vacant houses built on former farmland. In nearby coastal hamlets, some clusters of homes are half-built, with wires dangling from garage ceilings and pipes sticking out of the ground.
While just about every bank in town is suffering as a result, Bradenton's latest crop of start-up banks has been hammered. At First Priority Bank, which opened in 2003, nonperforming assets have swelled to 16% of total assets, according to analysts. Coast Financial Holdings Inc., staggered by bad loans to out-of-state investors who hoped to flip homes, nearly failed before being sold to First Banks Inc. of St. Louis last year.
"They went hog-wild and made far too many of these loans," said Tramm Hudson, a local banker who advised Coast before it was sold.
More than 630 banks were launched from 2003 to 2007, raising more than $8.9 billion in capital, according to SNL Financial, a Charlottesville, Va., research firm. But investors who poured money into fledgling banks, which usually rely heavily on commercial loans, are being pounded by the erosion in credit quality.
"Right now, the outlook is very challenging, and it will most likely get worse," said Christopher Marinac, research director of FIG Partners LLC, a research firm in Atlanta.
The troubles afflicting many of the banks that sprouted when times were good don't pose a major threat to the banking industry, because the fledgling banks generally are tiny compared with regional and nationwide lenders. But their stumbles show how far excessive exuberance had spread among bankers usually known for conservatism.
Many of the shakiest new banks were launched in red-hot real-estate markets that now are reeling from the housing slump.
In Florida, about 2.2% of loans at banks opened from 2003 to 2006 were considered problem loans at the end of this year's first quarter, according to SNL, meaning that a borrower has stopped paying interest and principal.
In the Atlanta area, problem loans amounted to 2.9% of overall loans at start-up banks. Banks and thrifts established outside those two areas during the same period averaged 1.1%.
Bradenton and the surrounding area of about 687,000 residents, roughly between Tampa and Sarasota, was a center of real-estate speculation. Three new banks formed in Bradenton since 2000 saw the activity as an opportunity for fast growth. Home prices surged 35% in 2005, and bankers eagerly made loans to finance houses, strip malls and condominiums. When the housing market stalled, defaults ballooned.
Loan officers at Community Bank of Manatee said they knew something was seriously awry when borrowers would come in and start to cry. "These were grown men," said Bill Sedgeman, the bank's chairman and founder. "They'd get very emotional."
Mr. Sedgeman's bank was founded in 1995 and avoided much of the construction lending that hurt its local rivals, he said.
Still, Community Bank of Manatee was pinched because it hasn't matched the deposit rates paid by struggling banks trying to keep customers from defecting. "People wanted us to match, but we need a spread to stay in business," he said.
Coast, started in 2000, sank more than $100 million -- or one-fourth of its loan portfolio -- into loans related to homes being built by Construction Compliance Inc., based in St. Petersburg, Fla. That exposure was far too big for the bank's size, analysts say. When the real-estate market plummeted, borrowers stopped payments on loans that were underwater. The builder halted construction, leaving cinder-block foundations and empty lots dotting towns south of Sarasota.
Five-year-old First Priority Bank reported $39.3 million in problem loans at the end of the first quarter. The bank has installed a new CEO in an effort to strengthen its financial condition.
A spokesman said the bank won't rule out selling itself. "First Priority will explore any opportunity that comes to it regarding ways to solve [its] issues," spokesman Frank Knautz said.
Also clobbered has been Freedom Bank, which opened in Bradenton in 2005. It posted first-quarter losses of $7.8 million, and nonperforming assets have climbed to more than 8% of its total, according to analysts.
"In looking back...loans were being made mostly in the commercial real-estate arena and the development arena, and when that bubble burst, we all had to live with that," said David Zuern, who was brought in as CEO in April.
Some analysts say struggling new banks in cities like Bradenton still might turn out to be solid investments if they can weather the current woes.
Once the banking industry stabilizes, "bigger banks outside of the area are going to be looking to, basically, find a bargain," predicted Karen Dorway, president and director of research for BauerFinancial Inc., a bank-rating and research firm in Coral Gables, Fla.
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