Six from Twin Cities among 20 in the U.S. most exposed to failing construction loans
An intensifying housing recession is zapping community banks across the Twin Cities – not with belly-up mortgages, but with failing construction loans for the housing behind them.
Since homebuyers slammed on the brakes, developers, builders and families across the region have been defaulting on construction loans for all manner of new housing, leaving community banks holding the bag.
Six of the 20 most-exposed banks in the country, ranked by the percent of overall bank assets that are in nonperforming construction loans, are based in the Twin Cities, according to New York-based investment rating agency TheStreet.com Ratings. Nonperforming means the loans are unlikely to be repaid.
They are: Key Community Bank in Inver Grove Heights, Vision Bank in St. Louis Park, Citizens State Bank in Hudson, Wis., Community National Bank in North Branch, BankCherokee in St. Paul and Lake Community Bank in Long Lake.
Industry observers aren’t predicting any collapses, but community banks are struggling to work through the mess. After all, development deals became a bread-and-butter business for many of the small guys during the housing boom. It’s not clear how many more shaky construction loans are coming due. With many developers and builders in dire straights, the banks are changing course, with some targeting other commercial lending.
Failing construction loans at the six Twin Cities community banks ranged between 3.6 percent to 5.2 percent of the banks’ total assets in the second quarter, according to Philip van Doorn, TheStreet.com Ratings bank analyst who ranked the banks nationally based on call reports filed each quarter with the Federal Deposit Insurance Corp., which regulates banks.
Those are high concentrations of nonperforming assets – one FDIC official called the percentages “extreme” – although they represent just $37 million. By comparison, the ratio of nonperforming construction loans to total assets for all banks nationally was 0.06 percent in the second quarter.
“I’ve been in the business 40 years, and I’ve not seen it like this,” said Gene Haberman, president of Citizens State Bank in Hudson, which has $201 million in assets and nearly $10 million in construction loans unlikely to be repaid. “It was like a line was drawn in the sand, and all the building stopped. No one was prepared for that.”
Nonperforming loans either are in default or have stopped accruing interest, but van Doorn’s nonperforming count also likely includes many loans in foreclosure. Construction loans include commercial and residential construction.
To be sure, Citizens State Bank and the others are not failing and remain well capitalized, according to van Doorn’s review. They all have tier-one leverage ratios – roughly a bank’s core capital as a percent of total assets minus some liabilities – above the FDIC’s required 5 percent.
Still, the high concentrations are troubling, particularly since the housing recession doesn’t appear to have hit bottom and could worsen as more loans come due. Four of the six banks lost money in the second quarter, some because they beefed up loan loss provisions. At the very least, the failing loans and housing recession spell a rough patch for community banks as they change the way they do business.
“While all are still well capitalized per regulatory guidelines, several are facing the prospect of having to raise more capital if construction and commercial mortgage loan quality continues to decline. All depositors in these banks should take an interest in what’s going on, especially those with deposits exceeding $100,000,” van Doorn said in an interview.
Haberman and the other bankers insist customers have no need to worry. They’re working with their construction borrowers, they said, and the loans pose no threat to financial stability. They dismiss the trouble as a market issue.
“Is it concerning to us? Obviously. Is it an issue of solvency? Absolutely not,” Haberman said. “The good news is it is real estate, and it ain’t going away. We have collateral.”
Heidi Gesell, president and chief executive of BankCherokee in St. Paul, agreed. Construction loans are just 12 percent of the bank’s assets, Gesell said.
“We’re staying ahead of issues in the market in terms of these loans,” Gesell said. “We’ve seen the low point in terms of our income for the year. I think we’re on the way back up.”
Haberman and Marshall MacKay, president and CEO of the Independent Community Bankers of Minnesota, say banks may have become too casual with their real estate underwriting.
“I guess the obvious answer has to be yes, because if we knew what we now know, we would have put bigger margins in,” Haberman said. “We followed traditional guidelines.”
Others disagree standards got lax. The bankers didn’t predict how quickly the high-cycle would end, they say.
That Citizens State Bank in Hudson popped out near the top of the list speaks to how the construction loan problems cut across a range of community banks. BankCherokee, Lake Community Bank (formerly State Bank of Long Lake) and Citizens State Bank all are 100-year-old institutions, not the kind of startup banks one might expect to be more vulnerable.
Such as Vision Bank. With assets of just $25 million, the St. Louis Park bank opened in 2005 specifically to fund commercial real estate deals. Brian Weimer, Vision’s chief executive, said most of his trouble is one group loan, called a participation loan, that Vision Bank joined to finance a housing development that isn’t in the construction phase yet. He wouldn’t name the project.
Bad construction loans led Key Community Bank in Inver Grove Heights last year to shut down a residential real estate finance division it opened five years ago and cut back sharply on new housing construction loans. As of June, it still had about $4.6 million in bad construction loans. David Bjerknes, Key’s senior vice president, said the bank has been “very effectively” working through the process to secure its collateral.
At Lake Community Bank, President Michael Byrne says, “we’re not going to make money this year.” Last year, loans tied to residential real estate made up 54 percent of the bank’s assets. It’s shuffling its deck, aiming for more business in commercial construction and other business lending. “I think this year we’re going to recognize everything and we’ll be making money next year.”
The troubles of another bank in the group are well known. Community National Bank in North Branch made headlines in July for its $35 million group loan to late developer Bruce Nedegaard for his failed Ramsey Town Center housing development. An attorney for that bank blamed the Ramsey Town Center deal for the bank’s high concentration of bad construction loans.
FDIC regulators say they can’t explain the cluster of failing construction loans in the Twin Cities. Federal banking regulators last year urged caution to small and midsized banks in managing risk.
John Anderlik, regional manager of the FDIC’s Division of Insurance and Research in Kansas City, Mo., whose territory includes Minnesota, acknowledged the ratios of the Twin Cities group are “pretty high.” But he called them “bank specific issues.”
As a whole, banks across the Twin Cities remain very well capitalized, he said.
“That’s a pretty strong mitigating factor, even given the extreme ratios on this list,” he said.
Jennifer Bjorhus can be reached at jbjorhus (at) pioneerpress (dot) com or 651-228-2146.
SHAKY LOANS
Six Twin Cities banks have landed near the top of a ranking of banks for nonperforming construction loans as a percent of total assets:
— Key Community Bank, Inver Grove Heights
— Vision Bank, St. Louis Park
— Citizens State Bank, Hudson, Wis.
— Community National Bank, North Branch
— BankCherokee, St. Paul
— Lake Community Bank, Long Lake
By JENNIFER BJORHUS, Pioneer Press
