ABA Banking Journal - January 2008 - (Page 24) COVER STORY Northeast was slightly up for the month—1.8%—and was the only region to show any improvement for 2007 on a year-to-year basis. “The thing that has always struck me is that real estate’s always local. And what one person might be experiencing, the other might not,” says Robert Seiwert, senior vice-president, commercial banking, at ABA. “But, in time, all lenders are affected, sooner or later, by national currents.” (Seiwert, formerly of the America’s Community Bankers staff, and a veteran banker, sat in on the discussion.) While many of Pearson’s customers are holding their own, some have gotten into trouble, one way or another. In the third quarter of 2007, Butler Bank’s ratio of noncurrent construction and development loans to total loans hit 4.21%, compared to 0.87% a year before, and coming down from 7.48% in the previous quarter. By comparison, the industry ratio for the third quarter came to 1.85%, and for banks and savings institutions under $1 billion in assets, the figure came to 2.08%, representing a tripling over the 0.68% of third quarter, 2006. A case in point is the builder who wound up putting up a huge home, with a pricetag of $2 million. “It’s a gorgeous place,” says Pearson, “but the guy spent way too much money on building it.” Pearson says that Butler gave the builder time to try to sell, but increasingly felt that his efforts weren’t cutting it. In the end, the bank foreclosed. One source of the bank’s problem credits, and therefore its builder-generated OREO, appears to be youthful optimism. “Some of the problem cases are sons of good builders,” says Pearson. “They just couldn’t hack it.” Sometimes the bank has worked with builders who are on the verge of backing out on incomplete homes, advancing them further funds to get the job completed. Pearson allows how it is hard to sell a half-built home. In one effort to fine-tune its approach a bit more conservatively, Pearson says the bank moved its typical initial loan-tovalue ratio to 70% from 75%. “We felt it was the right thing to do, for everybody involved,” says Pearson. “But, you know, there was a lot of squawking and jumping up and down.” 120% Median construction and development loan concentrations Percent of total risk-based capital, by lender asset size (1998-2007) 100% Assets under $1 billion Assets $1-10 billion Assets over $10 billion 80% 60% 40% 20% 0% 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 Source: FDIC Quarterly Banking Profile Elsewhere in the country Members of the roundtable panel represented multiple regions, and, often, experiences reflected very local conditions. On the residential construction side, most reported a slower pace, at the least. In Moorefield, W.Va., near the conjunction of that state and Virginia and Pennsylvania, “consumer, housing, and construction development lending have all slowed significantly,” says H. Charles Maddy, III, president and CEO of Summit Community Bank, $1.3 billion assets. “Three years ago, there was zero inventory of homes, I would say,” Maddy reported. “You couldn’t build them fast enough. I mean, if a builder built it, he sold it, and in many cases people were offering prices that were above the asking price.” By contrast, Maddy continues, “there’s probably somewhere around 18 months inventory out there in homes.” He says prices have dropped at least 20%. In central Virginia, J. Peter Clements said that his broad-based multi-county market saw some growth, but not nearly the high point of the upward swing seen by northern Virginia. Clements, president and CEO of The Bank of Southside Virginia, $480 million-assets, says his bank chiefly deals with smaller builders. These firms slowed down as market demand fell off, he says, “so we haven’t had the kind of oversupply problem, with its depressed prices, that residential has seen in other areas.” Open lots available for building have slowed down, however, and they are tending to stay on the market longer. “Housing’s not as strong, but it’s still pretty doggone good,” says Michael Crapps, president and CEO at $576 million-assets First Community Bank, N.A., Lexington, S.C. “It’s flattened, but we’ve not seen the depreciation of values I’ve been hearing about in other markets.” Fall saw a bit more slowing in this sector. The banker takes a somewhat philosophical view. “One season the team goes 30-0, and wins the national championship,” Crapps says, “and then the next 24 JANUARY 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html ALL CHARTS BY PHILIP DESIERE http://www.summitcommunitybank.com/ http://www.summitcommunitybank.com/ http://www.bsvnet.com/ http://www.bsvnet.com/ http://www.firstcommunitysc.com/ http://www.ababj.com/subscribe.html
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