Some banks feel the pinch

Several area community banks face woes linked to loans, money crisis

Many community banks in the Portland area are standing on wobbly legs, laden with dicey loans to homebuilders and developers and buffeted by the world financial crisis.

Just 14 months ago, Oregon banking regulators rated 33 of the 35 state-chartered banks in satisfactory or better condition. But as the real estate bubble burst, so did the fat times for local banks feasting on real estate lending.

State banking examiners pored through the books of 22 of those 35 banks in the 12 months that followed, and found 10 banks in 'less than satisfactory' condition, regulators told state lawmakers in late August.

The number has grown, as that pattern continued in subsequent bank examinations, said Richard Renken, who manages bank regulatory functions for the Oregon Division of Finance and Corporate Securities.

All local community banks are considered well-capitalized, meaning they have enough cash to keep humming. But most lent heavily for land developments and other risky real estate projects. That weakened their finances when the local market turned - now putting some of the banks survival in question.

After the U.S. Treasury invested $214 million in federal bailout money Nov. 14 into Portland-based Umpqua Bank, and as it puts more into other hand-picked banks, observers expect an industry shakeout, with stronger banks using the money to absorb the weak.

'I think there's a good chance that in some form or another, some of these banks will not be around at the end of 2009, whether they be outright failures or forced sales,' said Jeff Rulis, who analyzes bank stocks for D.A. Davidson and Co. in Lake Oswego.

In addition to Umpqua, large out-of-state players like Wells Fargo and KeyBank are logical suitors for local banks, Rulis said.

If regional or national banks swallow up community banks, the economic lifeblood of local communities could be sapped. Community banks, such as Portland's Albina Community Bank, focus on nearby neighborhoods. Their mission is to nurture small businesses and promote local homeownership, job creation and economic development.

'You have a lot more personal feel and a lot more chances of getting a loan at a community bank,' said Steve Emory, senior loan officer at Pacific Residential Mortgage in Lake Oswego.

Many community banks formed after the 1990s merger wave, which included the 1997 buyout of Portland's U.S. Bank by First Bank of Minneapolis. Community banks filled a vacuum when surviving big banks were accused of poor service.

Now several of those community banks are ailing or weakened. The list includes Albina Community Bank, MBank in Gresham, Lewis and Clark Bank in Oregon City, Pinnacle Bank in Beaverton and Lake Oswego-based West Coast Bank, according to interviews with bank experts, assessments of bank-rating organizations and FDIC reports comparing the banks to similar institutions around the country.

Oregon banks hold the sixth-highest concentration of real estate acquisition and development loans in the nation - the riskiest sector during the current downturn. Only California, Florida, Arizona, Georgia and Nevada banks hold a greater concentration of loans in that sector, Renken said.

'Mainly, our bankers were making good profits in good times by making loans to homebuilders and real estate developers,' he said. 'It's kind of an all-your-eggs-in-one basket situation. They've been paying pretty dearly for it.'

As more loans sour, bank profits turn to losses. Banks take money out of circulation to bolster loan-loss reserves.

On May 27, federal and state banking regulators issued a cease-and-desist order against Beaverton's Pinnacle Bank, ordering it to remedy 'unsafe and unsound banking practices.' Regulators said the bank didn't have enough capital or reserves to cover bad loans, and had a 'large volume of poor-quality loans.'

In August, state regulators said they reached informal agreements with six other banks. The agreements are designed to rectify shortcomings found when examiners inspected those banks' operations. State regulators also cited 'pending formal actions' against two other banks.

Regulators won't divulge the names of the targeted banks or the nature of their problems.

But the FDIC's Uniform Bank Performance Report reveals some potential trouble spots for specific Portland-area banks:

* West Coast Bank, the second-largest bank based in Oregon, has $135.2 million in nonperforming loans, up from $8 million a year earlier. On those loans, borrowers aren't making required loan payments to the bank.

West Coast has seized $48 million in real estate from troubled borrowers - half the total for all 35 state-chartered banks three months earlier, according to the latest state report. That number is a negative for banks - because foreclosing customers' real estate is costly, and banks often are forced to sell it at reduced prices.

* Of its total loan portfolio, Oregon City's Lewis and Clark Bank has issued 53 percent for real estate construction and development, which is considered the riskiest lending sector right now, and the cause of bank failures in other states.

The startup bank, formed in 2006, also boosted its real estate loans by 122 percent in the prior year, a time of peak prices before the real estate bubble burst.

* MBank in Gresham issued 32 percent of its loans for real estate construction and development. It has $19.6 million in nonperforming loans, up from $1.4 million a year earlier.

* Portland's Albina Community Bank has $10.2 million in nonperforming loans, up from $276,000 a year earlier.

Renken stressed that most bank customers' deposits are safe, especially since the FDIC boosted the guarantee on individual bank accounts from $100,000 up to $250,000. The FDIC also added an unlimited guarantee for business checking accounts that don't earn interest.