Washington banks sink deeper, quarterly figures show

Weighed down by bad loans and foreclosures, Washington's community banks last quarter sank further into the muck left behind by the real-estate implosion, a Seattle Times analysis of financial data from 53 banks shows.

Compared with the end of 2008, all but 10 of the banks examined had higher levels of nonperforming assets — mainly past-due loans and repossessed properties — relative to their capital levels, loan-loss reserves and asset bases. Thirty-eight of the 53 banks saw their reserves, which are used to offset loans that go sour, shrink relative to their problematic assets.

Some of the steepest deterioration in the quarter occurred among banks that already were among the most stressed in the state.

At Seattle Bank (until recently known as Seattle Savings Bank), for instance, nonperforming assets jumped from 14.2 percent of total assets at year's end to 24.7 percent. That means nearly a quarter of the bank's assets are generating either no income at all or less than they're supposed to.

The bank owned $9.4 million worth of real estate on March 31, up from $5.4 million three months earlier; 16.3 percent of its $647 million loan book is in nonaccrual status, meaning the bank is no longer counting on receiving the interest payments due it. Another worrisome sign: Loans 30 to 89 days past due jumped from $6.4 million to $71 million in the quarter.

Ellen Sas, president of Seattle Bank, acknowledged the gloomy numbers but said they're mainly the hangover from the heavy lending the bank used to do in residential construction and development. That business, which a year ago accounted for over half the bank's loan book, was halted last June.

"We have essentially gone through the entire book of business, and the majority of our problems are in that (loan) portfolio," Sas said.

Seattle Bank is working aggressively to resolve problem loans, re-appraise the depreciated real estate backing its loans, and diversify its lending, she added. But restoring the bank to financial health will take time.

"We're pretty sure we hit our (nonperforming assets) peak in April or May," she said. "The second quarter's still not going to look great, but in the third and fourth quarters we should show some improvement."

The charts on this page use three different gauges of a bank's financial health to rank the institutions with the poorest scores. Full results for all 53 banks, as well as two additional measures for each, are available online at seattletimes.com/businesstechnology .

Although most bank analysts don't consider a loan nonperforming until it's 90 days or more past due, the Times has chosen to include all loans more than 30 days late in its analysis. That's based on a judgment that, especially in these tough economic times, a broader measure of problem debt can be a better warning sign of potential trouble.

That broad definition is incorporated in the Times' comprehensive risk ratio, a revision of the classic "Texas ratio" devised during the savings-and-loan crisis of the 1980s. The ratio sets a bank's repossessed real estate (which sits on its books like dead weight until it can be sold off), past-due loans and nonaccrual loans against its tangible capital levels and loan-loss reserves. The higher the ratio, the more exposed the bank is to potentially crippling credit losses.

Of the 10 banks with the highest comprehensive risk ratios as of March 31, one (Westsound Bank of Bremerton) was seized by regulators and sold off earlier this month; six are operating under varying degrees of enhanced regulatory oversight; and one, City Bank of Lynnwood, says it is negotiating with the Federal Deposit Insurance Corp. on the terms of a similar consent order.

Lacey-based Venture Bank, for instance, has been ordered by the FDIC to raise more capital or put itself up for sale. Joseph Beaulieu, senior vice president for marketing at Venture, said the bank is working with several investors to finalize terms on a capital raise of $30 million to $50 million.

Most of the highly stressed banks can trace their troubles to a heavy concentration in residential construction and development lending. Though that business generated rich rewards during the housing bubble, its bursting means many developers can't pay back their loans — saddling banks with homes or lots they don't want and may have trouble selling.

At City Bank, for instance, nearly the entire $1.05 billion loan portfolio consists of real-estate loans — 60 percent in construction and land-development loans alone. Nearly 44 percent of the bank's assets consists of past-due or nonaccrual loans and repossessed properties.

City Bank had the highest comprehensive risk ratio and nonperforming assets ratio, and the lowest coverage ratio, at both year-end 2008 and the first quarter of 2009.

Conrad Hanson, City Bank's CEO, said the bank is making progress in whittling down its pile of nonperforming assets — even as more loans go bad and more homes are foreclosed.

In the first four months of this year, he said, the bank has sold or agreed to sell 570 homes for an average of $297,000 per home. The market has picked up in recent months, he said, especially for the starter homes and lower-end homes that made up the bulk of City Bank's mortgage portfolio.

"As we work these down, some are going off at no loss, others are going at a discount (to what was owed on the mortgage), and we're even experiencing gains on some of our sales," Hanson said.

The overreliance by many banks on one sector baffles Jim Mitchell, chief executive of Puget Sound Bank in Bellevue. That bank, which has a more balanced loan mix of business, commercial real estate and residential loans, had not a penny of nonperforming assets last quarter.

"I don't want to claim clairvoyance, but we saw such a high concentration of real-estate loans in some of these banks, and that just defies common sense," said Mitchell, who has more than three decades' experience in Seattle-area banking. "You should always try to be diversified."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com