9 banks teetering after bad land bets
After betting heavily on real estate lending, about a third of Utah’s smaller community banks are teetering between collapse and survival after the worst land-value crash in memory.
Nine banks are struggling to collect on development and construction loans representing 36 percent of their combined portfolios. Many loans are overdue to the point of default and are in danger of being written off as total losses.
If the past year is a guide, some of these banks may fail. Since January 2008, federal regulators have seized three banks and one credit union, including Barnes Bank just 10 days ago. All had gambled on speculative real estate construction and land loans.
The seizure of even one more bank could further deprive cash-hungry businesses of money, potentially amplifying the credit crunch and retarding Utah’s economic recovery. Community banks focus much of their lending on small businesses, which generate most jobs. Already the nine troubled banks have cut their loan volumes by an average of 16 percent, according to figures from the Federal Deposit Insurance Corp.
The banks operate in the formerly sizzling real estate markets along the Wasatch Front and in St. George. Until real estate began to slide in 2007, they were profitable; the loans produced rivers of cash. At times, construction and development loans constituted more than 70 percent of some portfolios.
They “were caught up in the land-rush mentality,” said Brighton.
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