Local Banks
If you have been following the news you will have heard the FDIC came in and forced merged Horizon Bank with Washington Federal effectively shutting down Horizon Bank. If you were with Horizon Bank there is one good thing with Washington Federal, in my opinion, you are probably associated with one of the best run banks in the nation. However the disturbing part is that it appears many of our local community banks are on the edge right now. The problem is two fold. The first one is that by their own charters many of these banks were required to do community based lending. The result was that these banks did most of the lending to our local builder community to build the homes that the public demanded as a result of the credit bubble. Wall Street created the fancy CDOs which provided the easy credit for the buyer, the local community banks are the ones who provided the construction and development financing to the builders and developers that supplied the new homes and condos for those buyers. By the terms of their charter 65% of their lending was to be community based. This meant they were in some ways obligated to loan to these builders.
Our local new construction market is different from the rest of the country. For example go to the Phoenix area and you see the publicly held large national builders such as KB Homes, DR Horton and Centex as the ones who are building the most houses. These companies raise their money to purchase land and build houses by doing a combination of public bond offerings and corporate lines of credit with large banks such as Chase and Bank of America. In Washington State it is much different. 90% of the builders in our state build less than a 100 homes a year and are privately held. Some of the larger builders get their financing from large money center banks; mainly Wells Fargo, BofA and US Bank. However the bulk of the lending for new construction homes and condos was done by Frontier, Homestreet, Horizon, Sterling, Seattle Bank, etc. It is mainly due to these construction and development loans that has caused these banks problems. The value of these assets has declined so dramatically that a once healthy bank like Frontier that was on paper one of the strongest and most profitable in the nation is in such a bind. The other fall out from the potential failure of these banks is that they are also did a lot of local lending to small businesses such as small retail and service companies. These companies are struggling but are able to meet their obligations unlike a lot of the builders and if this credit disappears they have no where to turn. They can go to Chase and get a credit card with a high limit and an 800 number and a 24% interest rate as their alternative, not really what they need.
The irony here is that the Federal Reserve bailed out the money center banks and brokerages that created the mess with the CDOs and invented the sub-prime mortgages but the collateral damage that it caused with the regional banks is just looking to be flushed. As a matter of fact it gets even worse. Since the regulators failed so miserably with the money center banks they now have decided to get tough on the regionals. In fact they are going to the regionals and saying to them they want them to get out of community based lending but they have no where else to go to make money. They are basically real estate asset based lenders. They are not competitive on car loans, they can’t do large corporate based lending and they have no other sources of income so what do they do? On the other hand the money center banks are in a position to consolidate their market share. So what do you do? I would suggest buying stock in Chase (JPM) and hope Jamie Dimon is merciful to our local lending needs. .
The second issue regarding regulatory changes will be addressed in another post.