WASHINGTON - They helped fuel a real estate and commercial development boom across Washington state, but now community banks are saddled with bad loans that are dragging down their balance sheets, causing a credit squeeze and making it hard for small businesses and farmers to get loans in an already difficult economy.
When it comes to delinquent land acquisition and construction loans, Seattle ranks No. 1 in the country and Tacoma No. 4, said Scott Jarvis, director of the Washington State Department of Financial Institutions. Three of the state’s 79 state-chartered banks have failed this year, at least 19 have received “cease and desist” orders requiring them to make changes in lending policies and management, and the situation could worsen.
“We have banks at real risk,” Jarvis said. “Next year could be tough.”
In an effort to ease the situation, Sen. Patty Murray, D-Wash., has introduced legislation that would provide $30 billion in federal assistance to the nation’s community banks, tapping the same account that earlier was used to bail out bigger banks in danger of failing.
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“Small businesses who have always paid their bills can’t get a line of credit,” Murray said in an interview. “It’s the little restaurant down the street that closes or the flower shop that has been there for years.”
The key to getting the economy rolling and generating more jobs is tied to the ability of community banks to make loans, extend operating lines of credit and provide other capital to small businesses, Murray said.
Small community banks, those with less than $10 billion in assets, make up 90 percent of all banks nationwide. They make nearly half of all small-business loans under $100,000 and more than 30 percent of the loans under $1 million, Murray said.
But these banks are being squeezed because under state and federal regulations they have to set aside money to cover their exposure to so-called nonperforming loans. That means they don’t have the money to make new loans.
Jarvis said the primary reason for the deterioration in the financial picture of the state’s community banks is the heavy exposure they have in the commercial real estate market. But delinquent home mortgage loans are a growing problem.
Though Washington state still ranks 40th among all states in total past-due loans, the number of past-due mortgage loans in Washington state has increased at a rate more than double the national average, according to the Department of Financial Institutions.
At the end of September, there were 82,500 past-due residential mortgage loans in the state, with more than 65,000 of them either 90 days past due or in foreclosure.
“Small banks are not in a position to lend,” Jarvis said. “They need to get toxic assets off their books.”
As president and CEO of Sound Community Bank in Seattle, Laurie Stewart knows the problem first-hand. And as a member of the FDIC Advisory Committee on Community Banking, she knows it’s a national problem.
“We are under increasing pressure to maintain higher than required capital levels,” Stewart said. “We have to restrict our loans. We are lending, but we are pretty selective.”
Unless small businesses start to thrive, Stewart said, it will be a “long, slow recovery.”
To Murray, Jarvis and others it’s about Wall Street vs. Main Street.
Initially, the $700 billion Toxic Asset Relief Program was focused on the nation’s largest banks and financial institutions that were thought to be “too big to fail.”
But latest projections indicate TARP will cost about $200 billion less than originally estimated and banks that were initially helped are starting to repay the billions of dollars in aid they received.
The administration and Congress are trying to figure out what to do with the extra TARP money. Republicans want to use it for deficit reduction. The administration and Democrats prefer it be used to create jobs.
Even as the House passed a bill last week imposing stricter regulations on financial institutions, Democratic leaders were working on a jobs bill. The White House is also considering ways to use excess TARP funds to stimulate job creation. Murray said she raised the issue of community banks with Obama at a White House meeting with congressional leaders last week and has twice raised the issue with Treasury Secretary Timothy Geithner.
“Geithner said he will work with us,” Murray said.
The senator said the Senate is also working on a jobs bill, but the administration, if it chose to, could provide the TARP money to community banks administratively.
“They could do it on their own,” she said. “We are exploring every opportunity.”
Les Blumenthal: 202-383-0008