The FDIC published their quarterly State Banking Performance Summary today and the data sends a troubling message. While assets (mainly loans secured by real estate) were down from $276 billion to $257 billion from 3rd quarter 2008 to 3rd quarter of this year, banks lost $2.4 billion from operations compared to a $1.2 billion profit during the same period. Fully 62% of Georgia banks were not profitable in the third quarter.
Banking profits declined 300% quarter over quarter while assets declined by 7%. It’s fairly easy to see how a small variation in a banks assets translates into a large impact on their bottom line. The troubling part is that a net decline in asset value of 7% does not reflect what is actually happening in the real estate market. During the same period the Case-Shiller home price index declined 9.3% in Atlanta. While the Moody’s/REAL Commercial Price index for repeat sales of the same properties is down an amazing 37% 3rd quarter 2009 over 3rd quarter 2008 nationwide. Even these numbers don’t reflect the true state of the market because they don’t account for the decline in transaction volume that is result of decreased demand, lack of financing and the gulf between bid and ask on real estate listings. When you look at total commercial investment activity, a recent Loopnet report showed dollar sales volumes down 90% year over year.
Why are banks assets not showing losses as great as the other real estate indices. A major reason is that these assets or loans are made on many different types of real estate. While rents are down across the board, many borrowers on apartment, office, industrial and retail loans are still making payments. The lion’s share of bad loans and foreclosed assets reside in the land category. Development loans are the real culprit in this banking crises.
As a broker working on land transactions in Metro Atlanta, I have a great deal of anecdotal evidence that suggests that banks are not willing to sell their land. With the exception of the larger regional banks, national banks and the FDIC, bank land is simply not selling.
But what motivation do these community banks have to take the loss when most of the toxic assets are in vacant land and subdivision lots. Unlike improved assets, land does not have a high carrying cost and virtually no management is required when compared to revenue producing assets like offices, warehouses, and apartment complexes. Unless regulators force their hands, the banks are content holding the bad loans and foreclosed land on their books. If these assets were sold in today’s market, the sale price would invariably be much less than the value the bank assigns to them on paper. Realizing the the actual loss would further erode the capital reserves and draw even more pressure from bank regulators to increase reserves or shut down.
Put simply, the borrowers on subdivision development and other land loans were the first to stop paying when the real estate market turned south. Without a steady stream of lot and home sales, the developers had no means to pay the debt service. Unlike improved commercial property, the income stream on land development is pretty much all or nothing. Now the banks are left holding notes or title to land that is worth far less than the original loan. They mark down the value incrementally based on appraisals and wait for the market to improve so they don’t have to realize the actual losses that result from selling the land in this terrible market. The whole situation serves to prolong the pain and extend the time required for the land market to reset itself.
Even if the banks wanted to sell their foreclosed land and lots, many could not because they do not have adequate reserves to absorb the loss. The all to familiar news of a bank closing on a Friday afternoon have most bankers thinking about their jobs when faced with selling an asset that would reduce their reserves. I can’t say that I blame them, but my job as a broker isn’t made any easier when banks don’t sell the assets they have nor lend money to buyers who want to purchase real estate.
