Under Siege

A crisis in the banking industry means banks will be swept aside unless they adapt. Fortunately, a number of local institutions are prepared to do just that.

By Bill Virgin | April 2010 | FROM THE PRINT EDITION

Credit: Illustration by Katie Miller; Photograph by Hayley Young

Washington bankers have added a grim ritual to their weekly
schedule: checking the Federal Deposit Insurance Corp.’s website on late Friday
afternoons to see if any of their neighboring institutions have been taken over
and sold by regulators.

A total of seven times in 2009 and 2010—eight if you count
the 2008 takeover of Washington Mutual, which technically was on a Thursday—a
Washington bank was on the weekly list (see chart at right; click for a larger view).

That’s not a huge number compared with states like Georgia,
where more than 30 banks have failed, or California, which has logged more than
20 bank failures.

But it’s a dramatic change from the days not so long ago
when the portfolio of problem loans at many Washington banks was almost too
small to measure, and the economic climate was healthy enough to generate new
banks almost as rapidly as fast-food joints.

Today, many of those same banks have eye-popping,
double-digit percentages for nonperforming assets (loans generating neither
interest nor principal payments, and in delinquency or default). Virtually
every part of banks’ portfolios—residential real estate (prime and subprime),
construction and development, commercial real estate, consumer and credit
card—has felt the strain of the recession. More than 20 banks in Washington are
operating under some sort of cease-and-desist order or written agreement with
federal and state regulators that prohibits unsafe and unsound practices, and
requires the banks to clean up their balance sheets.

The Seattle-Bellevue-Everett region earned the dubious
distinction of being first in the nation for the proportion of delinquent
commercial real estate loans (Tacoma was third), according to Foresight
Analytics. That picture has special meaning for banks in this state.

“Unfortunately, in our market here, [with] many of the
community banks here, their portfolio is very heavily weighted toward
commercial real estate,” says Rick Wirthlin, president for KeyBank’s
Seattle-Cascades district. “That’s what has been their downfall, frankly. Not
poor management but the fact they had a lot of exposure in commercial real
estate.”

And it’s not over yet. More bank failures—and more anxious
Fridays—can be expected.

“This is going to be a tough year,” says Scott Jarvis,
director of the state’s Department of Financial Institutions. “The pressure is
on.”

But some day it will be over. The economy will eventually
recover, the banks whose balance sheets are beyond repair will have been closed
and sold off, and the survivors will resume lending.

When that day comes, Washington’s banking industry is likely
to look and operate in significantly different ways from how it did five or 10
years ago.