Bad home-building loans plague banks

As financial regulators shift their sights to the mounting problems with commercial real estate loans, many Philadelphia-area banks remain bogged down in bad loans for residential construction.

Led by construction loans, the overall percentage of problem loans - those seriously behind in payment - at the 15 largest publicly traded banks here soared to nearly 3 percent Sept. 30 from 0.89 percent a year earlier.

That increase added $1.1 billion to the loans banks will have to collect through restructuring, foreclosure, or other measures - unless the improving economy allows the borrowers to recover enough to pay their debts.

The Federal Reserve did its part yesterday to help banks, keeping its target federal funds rate at the record-low level of zero percent to 0.25 percent. That keeps banks' borrowing costs low, helping them to earn more on the limited number of new loans they are making.

Bankers, meanwhile, even those with the strongest loan portfolios in the region, see continued problems.

"I think every bank is going to be thinking very carefully about bolstering their reserves because you just don't know what is out there," said Kent Lufkin, president of TF Financial Corp., of Newtown, the parent of Third Federal Savings Bank, which had the lowest rate of nonperforming assets among the area banks.

Lufkin said Third Federal stayed out of trouble during the real estate boom because it did not change its conservative lending practices. "That's helped us today to have a lower percentage of nonperforming assets," he said.

By contrast, Abington Bancorp Inc., of Jenkintown, followed a suburban builder with which it had previous experience into the Philadelphia condo market during the real estate boom. The move came after the company raised $71 million in a 2004 stock offering and contributed to Abington's possession of the highest rate of nonperforming assets in the region, 5.03 percent, according to data from Bloomberg News.

"It's our construction-loan portfolio that's in bad shape," said Robert White, the lender's chief executive officer. Indeed, the delinquency rate on its residential construction loans, including loans at least 30 days past due, was 35.2 percent on Sept. 30, according to a report by Stern, Agee & Leach Inc., a research firm in Portland, Maine.