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Monday, July 14, 2008

Regional Banks in the Spotlight

by Calculated Risk on 7/14/2008 11:59:00 AM

Regional banks are getting hit hard today. As examples, First Horizon is off 19%, Downey Financial is off 11%, Zions is off 16%, and M&T is off 15%.

WaMu is off 17% too. National City is off 20% and is now halted pending news. Update: NCC statement:

"National City is experiencing no unusual depositor or creditor activity. As of the close of Friday's business, the bank maintained more than $12 billion of excess short-term liquidity. Further, as a result of our recent $7 billion capital raise, National City maintains one of the highest Tier I regulatory capital ratios among large banks."
UDPATE 2: WaMu "no unusual depositor activity".

M&T is the first of the top 20 largest banks to report quarterly results, and the news is bad.

From the M&T conference call (hat tip Brian):
Analyst: On your Alt-A portfolio, can you just comment about the trends there? I think you saw $13 million or so of losses. I think that was mostly related to Alt-A. How is that trending?

M&T: Okay, I think just to sort of clarify, if you take the way the press release was written, take the $13 million that we mentioned and the $5 million in seconds, all of that comes from our Alt-A portfolios, so the number was $18 million. That was flat with the first quarter. We have actually seen a relatively leveling off of the loss content in that portfolio. We have begun to see, in the last two or three months, a slight downtick in the delinquencies in that portfolio. So I think the best thing that we can say is that we really feel that we have got our hands around that process. We have been at it for some time now, over a year. I think we think we have got our hands around it and we have done our work there. I would expect to see a continuation of those trends. Loss estimates up or down a bit, but pretty much I would expect the loss content, the loss trends, to continue there for a number of quarters.

Analyst: On the builder book, you mentioned that you have gone through the $2 billion book quite a few times. But how far a long do you think or in terms of really recognizing the NPLs?

M&T: Let me give you a couple of points here. You saw the three charge-offs that we had. Two of those were on credits that we had talked about in the past. Really what the issue was on those two credits was that the amount of spring sales was even slower on the last couple of months than our base case was. So across the board we are seeing slower sales and that means that there have to be price adjustments down in order to hit a price point where they are going to be able to move the properties. The third, and if you look at the third -- I'm giving you color on the types of things that are in the book. The third large charge-off was really a land acquisition and predevelopment loan. So you have got unimproved -- raw and unimproved land there. Really what you are looking at on those particular cases is, if the builder doesn't have the wherewithal to support the project, then land values are pretty low these days, maybe 40% to 50%. So we have kind of taken and all of that into account. We have just completed in May our most recent review. To put that into perspective, we reviewed primarily the mid-Atlantic portfolio, which at 6/30 was $586 million of outstandings. Half of that book is criticized ... But from our perspective in going through that review in May, from our internal perspective, we didn't see a lot of new credits. It's just that a lot of things got a bit weaker. I would guess that we are going to have to see a couple of quarters like the one we have seen.

Analyst: The numbers are again 25% of the whole builder book is classified? I just want to make sure that I have that number right. You said half of mid-Atlantic is criticized.

M&T: Yes, let me be real specific on that. If you look at our about $2.1 billion of total outstandings there [builder loan book], 25% of that book is in our criticized loan book. Almost all of that is in the subset, the $1 billion that we sort of call -- that is managed out of our mortgage division, and 47% of that book I am talking about, of the criticized loan book, is in the mid-Atlantic. So it is very concentrated.
Although residential real estate is being blamed for the write downs, the real problems are in the builder book. I don't know about land values in the mid-Atlantic area, but in California some land has sold at 15% to 25% of previous values (below the 40% to 50% M&T is suggesting for the mid-Atlantic area).