It looks like the real estate mess is starting to hit the Philadelphia area. Royal Bancshares of Pennsylvania Inc. of Narberth, led by Joseph P. Campbell, announced about 10 days ago in an SEC filing that it is holding up releasing its third-quarter results pending a review of its loan portfolio. This doesn't look good. The company says that at a minimum it will take a $5.2 million charge related to an equity position in a condominium development (unknown which one). It says it also has hired an outside consultant to assist in evaluating its loan portfolio and determining a loan loss provision for the third quarter. Ugh!
Then the bad news hit RBPAA stock, which dropped 20 percent last week, although note that two insider directors, John M. Decker and Sam Goldstein, seemed to consider it a buying opportunity.
At first read, I was fearful the charges were related to Royal's newest banking subsidiary, Royal Asian Bank (Also, see story here about community banks). The company has two banking subs: Royal Asian Bank and Royal Bank America, the original Royal Bank. However, a review of the Sept. 30 FDIC's Call Report (enter "Royal Asian Bank, Philadelphia, Pa.") shows no delinquencies and no non-accruals. That's an unbelievably stellar record.
No, the problem seems to be at Royal Bank America, according to the FDIC Call Report (enter "Royal Bank America, Narberth, PA"). It notes: "Past Due Loans 30 days through 89 days and still accruing" in the construction, land development and other land loan category. It skyrocketed to $10,224,000 from a respectable $763,000 since just June 30 this year. Wow!
Hopefully this represents more than one deal. Royal Bank's legal limit is around $16 million, or 15 percent of its capital. So Royal could legally make a $10 million deal. But, as they say, that's a lot of eggs in one basket. I would hope this new loan problem represents several deals that just happened to go delinquent at the same time.
Certainly I can't tell why this happened, or the outcome of this situation. But I do think it's a harbinger of things to come at other Philadelphia area banks. Some of these banks have been pretty active in the real estate development market: good loan volume; good fees and good interest rates. Have they "reached" from time to time? Sure! In a vibrant economy delinquencies and losses were well controlled at Royal and most other banks. But in a weak real estate market?
I suspect over the next several quarters we will see large increases in real-estate related delinquencies, non-accruals and ultimately loan charge-offs. Unfortunately it's a sign of the times: tighter credit standards being applied to individuals who want to buy homes; higher gas and energy prices; difficulty in selling existing homes to upgrade; less consumer optimism and all that.
If I were at a credit desk today, I'd certainly want to upgrade my credit standards for new loans and try to tighten up some of my existing relationships. Things may soon get messy for Philadelphia-area banks with large construction and land loan portfolios. If you have any contrary or supporting thoughts, I'm all ears.
- Larry Jilk is a former Pennsylvania bank executive, who does not own any RBPAA stock but does own stock in several commercial banks headquartered in Pennsylvania.
