Small Banks, Tight Credit

When Kassie Rempel, owner of SimplySoles, a D.C.-based shoe retailer, went to Eagle Bank for a loan to open her first store, she had to personally guarantee the loan. "It gave me pause, but not enough to not proceed with the paperwork," she says. (By Dominic Bracco Ii -- The Washington Post)
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Federal regulators warned banks in late 2006 to avoid too much concentration in construction and development lending. Almost half the banks in Virginia and 40 percent of the banks in Maryland now have concentrations of such loans in excess of the standard suggested by regulators. Nationally, about a quarter of institutions are above that threshold.

Some bankers say the concern is hard to address. Small banks now exist to make real estate loans, and by nature they rise and fall with the local economy.

"It's not an unfair concern, but I don't know how one really gets around it. We're located here, and this is our market," said John Shroads Jr., chief loan officer at Adams National Bank. "Your fortunes are tied to the place where you operate."

Adams National is the main subsidiary of Abigail Adams, which suspended its dividend yesterday. The holding company also owns a bank in Richmond. It is majority-owned and -operated by women, and it focuses on serving female- and minority-owned businesses.

The company most recently paid a quarterly dividend of 12.5 cents per share in June, and investors expected another payment in September. But the company said this morning that its board of directors had voted to suspend the payments. The company will save about $433,000 each quarter.

"Current economic conditions require prudent management and conservation of capital," said chief executive Jeanne Hubbard.

Banks are cutting back most dramatically on the business that burned them: development lending.

Caruso Homes of Crofton filed for bankruptcy protection after cost-cutting failed to shore up its financial health. Others, such as Seville Homes in Virginia, have lacked the resources to finish some of the homes they started, which has left customers out in the cold.

James Williams, executive vice president of the Northern Virginia Building Industry Association, said banks are hurting builders by tightening lending standards unnecessarily, such as requiring larger down payments or an assurance that homes will sell faster, allowing the loan to be repaid more quickly.

The new requirements feed a vicious cycle, he said. Builders can't borrow money, so their businesses struggle. That, in turn, makes it harder for them to meet their payments on outstanding loans.

"It's the action of the banks, not the performance of the builders," Williams said. "The builders are performing okay in general, but what the banks have done is changed the rules."

But the lending drought could have an upside for the industry in the long run by giving builders time to sell off the excess inventory of homes, office space and storefronts.