The Great Recession is forcing Connecticut banks to restructure a record number of loans as borrowers continue to fall behind on payments.
During the first quarter of 2010, Connecticut’s 55-federally insured banks had $229 million in restructured loans on their books, a 345 percent increase from the year ago period, a Hartford Business Journal computer analysis of Federal Deposit Insurance Corp. data has found.
That number was a slight decrease from the fourth quarter of 2009, when banks had $237.9 million in restructured loans, the highest amount in any quarter in at least 20 years, when the FDIC began tracking the data.
Banks are traditionally hesitant to restructure loans because it reduces the value of their original investment and it can be frowned upon by regulators. But the large amount of economic pain caused by the downturn, including high unemployment and tens of thousands of foreclosures, is forcing lenders to work with distressed borrowers at much higher rates than in recent history, to avoid even larger loan losses.
“It has all the elements of a poker game,” said Bert Ely, a Virginia-based banking consultant. “The question for the bank is what is best way to minimize the loss and also help get the borrower back on track. Finding that middle ground isn’t always easy.”
Ely said it’s not uncommon for banks to restructure more loans during a recession and the sharp increase experienced by Connecticut banks shows this downturn’s greater impact on the real estate market.
Connecticut banks had $1.2 billion in loans that were at least 90 days past due at the end of March, FDIC data shows.
Waterbury-based Webster Bank accounted for more than half of the first quarter total with $128 million in restructured loans, followed by First County Bank, Fairfield County Bank, and Unions Savings Bank, with $18 million, $14 million, and $10 million, respectively, in restructured loans.
Ed Steadham, a Webster Bank spokesman, said the lender has been aggressive in working with troubled borrowers.
In 2008, Webster initiated a foreclosure moratorium and mortgage assistance program for borrowers who were experiencing problems. Since then, Webster has modified more than $100 million in outstanding mortgages for about 500 homeowners across its footprint, including a large portion in Connecticut.
The modifications include temporarily reducing monthly payments, extending fixed payment periods on adjustable loans, extending mortgages beyond the current length, refinancing, or adjusting interest rates.
Of the loans the bank has modified, only about 10 percent have gone back into default, Steadham said. That’s well below the national average of about 50 percent.
“The goal is to ultimately get the borrower back on his or her feet so they can pay back the loan,” Steadham said.
Of the $10.8 million in restructured loans that Danbury-based Union Savings Bank had on its books in the first quarter, just over $6 million were residential, said John Kline, the bank’s president and CEO.
Kline said loans that the bank agreed to restructure are still performing, but the borrower has hit a bump like a temporary job loss.
Union Savings works with distressed customers in a few ways, Kline said, but the most common is by offering an interest-only period for about four to six months.
Commercial loans accounted for the remaining restructurings and Union Savings will attempt to re-price those investments, extend the terms, change covenants or even ask for more collateral.
After six months, most borrowers are able to get back to normal payment plans, Kline said.
“When we restructure loans, the assumption is made that the borrower has the intention to pay the loan back over time,” Kline said. “This gives them some breathing room so they can begin to generate cash flow again.”
Ely said many large banks are seeing a lot of commercial real estate restructurings, as that market continues to go through upheaval, hurt by declining occupancy and a lack of credit to refinance.
That has raised deep concerns among government and industry officials, who are projecting up to $300 billion in commercial loan losses for banks in the coming years, according to a recent report by the Congressional Oversight Panel.
Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach maturity and nearly half of those loans are “underwater,” meaning the borrower owes more than the underlying property is currently worth, the report said.
That increases the likelihood of a loan default and makes it more difficult to refinance the loan, Ely said.
The decision to restructure a loan isn’t easy for banks, Ely said, as regulators look down on the practice. Also, bankers and borrowers oftentimes find it difficult to come to an amicable solution.
But lenders have an incentive to work with borrowers, especially with a rising number of delinquencies, to delay, minimize, or avoid writing down loan values or recognizing losses.
Workout strategies may also help lenders avoid the significant costs, and discounted or distressed sale prices associated with foreclosures and liquidations, Ely said.
Ely said he expects the number of restructured loans to continue to go up in the coming months, even as the number of loans past due decline.
As economic conditions improve, more loans become feasible for restructuring, he said.
“Most of us believe we are in this for another 12 months or so at least,” Ely said. “It will be a slow crawl out.”
