Without Safety Net, Small Banks Feel Impact of Real Estate Bust

(MoneyWatch)  While big U.S. banks receive a pat on the back from stock analysts, small institutions get a kick in the ass from reality. A case in point is publicly held San Joaquin Bancorp. Federal bank regulators are giving the company and its $834 million-asset community one last chance to boost its capital reserves.

These orders are often a death knell for smaller players, which have limited options for raising money. In August, San Joaquin Bancorp said in a regulatory filing that it needed roughly $33 million to qualify as "well-capitalized" under federal banking standards. The CEO claims to have a plan for getting the dough.

A year ago San Joaquin Bancorp shares, which now trade at $2.35, fetched more than $20 a pop. That swift decline indicates how quickly many of the company's loans are falling apart. That in turn illustrates the plunge in real estate prices in its home region around Bakersfield, Calif., which is 110 miles north of Los Angeles.

San Joaquin Bank lives or dies according to the local real estate market. More than 90 percent of its $712 million loan portfolio is for real estate, with the bank catering to individuals and small businesses involved in the agriculture, oil, light industry, real estate development, and warehousing and distribution sectors. To offer a sense of how quickly banks can get into trouble, between year-end 2008 and June 30 San Joaquin Bank's total nonperforming and restructured loans more than doubled, rising to a whopping 14 percent of its total book, up from 5.7 percent in December.

Although housing sales are up in California, median prices have continued to fall, while the pipeline of potential foreclosures is rising. Notably, prime borrowers are falling behind on their loans at a faster clip than subprime customers, squeezed by soaring job losses and declining home equity. Unemployment in Kern county, where San Joaquin Bank does most of its business, has surged to more than 14 percent, far exceeding California's overall rate of 12.2 percent and the national average of 9.8 percent.

Commercial real estate in Southern California is in even worse shape. The Federal Reserve Bank of San Francisco in September cited numbers projecting that commercial property prices will fall around 30 percent from their peaks across all sectors, with loans tied to construction and land development hit especially hard. For California lenders, that is pushing up loss rates on CRE, although for now those remain lower than during the 1991-92 recession (click on chart to expand).

If large financial players get the headlines, it's lenders like San Joaquin Bank that are bearing the brunt of the banking crisis.

Graph courtesy of Federal Reserve Bank of San Francisco