From Bad To Abysmal In New England

Harold Brown was something of an oddity in New England real estate circles. One of the region's largest property owners, with 300 apartment and office buildings, the 65-year-old developer had a reputation for prudence. When he began a project, he customarily provided nearly half of the financing himself. Even after the real estate market began slumping in late 1989, bankers continued to line up to do business with him.

Although scores of much more highly leveraged developers began collapsing last spring, Brown, clearly no Donald Trump, looked secure. But then rather abruptly this past fall, he fell behind in payments on some $150 million in loans. In December, he was sued by a passel of big New England banks, such as the Bank of New England and Bank of Boston. The onetime triple-A customer blames the poor economy and plummeting rents. "It was only in the last six months that the more conservative, better-financed developers started feeling it," says Brown. Some of his biggest worries: how much further the real estate market will fall and how many victims it will claim.

STUNNED. He's not alone. In the wake of the failure on Jan. 6 of the Bank of New England, bankers and analysts are sounding fresh alarms about the New England real estate market. The market's weakness last year received wide attention. But bankers only recently have come to appreciate the surprising acceleration in the market's deterioration during the fall. The main causes appear to be further downturns in the region's economy and a sharp cutback in bank lending. Bank of New England Chairman Lawrence K. Fish says that while his bank had many other problems, it was this precipitous market drop that pushed his bank over the edge. "It's not unique to us," Fish remarks. "All banks are going to feel it."He is probably right. Although New England's big banks seem secure for the moment, many smaller institutions are at risk. The region's bankers are already warning of numerous additional failures. If so, the deleterious impact on public confidence in the banking system could affect other parts of the country. BNE's failure stunned the public. And recent news from the banking front outside New England has done little to reassure depositors. For example, Citicorp, the nation's largest bank, said on Jan. 15 that it lost $382 million in the final quarter of 1990.

New England bankers are howling for relief. Among other measures, they're suggesting a change in accounting rules that would allow them easily to reduce the value of a nonperforming loan to a level where borrowers can meet interest payments. Banks would then write off the difference. In a letter to Senator Christopher J. Dodd (D-Conn.), Connecticut bankers warned that "unless immediate action is taken, there will be numerous bank failures at enormous cost to taxpayers."

DEJA VU. On Jan. 11, New England's six governors held an emergency summit at the Massachusetts State House to discuss the depth of the banking industry's problems with FDIC Chairman L. William Seidman. What they heard during the closed-door session clearly rattled them. Says Connecticut Governor Lowell P. Weicker: "I don't think any of us are comfortable with the situation in New England."

Signs of the tailspin in the real estate market are now everywhere. Vacancy rates in downtown Boston shot up to 17.2% in the fourth quarter after stabilizing at about 14% in the first half of the year. And there are few indications of a turnaround. Peter M. Small, president of Boston-based developer Spalding & Slye, says property values "have literally evaporated" to half of what they were a year ago. "What took five years to happen in Texas took one year to happen here," he says. The Texas real estate debacle in the mid-1980s forced many of that state's banks into insolvency.

Eerie parallels between Texas and New England are already beginning to develop. Less than a week after BNE failed, Community National Bank in Glastonbury, Conn., with $84 million in assets, and Connecticut Savings & Loan Assn. in Hartford, with $17.4 million in assets, were seized by regulators. And at least half a dozen more New England banks are expected to report fourth-quarter losses that could force them into insolvency, says Gerard Cassidy, a bank analyst with Tucker Anthony Inc.

Consider Connecticut's tiny Merchants Bancorp of Norwalk. With $288 million in assets, a huge 21.5% of its assets are not earning interest. Even more unsettling is the bank's razor-thin capital cushion. Its common equity is a meager 0.3% of assets, a fraction of the industry's 5.9% average (table). Says Merchants President Larry L. Bentley: "We're doing everything we can to remain viable. Obviously, we are in need of capital."

NATIONAL PLAN. So far, regulators have had mixed reactions to New England bankers' calls for relief. Proposals to lessen the impact of real estate losses by changing accounting rules are "not something anyone is likely to adopt," says one regulator. Adds Washington attorney John D. Hawke, former general counsel to the Federal Reserve Board: "The whole history of the S&L debacle should have taught us that rinky-dink accounting only makes the problems worse."

In part because of difficulties with New England banks, however, FDIC chief Seidman has welcomed plans to bolster weak banks with capital infusions from healthy institutions. The Association of Bank Holding Companies, a trade group, is discussing with the FDIC a plan to set up an industry-backed fund that would help troubled banks restructure their loan portfolios. The proposed Financial Institution Restructuring Board (FIRB) would establish regional collection banks that would buy at a discount troubled assets and try to restructure or sell them. Any proceeds would then go into the FDIC's bank-insurance fund, which protects depositors. Figuring it's cheaper to solve a bank's problems before it fails, the ABHC says its plan will cost banks about half of the $25 billion they might otherwise have to put into the ailing insurance fund.

While Washington debates, developer Harold Brown and probably hundreds of other New England developers like him are trying desperately to stay alive. As his rental income continues to drop, what Brown needs more than anything is cash. Yet many of his bankers are not much better off than he is. "We can't borrow," he says despairingly. "There's no credit available." It could be a vicious cycle: Without credit, the New England real estate market will weaken further. And that means continuing bad news for the region's real estate-laden banks.

                                            Nonperformers       Common
                                               as a          equity
      Bank                    Total assets   percent     as a percent
      State                      Millions   of assets       of assets
      BANK OF BOSTON Mass.         $36,987       5.1 %         5.0%
      FLEET NORSTAR R.I.            33,604       5.6           6.4
      SHAWMUT NATIONAL Conn.        24,496       6.0           5.8
      BANK OF NEW ENGLAND Mass.     23,049      12.3           1.1
      BAYBANKS Mass.                10,272       5.0           5.1
      CITYTRUST BANCORP Conn.        2,222      12.1           0.4
      AMOSKEAG BANK SHARES N.H.      1,475      12.2           3.3
      CONNECTICUT BANCORP Conn.        741      13.7           5.9
      MERCHANTS BANCORP Conn.          288      21.5           0.3
      FAIRFIELD COUNTY BANCORP Conn.   173      13.9           8.7
      NATIONAL AVERAGE                  NA       2.6           5.9
      Data as of Sept. 30, 1990
      DATA: ADVEST INC.  NA = not availble