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Construction loans pose risk to Idaho banks

Syringa Bank’s Boise headquarters in 2013, before the bank failed.
Syringa Bank’s Boise headquarters in 2013, before the bank failed.

There is an underside to the Treasure Valley’s explosion of commercial development the past few years: a rising risk that it might end in a bust.

A bust is what followed the irrational exuberance, grounded in greed and fueled by easy lending, that drove Valley home and lot prices so high in the mid-2000s. By 2006, signs of the bust were emerging. In 2007, home prices began to fall. Of course, our valley was not alone. By 2008, the U.S. financial system was in crisis and the Great Recession was underway. Prices here plummeted through 2011.

That is a lens through which Gavin Gee sees Idaho now. Gee directs the Idaho Department of Finance. He regulates state-chartered banks and credit unions. He says they are mostly in good shape today, thanks to the economy’s renewed strength. But he says they are developing increasingly risky concentrations of loans in commercial real estate and construction.

Gee told me those concentrations now average 150 percent of the banks’ capital, the investments and retained earnings that buffer against losses. A bank with, say, $150 million in construction loans and $100 million in capital is at this point. According to Gee, the national average is 119 percent. Oregon and Washington have concentrations topping 200 percent. California and Nevada are approaching 250 percent. At 300 percent, Gee says regulators often intervene to stop a bank from going any further.

No one stopped Boise’s Syringa Bank in time. Syringa made so many loans to real estate developers who could not repay them after the bust that Syringa failed in 2014.

For now, the Treasure Valley remains in growth mode. Growth means construction, and that requires lending. So Gee expects loan concentrations to keep growing.

That bears watching. Gee says his office will monitor concentrations closely and work with Idaho banks to manage their risk. He adds: “Hopefully we’ll all do a better job of that than we did in the last crisis.”

Do you see signs of trouble or not? Tweet or email me.

Reporter Zach Kyle interviewed Gee on a range of topics for this edition. Read Kyle’s Q&A on page 17.

David Staats: 208-377-6417, @DavidStaats. This column appears in the Aug. 17-Sept. 20, 2016, edition of the Idaho Statesman’s Business Insider magazine as part of the edition’s special coverage of banking and finance. Click here for the daily Statesman e-edition, including Business Insider (subscription required).