New England condo-bust slows surge in thrifts. Finding investors is easy, but lending well is another matter

A condo in Boston is a long way, in distance and looks, from an oil derrick in Houston. But for savings-and-loan institutions in New England, those condominium buildings - many filled with unsold units - represent almost as much opportunity and peril as the banks in Texas have experienced with that state's struggling oil industry.

In a region that otherwise claims one of the strongest economies in the United States, the S&Ls in New England are learning some of the hard lessons of their counterparts elsewhere. But unlike Texas, where the thrifts were battered by a combination of a depressed oil industry, many bad loans, and occasional fraud, the problems of New England's thrifts grew out of what's supposed to be a benefit: lots of cash from eager investors.

Backed by a buoyant economy and leaping real estate values, the region's thrifts were able to attract millions and millions of dollars from investors, especially in 1985 and '86, after they converted from depositor-owned mutual institutions to investor-owned public corporations. At some thrifts, that new cash alone amounts to more than 20 percent of their total capital.

Then, the question became what to do with the windfall. If they didn't lend it out, the investors who put all that money there wouldn't be happy with the meager returns that would come if the thrifts sat on the cash or just lent it out to homebuyers. In that case the investors just might start looking for someone else to run the S&L.

And if the thrifts didn't find borrowers, an aggressive company from outside the region, like H.F. Ahmanson from California, Citicorp from New York, or Sears, Roebuck & Co. from Chicago, would be more than happy to take away some of their business. These companies have shown every indication that, despite some missteps, they intend to win their share of the area's mortgage and commercial lending business.

In the past year, loans at S&Ls that recently converted to stock ownership have grown by as much as 10 times that national average. Last year, loans at thrifts throughout the United States grew about 10 percent and have been growing this year by 3 to 4 percent. But in New England, loans have grown by at least 30 percent since the end of 1986. In some cases, depending on the thrift, loans swelled by 100 percent, to more than 500 percent, between 1985 and '87.

Unfortunately, analysts say, no economy, not even the hot New England region, can produce enough sound opportunities for this much lending. So while some thrifts can find good borrowers, plenty of others are too willing to take on the inexperienced or overconfident condominium developers and the shaky small businesses that will bring on problems later.

First Service Bank for Savings in Leominster, Mass., for example, had to write off at least $10 million of bad loans after regulators found several dubious real estate development loans from all over the region in its portfolio. By the end of 1987, construction loans reached 29 percent of the $884 million in total assets, compared with 14 percent the year before.

And at First American Bancorp in Boston, total loans more than doubled between 1985 and '87 and construction lending jumped more than five times, to $191 million, from $30 million. The bank did report a significant loss in the third quarter, and even though it is not considered to be in serious danger, its troubles may have contributed to the apparent suicide this fall of Robert G. Lee, its chairman.

And in September, Neworld Bancorp in Boston put off a planned $80 million acquisition of Intrex Financial Services in Lawrence, Mass., because of increased problem loans.

For now, however, the still-thriving economy is papering over most of the mistakes and presenting a decent overall picture of the region's thrifts.

``The key is not viability,'' says Henry Peltz, vice-president for thrift research at Keefe, Bruyette & Woods Inc., a New York brokerage. ``The key is profitability. We're not seeing the thrifts going under, but rather we're seeing them losing their profitability for a while.''

``Thrifts here are very strong, with some isolated exceptions,'' says Benjamin Doherty, a senior vice-president for thrift research at Legg Mason Wood Walker, a Boston brokerage. ``And you can describe the problem in one word: condo.''

Throughout the region, but particularly around Boston, Mr. Doherty and other analysts say, the thrifts have discovered condominium lending is a lot riskier proposition than anyone thought just two or three years ago. Then, lenders were competing with each other to hand over money to condo developers, even though some of the developers had little or no experience with such projects, or were building in areas that became saturated with condos before the developers could sell them and pay off their loans.

Today, real estate brokers in many towns, especially in some Boston suburbs, cannot find buyers for condos that have been sitting on the market for months, or they cannot get a price that will satisfy the developer. This is particularly true of ``middle market'' condos, which have been harder to sell than basic, no-frills ``starter'' units aimed at the first-time home buyer.

``Most of the condo problems are in the metro Boston area,'' Doherty says. ``Developers have exhausted their cash flow and they're trying to cut their prices. And the consumers are smart; they're just sitting back waiting to see if they can get the units for rock-bottom prices.''

``Condos are the first and foremost culprit,'' says Nick Adams, manager at First Financial Fund, a closed-end mutual fund managed by the Wellington Group in Boston. ``But the thrifts' problems are being covered by the fact that they have so much capital.

``Now, they're taking write-offs to their capital. But even after the write-offs, they'll have an excess of capital. It's just too bad if you're a shareholder in that company, because they have all this excess capital, and wouldn't it have been nice if they'd given some of that to shareholders, as opposed to throwing it away to cover their mistakes?''

Looking back, one could say the thrifts should have known better, says Allan Groves, who was, until a few months ago, chief economist at the Federal Home Loan Board of Boston. ``The ones who chose to go into that, looking at it in hindsight, are now rethinking the rewards of that decision,'' Mr. Groves says. ``But looking at it with foresight, it was much harder to say that was not a good set of decisions.''

``New England thrifts are in much better shape than thrifts nationally,'' he says. ``And in particular much better shape than thrifts in the Southwest.''

Thrifts in New England may be in better shape than in the Southwest, but too many of them are swimming in cash, Mr. Adams says. His mutual fund can invest all over the United States, but it owns shares in only two in New England: Lowell Institution for Savings in Lowell, Mass., and Eliot Bank in Boston.

While these two thrifts still have lots of real estate in their portfolios, he says, they are more diversified.

But the most important thing they've done, he stresses, is to bring in lending experts from commercial banks before, not after, they started major commercial lending programs.

Christopher S. Wilson, for example, was hired as chairman and chief executive officer of Eliot Bank in October 1985 from BankAmerica Corporation. Before that, he worked at Citibank. At Eliot, he has hired executives from Bank of Boston, Bank of America, European American Bank, and Citibank.

``We built our management team and filled positions with experienced commercial lenders and mortgage bankers first,'' Mr. Wilson says. ``As a result, we were able to grow the institution after we had those people in place.''

Growing the institution is just what they did. After the first six months of 1987, there was more than $280 million of loans on the books at Eliot. The bank went public in July of that year, and by June 30 of this year its loans had jumped 67 percent to more than $360 million. But Wilson has tried to keep condo lending under control.

Condo loans currently represent only 15 percent of Eliot's commercial real estate portfolio and 10 percent of its total assets, Wilson says. Also, he notes, Eliot requires a personal guarantee from the developer and also requires additional collateral up to the value of the loan.

But even Eliot has had some condo problems, he concedes. It has lent about $60 million to develop 550 condo units, and about 200 of them are still not sold - and their developers, not repaying their loans.

That's why some thrifts have all but shunned condos. ``We don't have much in the way of condo development,'' says Peter Verrill, executive vice-president of Peoples Heritage Financial group in Portland, Maine. While condo development around Portland and in southeastern Maine is active, Mr. Verrill says, ``we try to stay away from them, at least the speculative type. We would go into it if there was significant pre-sales or significant ability for the developer to pay us back from other sources. But we don't have a whole lot of interest in condominium projects.''