Banks taking hit with Carinalli loans

<p>The collapse of Clem Carinalli's real estate empire threatens not only the investments of dozens of prominent local residents, but also the profits of local banks that lent Carinalli tens of millions of dollars, some of it unsecured by any collateral.</p><p>Nine of Carinalli's 21 largest unsecured creditors are banks, according to papers filed Monday in U.S. Bankruptcy Court. These banks are owed $19.3 million in outstanding loans that are unsecured or only partially secured by property.</p><p>Now that Carinalli has filed Chapter 11 bankruptcy, many of those banks may see their unsecured loans evaporate, forcing them to set money aside to cover the losses, said John Biggs, CEO of Luther Burbank Savings.</p><p>"I think every bank that has a unsecured loan to him will have to write it off completely," said Biggs, whose bank has millions in secured loans outstanding to Carinalli.</p><p>Just as the list of private investors with Carinalli reads like a who's who of longtime Sonoma County families, many of Sonoma County's largest banks have been backing Carinalli's land deals for years.</p><p>The picture of Carinalli's financial dealings won't be complete until he files with the court details of how much he owes secured creditors, a term that describes lenders who made sure their loans were backed by collateral like real estate.</p><p>Carinalli declined Thursday to discuss the nature of the unsecured loans made public in his court filing.</p><p>The list of top unsecured creditors shows that Carinalli was doing business with numerous lenders, many of which apparently didn't take precautions to protect all their bets with hard assets.</p><p>The bank that lent Carinalli the most money without any security is also the one that has the closest ties to the Santa Rosa real estate financier.</p><p>Sonoma Bank, the institution founded as Sonoma National Bank in 1985, was co-founded by Carinalli. He served as founding director and original chairman of the bank, which merged in 2007 with Sterling Financial Corp. of Spokane, Wash.</p><p>The bankruptcy filing lists $5 million in loans from Sonoma Bank to Carinalli, loans that aren't backed by any collateral. Bank officials did not return telephone calls seeking comment.</p><p>How Carinalli's bankruptcy will impact Sonoma Bank's performance is unclear. But if it resembles the situation at North Valley Bancorp, the bank could face significant losses.</p><p>North Valley Bancorp, a Redding bank that opened branches in Santa Rosa and Ukiah in 2005, is the second-largest unsecured creditor listed by Carinalli. He owes the bank $3 million on an unsecured line of credit, according to the bankruptcy filing.</p><p>North Valley officials did not return a telephone call seeking comment. But the bank's latest earnings report shows it lost $4 million in the second quarter, largely because an unidentified Sonoma County borrower stopped making payments on $19.3 million in loans. These include five loans secured by real estate totaling $16.3 million and the unsecured $3 million line of credit.</p><p>Land records show Carinalli took out loans of similar sizes from the bank.</p><p>To deal with these bad loans, the bank set aside $1.4 million to cover possible losses from the five loans, and reserved another $3 million to cover the line of credit.</p><p>Other banks with unsecured loans include Five Star Bank, with $2.2 million; Summit State Bank, with $2 million; North Coast Bank, with $1.9 million; Wells Fargo, with $1.6 million and Westamerica Bank, with $1.5 million.</p><p>Officials from all of the above banks either had no comment or did not return calls for comment.</p><p>Two other banks, Luther Burbank Savings and Bank of America, are listed with loans that are not fully secured.</p><p>The $5.9 million Carinalli owes Luther Burbank Savings is all secured by real property, but the value of that property has dropped to $4.8 million, Biggs said.</p><p>"We do have secured real estate and if we have to take it back we will," Biggs said.</p><p>Bank of America appears to be in a similar situation, with a $3.9 million loan backed by property now worth $3.1 million, according to the filing.</p><p>While many may not understand why a bank would make an unsecured loan at all, it's not that unusual, said William Schrader, president of Exchange Bank, the county's largest community bank.</p><p>Exchange Bank has about $5 million in outstanding loans to Carinalli, all of them secured by real estate, he said.</p><p>The bank has done business with Carinalli for years, and over that period of time probably has made several unsecured loans to him, Schrader said. But it did not have any such loans outstanding at the time of the "epic" real estate implosion that has caused Carinalli's real estate empire to crumble, he said.</p><p>It is not that unusual for banks to sometimes make unsecured loans to people that they deem to be good credit risks, Schrader said.</p><p>Carinalli proved himself to be a "very shrewd, very successful investor in real estate," Schrader said. For someone like him, with a track record of repayment and plenty of assets, it's understandable why a bank might feel confident enough to make an unsecured loan, Schrader said.</p><p>Now that he's ceased payments on those loans, the banks will probably be forced to write them off and attempt to recover some of the losses through the bankruptcy process, Biggs said. But that could take a long time.</p><p>"For the unsecured creditors, it's going to take several years to figure out what's going to happen," he said.</p><p>Carinalli will be required to disclose how much he owes each creditor by Oct. 29. The amounts owed to individual banks, including on loans secured with property, will become public at that point.</p><p>On Thursday, Carinalli said in a brief interview that the strain of bankruptcy is "difficult, of course," and that he is swamped with an "incredible amount of paperwork."</p><p>"At this point, we're just getting all that stuff ready," he said.</p><p>Next week, Carinalli's lenders will meet to determine who will be on the creditors' committee, a group intended to represent all creditors in the bankruptcy proceedings.</p><p>The meeting will be at 1 p.m. on Thursday at the federal building in Santa Rosa, 777 Sonoma Ave., according to people familiar with the case. It is open to anyone who is able to identify themselves as a creditor.</p><p>"I expect this one will be well attended," said one bank representative, who asked not to be named.</p><p>A follow-up meeting will be held in court and all creditors will have the opportunity to ask Carinalli questions after he has been sworn in under oath. This meeting will likely occur in November, according to a person familiar with the case.</p><p>You can reach Staff Writer</p><p>Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.</p>