Bad loans up 69% in past year
Paul Davis
The Business Journal
triad.bizjournals.com
Triad-based community banks saw a jump in troublesome loans in the first three months of the year compared to the same time last year, and as a result bankers keep setting aside funds to weather what could be months of continued economic uncertainty.
Community banks in the Triad reported more than $36 million in nonperforming loans in the quarter ended March 31, up 69 percent from the same quarter last year. A loan is generally listed as nonperforming if it is at least 90 days past due, the interest is discontinued and the lender is unsure about collecting the principal.
Bankers and analysts, however, point out that charge offs were virtually unchanged from a year ago. Though banks are setting aside increased funds for potential further loan problems, the increases are not as steep as they were in previous quarters. The problem is that the numbers aren't improving, indicating that more months of turbulence lie ahead.
"Things are still deteriorating, but the rate of deterioration is slowing," said Tony Plath, finance professor at UNC-Charlotte. "Credit quality is still weakening, but not substantially more than in previous quarters. Right now we're holding pretty well."
Plath said continued malaise could make this year difficult for more community bankers, many of which dodged credit-quality issues in 2002. Though there has been no widespread epidemic of bad loans so far, he said more small banks could take selected hits over the next nine months.
"I'm concerned," he said. "Borrowers are stressed ... and a lot of the loans that were struggling last year are struggling more this year. The longer it stays slow, then the greater the chance that the stress on borrowers will lead to new bankruptcies."
Lending standards to stay tight
Plath said a slower rate of deterioration means banks won't be inclined to further tighten their lending standards. However, he said it also appears unlikely that banks will loosen their lending requirements at any point this year.
"But the problem right now isn't lenders who don't want to lend," he said. "Borrowers don't want to borrow" despite historically low interest rates.
The combination of low interest rates, fewer borrowers and continued charge-offs are expected to impact smaller banks' profitability over the next few quarters, bankers and analysts say.
"We're holding our breath to get through 2003," Plath said. "There will be more unanticipated bankruptcies in the third and fourth quarters unless (the economy) improves. It will be handicap to profitability but it won't threaten the solvency of any financial institutions."
Several community bankers said credit-quality issues, which last year were limited mostly to their consumer loans, are starting to be seen in more commercial loans. Plath said continued economic sluggishness has created "sporadic" issues in recent months for some community banks where one troubled loan may force a sizable charge-off.
Banks typically have to take charge-offs for unsecured loans that lack collateral, or in instances where collateral issues are uncertain, such as in bankruptcy procedures.
Southern Community Bank in Winston-Salem and Carolina Bank in Greensboro, for example, face loan exposure to Raleigh Country Club, which filed for Chapter 11 bankruptcy protection in February. The banks reported nonperforming loans in the first quarter of $3.4 million and $1.4 million, respectively.
But Southern Community President and CEO Scott Bauer said in April that the loan was backed by collateral. The banks are being represented by attorneys in bankruptcy court, where they hope to resolve collection issues.
Ernie Sewell, president and CEO of FNB Southeast in Reidsville, said his bank had a $360,000 charge-off in the first quarter after realizing that a Triad commercial borrower appears headed for bankruptcy.
"We just go ahead and face it, even if there's a possibility that it will work itself out," said Sewell, who declined to identify the borrower. "It is better to do that than to speculate."
Lee Burrows, managing director at Trident Securities, which has offices in Raleigh and Atlanta, said Triad community banks are in better shape than some larger banks. He said banks here tend to make loans secured by real estate, where values have held up reasonably well during the slowdown.
Bankers also said it is possible that banks can recoup funds that had been charged off. Carolina Bank, Surrey Bank & Trust in Mount Airy, MidCarolina Bank in Burlington and Bank of North Carolina in Thomasville all had more recoveries than charge-offs last quarter.
Anticipating loss
"But what you're really concerned about is unanticipated losses," Sewell said. "We don't see many of those."
But the conservative nature of banking led a majority of small banks in the Triad in the past quarter to bolster their reserves against unexpected bad loans at amounts larger than a year ago.
Provision expenses, or the amount set aside for potential future losses, in the quarter increased by 11 percent compared to the same period in 2002. Analysts say that increase, though smaller than those made last year, indicate that bankers are still concerned with the lending portfolios.
"I just think it's prudent to keep provisioning," said Robert Lowe, chairman, president and CEO at LSB Bancshares Inc. in Lexington. "The longer (the slowdown) goes, the potential impact on business is greater. Who knows when the economy is going to turn?"
Jerry Ocheltree, regional executive for Troy-based First Bank, noted that other factors, such as anticipated loan growth, also play into increased provisioning. The bank set aside $475,000 in the first quarter despite a 12 percent decrease in nonperforming loans.
"With our growth and the economic times, we went ahead and bit the bullet," Ocheltree said. "It is always good to put that money aside for a rainy day."
Reach Paul Davis at (336) 370-2916 or pdavis@bizjournals.com.
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