By Mark Wineka and Elizabeth Cook
mwineka@salisburypost.com
Mark Lewis, a Salisbury-based executive for Bank of North Carolina, says it’s not as much fun going to work in these tough economic times.
His customers are hurting, and his customers are his friends.
“When they’re hurting, I hurt,” says Lewis, a regional executive and senior vice president.
Lewis predicts Rowan County, the state and country will get through the current recession, but he fears the recovery won’t come until a lot of people lose everything they have.
Lewis’ concern is reflected clearly in numbers ó the increase banks have seen in their troubled assets.
In many cases, homeowners have stopped paying their mortgages, business owners are defaulting on their loans, or builders and developers can no longer carry houses built on speculation or land purchased as an investment.
It has challenged the balance sheets of virtually every bank in the country, including many of the community banks serving Rowan County.
“As a community bank, we’re going to reflect the communities we serve,” says Mark Hensley, executive vice president and chief banking officer for CommunityOne. “If they are struggling with job losses and falling behind in loan payments, we’re going to feel that.”
Consumer confidence
For things to turn around, it will require a significant growth in consumer confidence, employment and the housing market, Hensley says.
Meanwhile, bank officials say they are working with their borrowers to the fullest extent possible.
“We’re taking care of our loan relationships, our own customers,” says Bruce Jones, president and chief executive officer of Community Bank of Rowan.
The Investigative Reporting Workshop at American University analyzed 2007 and 2008 year-end data for the more than 8,300 banks in the United States.
From numbers reported to the Federal Deposit Insurance Corp., the study derived a measurement called a “troubled asset ratio.”
The ratio compares troubled loans against the bank’s capital and loan loss reserves.
It’s an indicator of the stress placed on banks by troubled loans.
According to the study, the typical U.S. bank had a ratio (or percentage) of less than 10 at the end of 2008.
But 197 banks had ratios of 90 or more, and 163 banks ended the year with more troubled loans than capital.
Out of danger
All the banks doing business in Rowan County had ratios of 55.5 or less, meaning a snapshot of their conditions at the end of 2008 did not put them in a danger zone.
The Post is refraining from publishing the ratio numbers out of concerns that it cannot reduce the health of a bank to a single number. Each bank must be evaluated separately using numerous measures.
But the jump in troubled assets from 2007 to 2008 were significant in many cases and reflective of the year’s souring economy and increases in loan defaults and foreclosures. (See the accompanying chart.)
Nationally, the amount of non-performing loans and foreclosed properties on bank books more than doubled last year, from $123 billion at the end of 2007 to $261 billion at the end of 2008.
The troubled assets cited in the comprehensive study measured three elements: loans that were 90 days past due; loans that were in non-accrual status, meaning the bank was no longer adding interest from the loan to its income; and real estate that the bank already owns, usually from foreclosures.
All the banks in Rowan County saw their troubled assets increase from the end of 2007 to the end of 2008, except for Bank of the Carolinas. The Mocksville-based bank reported, however, a net loss of $2.19 million last year compared to net income of $1.96 million for 2007.
90 percent full
“There is no doubt that non-performing loans and foreclosures will increase for a while longer,” says Paul Fisher, chairman and chief executive officer of F&M Bank. “This will begin to improve when housing prices stabilize and companies begin to call back laid-off workers.
“The good news is ó and it is often overlooked ó that 90 percent of homeowners are taking care of their mortgages, as agreed. In this case, the glass is 90 percent full.”
Fisher says the issue of troubled assets is a complex and, at times, misleading one as it is applied to community banks. Yes, F&M’s troubled assets have grown significantly, he says, but a more revealing statistic in this category is the amount of those troubled assets actually falling to the point of being charged off.
“F&M has historically been, and continues to be, in the upper tier of North Carolina banks in terms of low charge-offs,” he says.
Because F&M is a 100-year-old institution, the troubled asset figures also are a byproduct of the maturity of the bank’s loan portfolio. Comparing the troubled assets of a 100-year-old financial institution to those of a two- or three-year-old bank is an apples-and-oranges comparison, according to Fisher.
“One would certainly expect there to be little or no troubled assets in a two- or three-year-old institution simply because the loans had not seasoned enough to go bad,” Fisher adds. “By contrast the 100-year institution has many relationships that have seen both good times and bad.”
Fisher says the issue of troubled assets is only one component among many that have to be used in judging the strength of a bank. He believes a truer test is looking at four areas: earnings, capital, stock price and dividends.
F&M is in the 92nd percentile of its peer group in capital, its stock price has held up relative to the decline in other banks, its dividend increased last fall and is at an all-time high and earnings remain strong, Fisher notes.
Ride out downturn
Community Bank of Rowan’s troubled assets were lowest among local banks at the end of 2008, mainly because it didn’t have its first full year of operation until 2007. Jones says his bank is well-positioned to ride out the economic downturn and prosper in the future.
To be a well-capitalized bank, Jones says, the risk weighted capital ratio should be at least 10 percent. Community Bank of Rowan’s stands at 11 percent, with a goal of soon reaching 12 percent, he says.
Jones predicts local banks will keep seeing a growth in non-performing assets this year, but this region, he says, hasn’t experienced the huge decrease in property values evident in other areas of the country.
F&M’s Fisher agrees with economists who say 2009 will be much like 2008 and that the recovery might not begin until the first half of 2010.
Fisher adds, “We as a nation are currently going through what’s called deleveraging ó a process by which real estate, stocks, bonds and other financial instruments are being repriced at levels that our economy can fully support.
“Once deleveraging takes place, our markets will begin to stabilize and then gradually recover.”
There to help
Fisher’s father steered F&M Bank through the Great Depression and several other troubled times. Fisher himself has guided the bank through patches such as the 1973 oil crisis and stock market crash, the hyper-inflationary period of the early 1980s, the 1990-91 recession, the 2001 dot.com meltdown, the post-Sept. 11 months and now what he calls “this sub-prime credit mess.”
He shares Lewis’ optimism that the community, state and nation will bounce back and community banks will be there to help.
“We’ll get through this,” Lewis says.