Cracks in Credit Quality Appear in 2Q Reports

Across the industry, the formation of new credit problems has fallen to pre-recession levels. At some banks, however, assets have continued to sour at a troubling pace, according to second-quarter reports.

At First Bancorp (FBNC) in Troy, N.C., nonperforming assets to total assets jumped 50 basis points from the first quarter to 4.51% in the second quarter, mostly because the company reclassified $12 million of loans as restructured as a part of a regulatory exam. (The ratios exclude assets covered under loss-sharing agreements with the government.)

The reclassification occurred around the time that the $3.3 billion-asset company announced that Richard Moore, a board member and former state regulator, would succeed Jerry Ocheltree as chief executive, with Ocheltree remaining as president of operating unit First Bank. In the first quarter a $22 million provision for loan losses had driven First Bancorp to a $5 million loss.

Overall roughly $15 billion to $25 billion of bad assets has surfaced on bank books each period in recent quarters. That figure reflects changes in the amount of outstanding nonperformers (including all loans that are overdue by 90 days or more) — which have been falling since early 2010 — combined with chargeoffs of uncollectible debt. Loans can move instantly from current to chargeoff, or chargeoffs can reduce pools of assets that have already been categorized as nonperforming, so including them provides a fuller perspective on the formation of credit issues.

That range is lower than in the third quarter of 2007, the final full period before the recession officially began, and represents a dramatic recovery from a peak of $96 billion in the first quarter of 2009 (see top chart).

The set of charts at the bottom shows a group of companies with high rates of problem-asset formation as a percentage of assets among banks for which second-quarter data is available.

At S.Y. Bancorp (SYBT) in Louisville, Ky., the ratio was 33 basis points, or about twice the pace that has prevailed industrywide in recent periods. A 20-basis-point jump in nonperforming assets to total assets from the first quarter to 2.04% in the second quarter was driven by an $8.8 million land development loan that was placed in nonaccrual status.

The $2.1 billion-asset company said it had already had reserved for the loan, however, and its overall level of bad debt compares favorably with peers. S.Y.’s provision fell from the first quarter, and it notched another quarter of strong profitability with a return on assets of 1.2%. Still, citing doubts about the strength of the recovery, the company warned, as it has before, that economic conditions are creating “credit fatigue among traditionally solid and stable borrowers” and that other customers could succumb.

For much of the industry, the turn in the credit cycle has meant profit-plumping reductions in loss cushions. But whenever there is lending, problems are going to surface somewhere.