In a series of presentations at a Boston conference this month, bankers told analysts that, despite the recent rise in troubled loans at their institutions, they expect credit quality to begin to improve by next quarter.
Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP, was not buying it. "These guys are delusional," he said he was thinking.
Soft demand in many pockets of the country has left countless developers stuck with homes and condominiums they cannot sell — and loans they cannot repay. In an interview last week, Mr. Fitzgibbon said that for many community banks whose bread and butter is construction and commercial real estate lending, "credit quality is going to be a problem for some time."
One of the more troubled companies is the $6.5 billion-asset BankAtlantic Bancorp Inc. in Fort Lauderdale, Fla. It reported a $29.6 million loss for the third quarter, mostly as a result of loans to developers who missed payments because they could not sell homes they built. Nonperforming assets increased a whopping 659% from the previous quarter, to $165 million, and Alan B. Levan, BankAtlantic's chairman and chief executive officer, warned in a conference call last month that he expects credit problems to worsen for his and other Florida lenders.
"I don't believe that the market has recognized yet or, to some extent, other lenders recognized the seriousness of this situation," he said.
Other companies are reporting blips in credit quality, and some even delayed earnings reports to assess their loan losses.
o American Community Bancorp in Evansville, Ind., announced Nov. 14 that it would take an after-tax charge of nearly $1.5 million this quarter, because it had to set aside $2.44 million for a special loan-loss provision. The $269 million-asset company said the provision relates to a commercial loan relationship with three borrowers, one of whom had filed for bankruptcy protection.
o Royal Bancshares of Pennsylvania Inc. delayed its third-quarter earnings release because it needed more time "to determine whether additional reserves will be needed to cover loan losses." The Narberth company said it expects to report an $8.9 million loss for the quarter, because of a pretax loan-loss provision estimated at $14.1 million, including $5.2 million related to an equity investment in a condominium project.
o Hanmi Financial Corp. in Los Angeles postponed its third-quarter earnings report to Nov. 6, so it could have an extra two weeks to determine its loan-loss allowance. When the earnings came out, the allowance had quadrupled from a year earlier, to $8.5 million.
The $4 billion-asset Hanmi said that nonperforming assets, including loans 90 days or more past due and still accruing, more than doubled from a year earlier, to $45 million at Sept. 30. The nonperformers included a $17 million construction loan for low-income housing that is fully collateralized, but got downgraded because of cost overruns and construction delays. Despite the setback on this loan, Hanmi says it anticipates being repaid without any loss.
Sung Won Sohn, its president and chief executive officer, said in an interview that his company delayed its earnings report for two weeks as a precaution. "We just want to make sure we have a better handle. To me, during times like this, that's called for."
Analysts, though, remain skeptical.
In a conference call the day Hanmi issued its earnings report, analysts repeatedly questioned whether it had set aside enough for potential losses.
"At the moment, we feel this is adequate," Mr. Sohn replied.
Michael S. Sutton, American Community's president and CEO, said in an interview that chargeoffs have totaled $100,000 in its six-year history, so he sees its special provision as an aberration.
It came about because of problems that are specific to the borrowers, he said. "It is not systematic of the local economy."
Generalizations about credit trends are difficult to make for community banks, Mr. Sutton said. "I really do think the loss and credit history will be much more driven by the local economy."
No one is suggesting that the current credit crisis is as bad as that of the late 1980s and early 1990s, when hundreds of small banks and thrifts failed as real estate markets went bust.
In a Nov. 13 report reviewing the third-quarter results for banking and thrift companies in the Middle Atlantic and the Northeast, Richard D. Weiss of Janney Montgomery Scott LLC wrote that the nonperforming asset rate for small-cap banking companies rose 4 basis points from the previous quarter and 17 basis points from a year earlier, to "a still respectable" 0.42% of total assets.
Credit quality has been "fabulous" for several years, he said in an interview. "Just because it got worse doesn't mean it's going to be horrible."
Still, Mr. Fitzgibbon said that third-quarter nonperforming assets increased a median of 67.9% from a year earlier at the 600 banking and thrift companies analyzed by Sandler O'Neill. The increase was the fifth in as many quarters and the biggest in the 16 years covered by the study, he said, and he does not see the trend reversing soon.
Matthew Schultheis, an analyst at Ferris, Baker Watts Inc., said the uptick in problem credits is widespread, even though the rise might not be alarming for many individual community banks and thrifts so far.
"Everybody has one or two large problem credits. It should be more concerning to people that everybody is exhibiting the same trend of having a couple," he said. "My attitude on it is, if everybody has a cold, somebody gets the flu eventually. Right now it looks like everybody has a decent cold."
Mr. Weiss said he attended the America's Community Bankers conference in Las Vegas this month and got the sense from bank and thrift executives that they were less concerned with deteriorating credit quality than they are with other challenges, such as how to attract cheap deposits.
"I was surprised," he said. "I thought there was going to be a lot more anxiety about credit quality. I got this feeling like, 'Oh, credit, it'll get a little bit worse. But the thing that really hurts is funding.' "
Eric Hovde, the chief investment officer of Hovde Private Equity Advisors LLC in Washington, said too many bankers still think the current credit crisis is all about subprime mortgages, which most community banks do not make.
"This is fundamentally a housing and mortgage issue, and the sooner people wake up to that fact and stop thinking this is just subprime, then I think they will understand better how this is going to unfold," Mr. Hovde said in an interview.
Residential construction loans, second mortgages, home equity loans, and even business loans, whether to architects, landscapers, or furniture stores, are likely to suffer, he said. "There are so many things that the housing market touches. You're talking about 35% of the economy."
Mr. Hovde expects more banks and thrifts to need a capital infusion as they work through this credit cycle, and he said his company intends to invest about $200 million to $300 million in the industry over the next year or two.
"What's happening in the broader housing market is a telling sign as to when things finally hit their inflection point and start stabilizing," he said. "Unfortunately, I don't think we're anywhere close to that point yet."
