Underwriting practices at Southeastern banks are beginning to draw more scrutiny from regulators.
Loan yields are continuing to fall, and more banks are loosening standards, highlighting a rise in "liberal concessions" tied to intense competition, the Office of the Comptroller of the Currency said Thursday in a report on banks along with Gulf Coast and Appalachian states.
The regulator pointed to less-restrictive covenants and extended repayment schedules as examples of relaxed terms. The report also found that, in some instances, banks have released borrowers from personal liability on business and real estate development loans.
"It is something we want to keep our eye on," Janice McQuary, an associate deputy comptroller, said during a conference call to discuss the regulator's findings.
Total loans at banks in the nine-state region rose 8% in 2014, doubling the rate of growth reported the prior year, the report said. Meanwhile, loan yields plunged by 19 basis points last year compared to 2013.
Several banks in the Southeast, including BB&T in Winston-Salem, N.C., and Trustmark in Jackson, Miss., reported during first-quarter earnings calls that some customers were paying off loans after competitors lured them away with lower rates or relaxed structures and covenants.
Trustmark had about $12 million to $16 million in first-quarter paydowns on loans it considered "substandard," Gerard Host, the company's president and chief executive, said during a conference call Wednesday to discuss quarterly results.
"We're glad to see those go," Host said. "We may have to give some on the pricing, but we want to stick to certain disciplines" tied to structure.
Looming threats from low oil prices have also put regulators on guard. The OCC emphasized during Thursday's call that the biggest threat facing community banks is the broader economic fallout, as companies lay off workers and municipalities lower their revenue projections.
Less than 6% of the 455 banks in the OCC's southern district have direct lending concentrations tied to oil and gas exploration/production that exceed 25% of capital, even though 300 of the district's banks are located in Texas, Oklahoma and Louisiana.
"The larger impact would be from indirect exposures," McQuary said, which are "more difficult to assess, but are critical in identifying risk."
The OCC noted that the southern region is more diversified and better equipped to handle the pressure of sagging oil prices, compared to previous downturns. Community banks in the region have more liquidity, and higher collateral margins have hedged on prices, said Gil Barker, the district's deputy comptroller.
"The economic impact is going to be felt, but it's not going to be anything like the 1980s," Barker said during the conference call. "We're very fortunate that a lot of bankers in Texas have long memories."
Despite concerns over credit quality, smaller banks in the Southeast have returned to pre-crisis health. The number of problem institutions in the region fell 40% in 2014 from a year earlier, to 43. Nearly all banks in the district a total of 91% received a 1 or 2 on the five-point Camels scale.
Banks based in Southern states that were hit hard by the financial crisis including Mississippi, Alabama and Tennessee reported loan growth for the first time in several years. The net interest margin also widened slightly last year, mostly due to higher yields on securities.
Still, the OCC said it is keeping an eye on strategic and interest rate risks, as banks compete in the low-rate environment.
Compliance risks are another concern, particularly tied to anti-money laundering procedures under the Bank Secrecy Act. "South Florida banks in particular are engaged in products and services that present a higher risk in this regard," said Brett Bouchard, an assistant deputy comptroller based in Miami.
The OCC's southern district includes national banks and federal savings associations in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma Tennessee and Texas.