Signs of Turnaround in the Southeast

ATLANTA - Poor asset quality continued to plague southeastern banks in the second quarter, but analysts believe the region may have finally hit bottom.

"It does appear credit quality is stabilizing and, in some cases, showing signs of improvement," said Kathryn H. Bissette of the Atlanta brokerage firm Interstate/Johnson Lane.

The stabilization in nonperforming asset growth had its effect on the bottom line. The 29 southern regional banks followed by Keefe, Bruyette & Woods Inc. reported a 1.5% earnings gain over the previous year's quarter and a 5.2% surge from the first quarter.

Confidence Reviving

"More and more banks are sounding more and more confident about [bad loans] peaking out in the relatively near future," said analyst Richard I. Stillinger, who covers southern banks for Keefe Bruyette in New York.

Even Southeast Banking Corp., whose $147.2 million loss was the worst in the region, was able to show a small decrease in nonperforming assets, to $767 million from $776 million in the first quarter.

Unfortunately, Southeast's string of seven consecutive quarterly losses totaling $483 million leaves its capital so depleted that the Miami bank's future as an independent entity is in doubt. Southeast's Tier 1 capital ratio of 2.84% falls below the 1992 regulatory guidelines of 4%.

Weaknesses in Dividends

While other major southeastern banks are grappling with sour commercial real estate loans made in prior years, none has sustained as much damage as Southeast. Some banks, though, have been forced to cut their dividends and more may follow.

At Atlanta-based C&S/Sovran Corp., nonperforming assets rose less - 14% - than the 58% increase reported in the first quarter. But the loan-loss provision surged 37% to $169.5 million, from $123.6 million the previous year, most of it related to the troubled Washington-area portfolio. This pushed earnings down to a paltry $61.6 million, or 45 cents a share, which covered the dividend of 39 cents a share only with help from securities gains.

C&S/Sovran, in a recent filing with the Securities and Exchange Commission, indicates that its dividend could be cut as a result of its pending merger with NCNB Corp. The company also said that it may dispose of nonperforming assets more quickly than in the past, resulting in higher reserve levels.

Barnett Burned in Florida

Jacksonville-based Barnett Banks Inc., which is exposed to the full brunt of Florida's real estate recession, reported an 84% jump in its loan-loss provision, to $85.6 million. This drove earnings down 50% from the previous year, to $29.2 million.

On a positive note, Barnett's nonperforming assets fell 5% from the first quarter, to $942.8 million.

Charlotte-based First Union Corp., which is exposed to bad loans in both Florida and D.C., reported a loan-loss provision of $113.7 million, three times the $36.2 million set aside a year earlier. Nonperforming assets rose 8.5%, to $1.2 billion, from the first quarter.

But First Union's credit troubles also seem to be moderating when compared with last year, when percentage surges in problem loans from quarter to quarter ran in the double digits.

NCNB Mirrors the Trends

NCNB, the largest southeastern bank with $66 billion in assets, mirrored the regional trends. The loan-loss provision surged 49%, to $125 million, from $84.1 million in the year-ago quarter.

At the same time, nonperforming assets rose only 2% from the first quarter, to $1.05 billion, the smallest increase in the past six quarters.

Two of the three large Virginia banks showed signs of stabilizing asset quality. On a quarter-to-quarter basis, nonperforming assets at Signet Banking Corp., Richmond, rose only 1%, to $331.8 million; at Dominion Bankshares Corp., Roanoke, 3%, to $372 million.

Crestar's Performance

But Richmond-based Crestar Financial Corp. reported a 20% surge in nonperforming assets, to $370.6 million. The company attributed the second-quarter increase largely to its Washington-area portfolio.

"It suggests that Crestar is being hit later in the cycle than its competitor banks," said Anthony R. Davis, a stock analyst with Wheat First Butcher & Singer in Richmond.

Mr. Davis said much of Crestar's problem derives from completed buildings. "Their tenants are jumping because there is so much space available in D.C. That's tending to throw previously performing assets into nonperforming status," Mr. Davis said.

Lapses Even for Strongest

Even the two best-quality southeastern banks sustained some minor credit deterioration in the second quarter. First Wachovia Corp., Winston-Salem, reported a 4% jump in nonperforming assets, to $160.9 million. But the company's ratio of nonperforming assets to total loans, 0.98%, remains among the region's lowest.

Atlanta-based SunTrust Banks Inc., saw a 3% increase in nonperforming assets, to $690.1 million, mostly from its Tennessee unit. Problem loans at Nasville-based Third National Corp. rose $19 million during the quarter, to $281.7 million.

Table : Second-Quarter Earnings at Southeast Banks Asset figures in billions; income in millions Ending 2Q '91 Versus NPA(*) Tier 1 assets Income 2Q '90 ratio capital ratioNCNB $65.90 $142.2 3.5% 2.78% 6.69%C&S/Sovran 49.08 61.6 19.0 3.84 6.67First Union 39.72 66.3 -14.9 4.40 6.81SunTrust Banks 33.11 92.6 5.0 3.17 8.88Barnett Banks 32.02 29.2 -50.0 3.77 5.86Wachovia 25.34 79.5 5.7 0.98 9.10Crestar Financial 11.53 11.5 39.0 5.35 7.80Signet Banking 11.33 8.4 187.0 5.36 8.24Southeast Banking 11.25 -147.2 NA 9.22 2.84Dominion Bankshares 9.93 5.7 -72.0 5.63 6.90

(*) Loans and default, reworked loans, and foreclosed properties as a percentage of total loans and foreclose properties.

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