Cincinnati banks still caught in loan trap
Premium content from Business Courier by Steve Watkins, Staff Reporter
Date: January 18, 2013, 6:00am EDT
Business borrowers lag on problem loan payments, slowing recovery at Tri-State's 15 largest lenders
Local banks' nonperforming loans are recovering much more slowly than state or national averages.
You've seen the statistics: Greater Cincinnati's economy is recovering.
Unemployment here is down to 6.3 percent, from 10.7 percent in 2009. Manufacturing has rallied, with local jobs rising 6 percent last year. Even the moribund housing market is picking up steam, with local sales jumping 20 percent in November over a year ago.
But it's not all good news. Indeed, there's one strong signal that Cincinnati's economy has a long way to go: Problem loans at locally based banks, with assest ranging from $200 million to $118 billion, remain high.
New data compiled for the Business Courier by research firm SNL Financial show that problem loans at the 15 largest Cincinnati-based banks have recovered at a much slower pace than even the average Ohio, Kentucky and Indiana bank, as significant numbers of business borrowers continue to fall behind on loan payments.
"Because the recovery is so slow, (local) banks are still having borrowers come in and say, "I can't make this work anymore," said Scott Deters, shareholder in charge of the financial services industry at downtown-based accounting firm Clark Schaefer Hackett & Co. "It's not to the degree of 2008, '09 and '10, but that is still happening."
Fifth Third Bancorp, by far Greater Cincinnati's largest locally based bank, brought its problem loans down and rose to the top half of large local banks for best bad-loan ratio. First Financial Bancorp carries the best ratio of bad loans to total loans, while Union Savings Bank showed the strongest improvement. But several banks, including FCN Bank, Harrison Building and Loan and LCNB, suffered sizable declines in loan quality while United Community Bank had one of the worse bad-loan ratios.
Banks working longer with borrowers
The problems, bankers and analysts say, are that Cincinnati's economic recovery is still slow. And local banks are working longer with borrowers, which then keeps troubled loans on the books longer.
Banks have to reserve more capital to cover bad loans, hurting profits and their capital levels. That can mean they have less money to lend. And it can be tougher for borrowers to get a loan, too. In fact, Craig Liechty, audit partner for banking at the Cincinnati office of accounting firm BKD, said high problem-loan ratios typically cause banks to tighten their lending standards.
Adjusted nonperforming local loans, which are those that don't accrue interest because the borrower has fallen behind on payments and those that have been restructured, improved by just .01 percentage points at the median local bank in the third quarter last year compared with the prior year. That's according to data compiled for the Business Courier by Charlottesville, Va.-based research firm SNL Financial. Its study included the 15 largest locally based banks, each of which has assets of more than $200 million.
The local rate of improvement falls far short of the average bank across the three states. The median similar-sized bank in that region improved its nonperforming loan ratio by 0.11 percentage points. It's not just the rate of improvement at Greater Cincinnati banks that's meager. Local banks struggled to a median ratio of nonperforming loans to total loans of 3.84 percent. That's more than a percentage point worse than the 2.51 percent median for banks based in Ohio, Kentucky and Indiana. And it's a far cry from the 1.95 percent ratio for the median bank nationally.
A closer look at specific local banks shows that dynamic is making an impact. Lawrenceburg-based United Community's nonperforming loans worsened slightly from a year ago, according to SNL, leaving it with the second-worst problem loan ratio among the big local banks. Ten percent of its loans rate as troubled.
COO E.G. McLoughlin said he expects the ratio to keep getting better, thanks largely to the improving economy. But commercial real estate hasn't come back, McLoughlin said. That's kept the bank's problem loans high.
"That was the area that was hit hardest in our portfolio," McLoughlin said.
Liberty Capital Inc. in Wilmington had the worst ratio, thanks to that region's economic struggles. FCN Bank in Brookville and Harrison Building and Loan turned in the biggest increases in problem loan ratios.
Best way to clear it up? Catch bad loans early
Big banks generated better results. Fifth Third, the 800-pound gorilla among locally based banks, turned in the second-best improvement. First Financial's problem loan ratio of 1.9 percent was the only one to beat the U.S. average.
The next two largest banks also fared well. Crestview Hills-based Bank of Kentucky saw troubled loans improve and had a 2.3 percent problem loan ratio, the third-best among local banks. Its ability to work out problems before they reach the nonperforming level helps it keep that ratio low, said Andy Hawking, Bank of Kentucky's chief lending officer.
"The clearest path to reducing (nonperforming loans) is to catch problems early," he said.
Union Savings, the biggest local mortgage lender, had the second-best problem loan ratio, at just 2.1 percent. And its bad loans improved by a full percentage point, the largest increase of any locally based bank. It's known for closely managing its loan portfolio to avoid problems.
Burlington-based Heritage Bank was one of a handful of banks to improve its bad-loan ratio. CEO Lytle Thomas credited the economy and Heritage's ability to work with borrowers. But that process takes time, keeping some bad loans on the books longer than other banks have. That's reflected in Heritage's 4.8 percent ratio of nonperforming loans to total loans.
"It takes longer to work through this than if you foreclose or blow the deal up," Thomas said. "But we're privately owned, so we don't need to make quarterly numbers. We have seen continued improvement."