Cincinnati's small lenders increasing reserves
Premium content from Business Courier by Steve Watkins, Staff Reporter
Date: Friday, September 14, 2012, 6:00am EDT
Banks in Ohio could soon be getting a break on their taxes. Most banks, anyway.
Greater Cincinnati's small banks boosted by 30 percent the amount of money
they set aside to cover problem loans over the past year, thanks to
regulations that aim to protect them against the impact of loan losses.
That increase in loan-loss reserves - $32 million for the Tri-State's 47
small banks - came directly out of those banks' profits.
The Business Courier annually studies the financial positions of
Cincinnati's small banks using data compiled by Charlottesville, Va.-based
bank research firm SNL Financial.
These banks - with less than $3 billion in assets - serve a key role in the
local economy: Many customers say it's easier to get loans from a small bank
and they can more easily build relationships with bank executives.
Click here for a full ranking of Cincinnati small banks in all four categories.
But regulators are requiring banks to sock away more money to protect
against losses. Many small banks also are playing catchup after a few years
in which they didn't put away enough money to adequately cover possible
losses, in regulators' eyes. Loan loss reserves at locally based small banks
are now at $140 million, up from $108 million a year ago. The increase
matches a national trend for small banks.
"All the regulators think right now is that everything is going to hell in a
handbasket," said Dave Donihue,
who runs Leesburg, Fla.-based bank consulting firm Maximizing Shareholder
Value. "Banking is tough right now."
Regulators require more protection
RiverHills Bank in Milford is a good example of a bank affected by the loan-loss reserve philosophy shift. Its reserves rose by two-thirds in the past year, from $786,000 to $1.3 million. But its loan losses have fallen by about one-third."Regulators are requiring more added protection," CEO Chuck Snyder said. "We've had very few charge-offs this year, but we're still adding to reserves."
That's partly to help the bank catch up to where it should be. Its year-ago reserves were "astronomically low" as a percentage of total loans, Donihue said.
But at the same time, many banks that boosted reserves still generated healthy profits because of a significant decline in problem loans. Cheviot-based Cincinnatus Savings & Loan Co. bounced back from a year-ago loss to a profit. Earnings for Eagle Savings Bank, based in Green Township, and Fort Mitchell-based Victory Community Bank doubled. Those banks had among the largest increases in loan-loss reserves among local small banks.
Victory had virtually no loan charge-offs last quarter and is highly profitable. Yet it nearly doubled reserves from a year ago.
"I can almost guarantee Dodd-Frank had something to do with that," Donihue said, referring to the law tightening bank regulations in the wake of the 2008 financial crisis.
"Right now, it's a positive sign that reserves are up," he said.
It's not just regulators. Smaller banks don't face the profit pressures that big banks do, said Jeff Beerman, CFO for Cincinnatus.
"We can take a more conservative approach to reserves," he said.
Cincinnatus still has an above-average amount of problem loans. But they fell by half from a year ago. CEO Terry Todd said he expects continued improvement in loan quality should allow it to lower the amount it sets aside.
Reserve increases don't have much effect on the amount of money banks have to lend, said Bert Ely, an Alexandria, Va.-based banking consultant. Banks can become more selective, though. If they add loans that go bad, they'll have to boost reserves even more.
Beyond the loan-loss reserves, other key measures of banks' health remained steady. The ratio of problem loans to total loans was about even with last year and already strong capital levels got slightly better. Profits held up, even though they remained a bit below national and Tri-State averages.
Still, there were outliers. Clifton-based Columbia Savings Bank has the weakest capital position, a large net loss and the second-worst problem loan ratio. Two Wilmington-based banks, Wilmington Savings Bank and Liberty Savings Bank, rank among the bottom four in problem loans. That's a reflection of the Wilmington area's economy. On the flip side, Citizens Federal Savings & Loan and CBank ranked among the best in a few categories.