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Slowdown has lenders, borrowers at its mercy
Journal Graphic by Jeremy Boyd
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Published: August 17, 2008
The Triad has been spared the worst of the national housing crisis.
But there's little doubt these days that a credit crunch has taken up residence in the region and that financial institutions, real-estate developers and consumers are increasingly feeling the pinch.
The most visible sign can be found in most communities -- new residential neighborhoods stuck in neutral or worse for months, with empty lots outnumbering newly built homes.
Developers are struggling to unload inventory even in a buyer's market. The average sale price in the Triad was down 5 percent in June, to $184,824, compared with June 2007, according the N.C. Association of Realtors.
The crunch is squeezing the bottom lines of financial institutions as well.
Most banks serving the Triad raised their provision for loan losses during the second quarter, reflecting that late payments and delinquencies are chipping away at their profits. At some banks, the higher provision contributed to a quarterly loss.
"There are challenges that our company and our industry are facing which are new to us all," said Swope Montgomery Jr., the president and chief executive of BNC Bancorp, the holding company for Bank of North Carolina.
Tighter lending standards
Meanwhile, consumers are facing tighter lending standards, and fewer mortgage options and new homes to consider.
"My fear is that the entire economy is broken, particularly at the national level, but it's affecting us in the Carolinas, too," said Tony Plath, a finance professor at UNC Charlotte. "We're seeing a more significant impact on commercial-loan quality and local real-estate values than I'd originally hoped we'd see."
Plath said that the problems could result in banks closing branches or reducing service. It also means that some banks would be more vulnerable to becoming a takeover target.
"It's going to take a few years to fix it," Plath said. "That means lots of stress on community, banks, poor growth prospects and a lot fewer banking jobs here."
Local financial officials, as well as the N.C. Bankers Association, emphasized that most banks based in the state have enough money and resources on hand to weather the crisis. "We have seen no indication of any bank based in North Carolina facing any situation that would lead them to default," said Paul Stock, the executive vice president and counsel for the association.
As far as consumers go, Stock said that the "majority of credit-worthy borrowers will find no shortage of loans for traditional mortgage products, such as fixed-rate loans."
"But they will be expected to meet credit standards that some lenders have de-emphasized in recent years."
Trouble selling homes
Real-estate developers are having trouble selling homes they've already built, and some have fallen significantly behind on loan payments.
Pierce Homes of Carolina Inc. is the biggest example to date. The company announced earlier this month that it was shutting down "as a direct result of the ongoing crisis in the housing and financial industries." The company had been a major land developer and home builder in the Triad.
Among those affected by Pierce's decision is BNC Bancorp.
The bank said in its second-quarter earnings report that it had to place "one large residential construction and development relationship of $4.5 million" as a nonperforming asset -- a major step closer to a loan default. Bank officials later confirmed that Pierce represents that relationship.
"This situation came up fairly quickly, within the last six months, with a client that we've been doing business with 20-plus years," Montgomery said.
"They took out a considerable amount of loans, not just with us, to buy a lot of land in recent years at what they thought was a good price. They put in sewer and utilities and prepared the lots to develop for themselves or sell to other developers,'' Montgomery said. "When the slowdown hit, they had little maneuvering room left."
If misery loves company, then there is no shortage of commiserating banks.
The most visible example, by far, is Wachovia Corp.
The bank lost $8.9 billion in the second quarter -- the second-largest ever in a fiscal quarter for U.S. retail banks.
Contributing to the loss was the need for Wachovia to raise its provision for loan losses to nearly $5.6 billion. The bank reported $11.9 billion in nonperforming assets compared with $2.1 billion a year ago.
In reaction to a deteriorating mortgage portfolio, Wachovia is cutting more than 11,000 jobs over the next three months. It also slashed its dividend to 5 cents a share from 37.5 cents a share.
"The reality is we're really in challenging times in terms of the economy, the markets, in housing and financial services," Robert Steel, the recently hired chief executive and president of the bank, said last month when the reductions were announced. "Lots of good progress has been made in working through difficult issues."
But Steel cautioned that "the odds are high there will be new challenges and additional issues that we'll have to face."
Bank of the Carolinas said that its nonperforming assets reached $14.4 million on June 30 -- representing about 3.6 percent of its outstanding loans, or what the bank called "a historically high level."
The bank said that the increase was caused primarily by a problem loan valued at $4.9 million, of which 75 percent was guaranteed by the U.S. Agriculture Department.
Even BB&T Corp., which has received praise from analysts for not using risky mortgage loans, was not immune from problems. It raised its provision for loan losses in the quarter to $330 million compared with $88 million a year ago.
The bank reported that most of the increase in nonperforming assets, net charge-offs and provision for loan losses "were largely driven by continued challenges in residential real-estate markets, with the largest concentration of credit issues occurring in Georgia, Florida and metro Washington."
Housing-market decline
The decline in the housing market, particularly the rising number of loan defaults, has sobered most financial institutions locally and nationally.
According to a report from the Federal Reserve Board released in July, about 75 percent of domestic banks had tightened their lending standards on prime mortgages. For those that offered nontraditional residential-mortgage loans, about 85 percent had tightened their lending standards.
Still, the number of local foreclosures continues to rise.
RealtyTrac Inc. reported Thursday that the number of foreclosure filings in the Winston-Salem metropolitan statistical area nearly tripled in July to 270 from 98 in July 2007. The MSA consists of Davie, Forsyth, Stokes and Yadkin counties.
Foreclosure filings in the Greensboro-High Point MSA surged to 434 in July from 57 a year ago. That MSA consists of Guilford, Randolph and Rockingham counties.
Southern Community said in its second-quarter report that a slumping Triad residential construction industry led to a 69 percent decline in net income to $603,000 in the second quarter.
A decision by Southern Community to raise its provision for loan losses to $3.5 million from $600,000 represented 7 cents of the 8-cent decline in diluted earnings to 3 cents. Its nonperforming assets were at $14.2 million, compared with $2.2 million a year ago.
"Unfortunately, like many community banks, we're a reflection of the economy we're in right now, and banks are in disfavor with the investment community," said Scott Bauer, the chairman and chief executive of Southern Community.
Southern Community said it has "taken an aggressive approach in moving relationships" to nonperforming-loan status.
"This approach has led to early identification of potential problem assets, and as a result we have increased the allowance for loan losses commensurately to recognize the loss potential in our loan portfolio," he said.
"In the majority of these cases, these real-estate loans were good loans when they were written," Bauer said. "They became negative loans because good home builders are having a rough time in the economic slowdown.''
Michael Clapp, a local commercial real-estate analyst, said that too-relaxed lending standards have played a major role in the housing crisis.
"There's no question that we had too much residential expansion from 2002 to 2006, with mortgages being given to homeowners who didn't have the financial resources to maintain the loan when their adjustable-rate mortgage rose," Clapp said.
"The local housing market is paying the price for that lending binge that's likely to carry into 2010, and likely lead to more home builders going out of business as we work our way back to a normal housing market."
Scott Anderson, the chief executive of Bank of Granite Corp., said that his bank, like others, is trying harder to give loans to individuals and businesses that can pay them back.
Bank of Granite reported a $3.4 million loss in the second quarter. Nonperforming assets were up 46 percent in the second quarter to $42.1 million, and its provision for loan losses rose 13 percent to $8.4 million.
"We must stay the course and continue our focus on credit quality as we resolve our problem loans," Anderson said. "This process is difficult, but necessary."
NewBridge Bancorp found it necessary to slash its quarterly dividend -- from 17 cents to 5 cents -- and close four branches as part of its response to a surge in nonperforming assets to $31.9 million compared with $10.5 million a year ago. The bank also raised its provision for loan losses to $5.6 million from $1.2 million a year ago.
"We are taking a number of steps to prepare the company to emerge from this economic downturn in a strong competitive position," said Pressley Ridgill, the president and chief executive of NewBridge.
The bank has cut staffing by 18 percent since its merger with FNB Southeast Financial Corp., and also is cutting operating expenses.
Grover Shugart, the chief executive of a local residential developer, Shugart Enterprises LLC, said he believes that tightening standards should help the local housing market.
"With everything that has gone on, more borrowers' eyes are open to which options are realistic for buying a home and which options are just too risky," Shugart said.
"We're just in an overly tight housing market now, and it obviously hasn't helped consumer confidence with gas and heating-oil prices over $4 a gallon at one time,'' he said.
Shugart said he still believes that the Triad housing market remains solid, "with great economic potential with FedEx (cargo hub) and Mack Trucks coming up.
"Sometimes it's just a matter of the economic times getting ahold of you,'' he said. "Some of the local developers are not getting the revenue from their developments they needed to.''
Stock said as in most housing downturns, sales will improve once consumers believe that the economy is on an upturn.
But Plath, the UNC Charlotte finance professor, cautioned that the local banking market is likely to get worse before it gets better.
"I hope it's idiosyncratic (one or two loans) rather than systemic -- a slowing economy that diminishes overall credit quality," Plath said.
"It is a lot easier to fix a few problem loans than it is to fix the entire economy."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
Taking precautions
Most banks serving the Triad significantly raised their provision for loan losses in the second quarter, setting aside more money to cover potential increases in loan delinquencies or defaults.
Bank 2nd quarter 2007 2nd quarter 2008
Bank of America Corp. $1.8 billion $5.8 billion
Bank of Granite Corp. $7.5 million $8.4 million
Bank of the Carolinas $412,000 $781,000
BB&T Corp. $88 million $330 million
BNC Bancorp $650,000 $1.1 million
First Citizens BancShares Inc. $934,000 $13.3 million
First Community Bancshares Inc. $0 $937,000
NewBridge Bancorp. $1.2 million $5.6 million
Southern Community Financial Corp. $600,000 $3.5 million
SunTrust Banks Inc. $104.7 million $448 million
TriStone Community Bank. $60,400 $136,500
Wachovia Corp. $179 million $5.6 billion
On the rise
Real-estate foreclosures are up throughout the state, a key indicator of the housing crisis that has affected North Carolina banks.
Area June 2008 June 2007 % change
Forsyth County 202 160 26
Guilford County 367 281 31
Charlotte 1,208 1,059 14
Triangle 744 631 18
Asheville 83 62 35
Wilmington 80 38 109
North Carolina 4,874 3,981 22
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