Community banks weathering the subprime storm

Monday, February 18, 2008 at 2:07am

Headline after headline has the banking industry reeling from not only the subprime mortgage mess but also from residential real estate developers having difficulty repaying their loans as newly built houses sit unsold.

Regions Bank, which has the largest market share in Middle Tennessee, recently reported an 80 percent drop in profits in the fourth quarter last year. Nearly two weeks ago Citi Investment Research downgraded the bank’s stock from ‘hold’ to ‘sell.’

Bank of America’s net income last year dropped more than $6 billion. SunTrust has posted significantly lower profits as well.

First Horizon National Corp., parent of First Tennessee, reported a net loss in the fourth quarter of $248.6 million because of its faltering mortgage business.

To address troubled consumer and residential construction loans, the big banks have had to set aside considerable sums to cover bad loans. A report from Bank of America last week showed that the U.S. subprime collapse brought a global loss of $7.7 trillion in stock-market value.

Yet, to a large degree, community banks in the Nashville area have been posting better earnings than the big boys in the market mostly because they had little or no exposure in subprime lending.

Instead, many increased their commercial and industrial business lending and loans to individuals with strong credit.

Last month, for example, Pinnacle, the No. 4 bank in the Nashville area with last year's acquisition of PrimeTrust Bank and Bank of the South, reported a 10.6 percent increase in earnings in the fourth quarter, climbing from $5.6 million to $6.2 million. Net charge offs was .07 percent of average loan balances for the year. It’s loan delinquency dropped from .74 percent of total loans to .45 percent.

“We never had anything in the subprime orientation,” said Terry Turner, Pinnacle’s president and chief executive officer.

Tennessee Commerce Bancorp last month reported a 33.2 percent increase in net income to $2.1 million in the fourth quarter. The bank raised its provision for loan losses because of a softer economy, George Fort, Tennessee Commerce’s chief financial officer, said in a prepared statement at the time.

“Overall, our asset quality remained very good at year end,” Fort said. “We have no exposure to subprime loans and limited exposure to construction loans.”

Tennessee Commerce focuses mostly on business lending. Pinnacle is primarily focused on commercial lending and Turner said only 5.8 percent of its loan portfolio is in residential mortgages. The bank has largely stuck to its mission of business lending and wealth management for affluent clients.

Turner said Pinnacle residential mortgages tend to be borrowers who put down 25% and have 15-year terms. Those are held on the bank's balance sheet.

“Those are high quality loans that can weather the storm,” he said.

“Truth is there is plenty of money out there to be had for residential mortgages,” Turner said. “It's the lowest end category where the money disappears.”

Turner said construction loans to residential real estate developers would present indirect exposure to banks.

As such, not all community banks have gone unscathed. GreenBank reported last month an earnings decline of 47 percent in net income for the fourth quarter of last year, dropping from $5.2 million to $2.8 million.

The Green County-based bank increased its provision for loan losses significantly to $10.8 million in the final three months compared to $1.5 the previous year.

The bank said it had experience an increase in non-performing loans because of the slumping economy and deteriorating credit quality related to residential construction loans.

GreenBank is among the creditors in the bankruptcy filing last week of Corinthian Custom Homes along with Bank of America, several small banks and First Tennessee.

While First Tennessee’s parent struggles with the residential construction mortgages, Tony Thompson, the regional president here, said there isn't much exposure to the bank in the Middle Tennessee market.

“We had double digit growth in our commercial lending,” he said. “We had double digit growth in total deposits. It's a good steady marketplace.”

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