JACKSONVILLE BANKS: LOTS OF BAD LOANS DOWNTURN Most Area Banks Perform Worse Than Average U.S. Firm. DEBT Soured Loans as Ratio of Total Capital Run as High as 88 Percent. DANGER When Loan Gets "Noncurrent," Chances of Repayment Drop Fast

Article excerpt

Byline: MARK BASCH

Ben Bishop has been one of Florida's top banking analysts for 35 years. But the chairman of Allen C. Ewing & Co. in Jacksonville says his vast experience gives him little additional insight into what's going on in the banking industry.

"Experience means nothing. None of us has been through this at all," he said.

What "this" is is a high level of bad loans, particularly at Jacksonville-area banks.

The Times-Union looked at several key financial measures in the first-quarter regulatory reports filed by the 17 banks and savings institutions in the Jacksonville metropolitan area insured by the Federal Deposit Insurance Corp. The data shows that most area banks performed worse than the average U.S. bank, and have a level of problem loans that are higher than the national average.

The average U.S. bank had a ratio of noncurrent loans to capital of 13.1 percent as of March 31, but 15 of the 17 Jacksonville banks exceeded that ratio. A noncurrent loan is a loan in which the borrower is at least three months behind in payments, or has stopped making payments altogether.

The overall number of noncurrent loans rose sharply last year as the banking crisis worsened, and it continued to rise in the first quarter this year, a trend Bishop called "disturbing."

Once a loan falls into the noncurrent category, the bank faces the likelihood that it will never be repaid. According to Michael Gullette, vice president for accounting and financial management at the American Bankers Association, there are no set rules on when a bank has to go ahead and write off a noncurrent loan. Each bank sets its own policy. But once it gets past 90 days overdue, the outlook is grim.

A recent report on credit trends by banking analysts at FBR Capital Markets & Co. painted a dim picture.

"We are seeing further evidence in recent quarters that cure rates in delinquencies are falling, meaning that banks are experiencing a growing incidence of default once borrowers become delinquent and an increased incidence of outright defaults of current loans, loans that go nonperforming without first shifting into delinquent status," they said.

A bank doesn't necessarily lose money at the moment it writes off a bad loan. It generally takes a loss on the loan before that, when it looks like the borrower won't repay it. The bank takes money out of its profits and puts it into its loan loss allowance. When the loan is finally written off, the money comes out of the loan loss allowance.

Unfortunately, the Jacksonville data shows that all but one of the banks have a level of noncurrent loans that exceed their loan loss allowance.

If all of those problem loans have to be written off, the banks are going to have to put more money into the allowance to cover the bad loans. And that would mean more losses that would eat away at the banks' capital.

In the first quarter, 10 of the 17 banks reported net losses. And of the seven that were profitable, all but one recorded a return on average assets that was below the national average. The return on assets measures profits as a percentage of assets and is a good way to compare the results of banks of different sizes.

All 17 banks exceed the basic regulatory requirement that they have capital equal to at least 4 percent of their assets. But only four of the banks have a capital-to-assets ratio that exceed the national average of 10.58 percent. Additional loan losses could lower capital levels further.

Bishop said that Jacksonville-area banks are seeing more problem loans than other areas in Florida.

"The Jacksonville banking group is worse off than those in Orlando and Tampa," he said. But Bishop said he can't see a reason why Jacksonville is worse off.

According to statewide data compiled by Saltmarsh, Cleaveland & Gund, a Tallahassee accounting and consulting firm, only the Southwest and Panhandle regions of the state had higher levels of problem loans than Northeast Florida. …