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Strategic Thought Leadership for Community Banks

By Bill Orben, Associate Managing Editor- Orlando Business Journal – March 30, 2012

Seventeen Orlando community banks wrote off a combined $405.7 million in bad loans during the past five years — and that means less money they can lend to area businesses.

Don’t expect the situation to improve anytime soon: The banks have set aside $101.4 million for anticipated loan losses this year — capital that otherwise could have been used as commercial loans to start or expand local companies.

And when small businesses can’t get loans, the impact is felt throughout the economy. “They don’t hire as many people, keep inventories low and don’t replace equipment,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, N.C.

So, when will the tide of red ink subside? The middle of 2013, when property values begin to stabilize, predicted Gregory L. Nelson, president and CEO of Eustis-based United Southern Bank.

An improved housing or labor market will better the economy and help community banks, said University of Central Florida economist Sean Snaith, who believes robust economic growth won’t surface until later this year or next year. “I can’t see anything turning around rapidly.”

David E. Brown, managing partner with Boston-based RMPI Consulting LLC, which advises banks, agreed that economic recovery will take more time: “I don’t see any sector that is going to drag banks out of this problem.”

The local community banks reserving the most money for bad loans are:

• CNLBank, which has the lion’s share of bad loans in Central Florida, accounting for half of the $80.9 million worth of community bank loan losses in 2011. The bank set aside another $20 million to cover losses this year. Its loan value shrank from $1.02 billion in 2010 to $875.3 million last year.

“Given the legal system, the state of the economy and the flooding of the system with legal actions, it is not unusual for it to be a period of years from the time a loan goes past due until it is fully resolved and off the books,” said CNLBank CEO Michael Collins.

CNLBank, Orlando’s largest community bank, shed some of its most problematic loans, judging by the amount of loans 30-89 days past due — which fell from $39.1 million at the end of 2010 to $14.5 million at the end of 2011. The bank was able to do that “by working with our customers to resolve these loans,” said Collins.

CNLBank cut its loan losses from $36.3 million in 2009 to $30.1 million in 2010, before rising to $39.2 million in 2011. “Resolving loan issues is a very long process,” said Collins. “A loan does not become problematic overnight. Likewise, problem loans are not resolved overnight.”

• Independent Bankers Bank of Florida reported loan losses of $45.6 million during the past five years. To its credit, the bank cut its loan losses in half from 2009 to 2010 — from $19 million to $10 million and again in 2011. James H. McKillop III, president and CEO of the bank whose customers are other community banks in Florida and south Georgia, set aside $18 million in 2008 and $23 million in 2009 to cover potential loan losses. The bank has been working with other banks to get updated financial information so it is not surprised by other loans. “When my customers catch a cold, I catch pneumonia,” he said.

• Urban Trust Bank set aside $8.3 million to cover future loan losses. The bank had $14.8 million in loan losses between 2007-2012. They rose from $3.9 million in 2009 to $5.8 million in 2010, before falling to $5.1 million in 2011. Bank executives declined to comment.

• United Southern Bank, which had a profit of $10.7 million during the past five years, reported loan losses of $11.7 million and set aside another $7.3 million to cover loan losses in 2012. Nelson said those losses came as the result of falling residential real estate values that made the loans worth more than the property.

“We’ve always believed in maintaining a strong loan loss allowance, even during strong economic times,” said Nelson. “Bankers make their worst loans during the best times and their best loans during the worst times.”

• Orange Bank of Florida set aside $7 million to cover loan losses in 2012, which it expects to continue because it’s being conservative in estimating future losses. The bank had loan losses of $14 million between 2007 and 2011. It cut those losses from $7.2 million in 2010 to $2.6 million in 2011. A sour real estate market brought on by the Great Recession and falling property values accounted for most of the bank’s bad loans. “The length and depth of the dip is one no one could have anticipated,” said Tom Dargan, CEO and president.

Meanwhile, as federal regulators examine bank loans and question a borrower’s ability to repay, banks may be forced to label them as problem loans and not renew them. And that could lead to a continued credit crisis for businesses. Said Snaith: “A long housing crisis, a tempered recovery and a regulatory burden we have forced on the banking sector isn’t a recipe for the free flow of credit.”

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