Several community banks back peddled with loan-loss provisions during the third quarter as uncertainty beyond credit quality led them to boost reserves after several quarters of easement.
Analysts often watch the direction of provisions to determine if a bank has moved past its problematic loans. Most industry observers assert that the biggest problems have passed, but they caution that surprising upticks in provisions at some banks indicate a bumpy ride to recovery.
More than 200 community banks, or nearly 40% of banks with $20 billion or less in assets to report results through Nov. 1, have validated that view, reporting a spike in third-quarter provisions after reducing them a quarter earlier. "Recovery is marathon, not a sprint," said Jeff Davis, an analyst at Guggenheim Securities.
A wave of higher provisions baffled many analysts because credit quality had somewhat stabilized, resulting in a trend of banks releasing provisions earlier this year.
Still, a number of bankers are raising their provisions for broader concerns than transcended loan quality, including ongoing economic uncertainty and concerns over how lawmakers will handle fiscal issues such as the national deficit.
"We have concerns over the broader economic situation that we needed to provide for … as opposed to a specific credit problem," said Michael Clarke, the president and chief executive of Access National Corp. in Reston, Va. The $765 million-asset bank had the highest percentage increase among banks that have raised provisions.
Access National set aside $715,000 in the third quarter after benefiting from a small reserve release a quarter earlier. The company stayed profitable — earning $3.1 million — but it grew concerned about its Washington-area customers that are highly dependent on government contracting. While those clients are doing well, their circumstances could change depending on how Congress addresses budget cuts and the deficit.
"We have a very fragile economic recovery so until we feel we are clearly out of the woods, we will err on side of better safe than sorry," Clarke said.
A higher provision may also reflect a bank's strategy or growth trajectory.
Pacific Premier Bancorp Inc. in Costa Mesa, Calif.
Steven Gardner, Pacific's president and chief executive, said he would rather take on all the loss than share it with the FDIC. "It is a time-consuming, costly and cumbersome process to have the FDIC loss-share in place," he said. "We work through problem loans very rapidly and we don't want to be handcuffed by going to the FDIC."
For other banks, the higher provision was tied to the shock of having a big credit unexpectedly turned south.
United Community Banks Inc. in Blairsville, Ga., is a good example of a company that was hit with such a setback. In July, the $7.2 billion-asset company
The euphoria was short-lived; a $77 million commercial lending relationship put United back into the red during the third quarter. A decision to classify the relationship led management to increase the provision by 227% from a quarter earlier, to $35 million. (United lost $6.2 million in the third quarter.)
Jimmy Tallent, the company's president and CEO, said during a Thursday conference call that management classified the relationship because the underlying collateral had failed to sell in a timely manner. (The borrower remains in full compliance.)
"Because those sales have not occurred as anticipated and because the real estate market has continued to deteriorate, we believe full repayment has become unlikely," Tallent said.
Still, some analysts believe that United Community's woes should not portend a large-scale setback for the banking industry when it comes to fundamental asset quality.
"UCBI is very unique case," said Brett Scheiner, an analyst at FBR Capital Markets. "I haven't seen anything [overall] that would lead me to believe there is an uptick in credit quality weaknesses."
"Don't read into it that there's a re-emergence of issues," said Davis, adding that the provision spike at United Community is likely a "one-off event."
