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More bank lending in 2011? Answer is in bad loan cleanups

Banking Commissioner John Allison says he’s seen signs that may signal turning of corner for Mississippi banking sector

Nationally, banks have loosened lending and eased up on an obsession with cleaning up their balance sheets, says Sheila Bair, chairman of the Federal Insurance Deposit Corporation.

Some of that change could filter down to Mississippi in the weeks ahead, Banking Commissioner John Allison said, but that will require some cracks in the instinctive conservatism of both lenders and borrowers in the Magnolia State.

“When banks ratcheted down so did their [commercial] customers,” he said.

Allison said he thinks businesses will soon realize they must do some borrowing or give up potential profits — or even shut down. “They’ve been kind of keeping the status quo. But, here again, they are going to have to do something” other than try to sustain themselves through saved income and reliance on other resources, he said.

Even though Mississippi’s lenders and borrowers have not fully re-entered the arena, Allison said he has seen some “green sprouts” in the banking sector.

“I’m trying to be optimistic,” he said, citing his belief that “some of the problems we’ve seen have kind of bottomed out.”

For one, charge offs from bad loans “are not as great,” Allison said. “It appears we’re past much of it.”

Tupelo-based BancorpSouth, a $13.5-billion institution and the largest bank headquartered in Mississippi, made a $32.3-million allocation in the third quarter to cover a $107.1-million increase in non-performing loans, a move that took a big bite out of earnings.

Getting the allowance up is part of the regional bank’s strategy to aggressively deal with troubled loans, said Bill Prater, COO, in a recent interview. “Most of our difficulties have been in residential development loans in two or three markets.”

As they’ve done in previous quarters, problem real estate loans in markets in Alabama and metro Nashville and greater Memphis in Tennessee put a drag on BancorpSouth’s 3Q earnings. This time around it contributed $47.2 million of the total increase in non-performing loans.

BancorpSouth’s Memphis borrowers were financially strong and encountered repayment problems much later in the recession, Aubrey Patterson, chairman and CEO, said in  his 3Q earnings presentation

“We have had to deal with it at a later time than some other Memphis lenders.”

As a result, BancorpSouth’s non-performing loans have climbed 30 percent or more the last few quarters. “I suppose that some other lenders aren’t seeing an influx of NPLs (non-performing loans) because they hit it earlier than we did,” Patterson said.

It’s not a one-time clean up process, Prater emphasized. “We’re recognizing these losses as they occur.”

Residential developers aren’t collecting from builders who bought lots within their developments. The result, Prater said, is the banks take over the lots and put them on their books at a significantly diminished value once reappraised at today’s market values.

BancorpSouth’s non-current loans and leases stand at $360 million, compared to $105.5 million in the third quarter of last year, an increase mostly attributable to troubled commercial and residential real estate loans. A bulk sale of the real estate assets is “certainly something” BancorpSouth would consider, Prater said, but noted that at the moment, “We’re not under any pressure to try to do something like that.”

Prater said the highly localized and fragmented nature of Mississippi’s housing market explains why some banks have been hit hard with loan troubles and others not so hard. “Each individual bank’s loan portfolio is going to reflect the market in which they operate,” he said.

For instance, Community Bank of Mississippi, a $636-million institution based in Forrest, saw non-current loans and leases drop to $4.1 million in the third quarter from $7 million in the previous third quarter.

Allison

Allison

A number of the state’s largest banks — among them Trustmark, Hancock, Renasant and Cadence — had third quarter increases in late loans and leases.

Trustmark said in its 3Q earnings presentation it is aggressively cleaning up its Florida loan portfolio. Its non-current loans and leases rose to $214.9 million from $181.5 million in the same quarter of 2009.

Hancock and Renasant both showed increased non-current loans and leases in the third quarter, though both have made acquisitions of troubled community banks in the last year or so.

The $5.3-billion Gulfport-based Hancock listed non-current loans and leases of $101 million, compared to $13.6 million in the third of last year. Hancock acquired troubled Peoples First Community Bank of Panama Beach, Fla., in Dec. 2009. Of the $101 million in distressed loans, $43.2 million are loans guaranteed by the FDIC stemming from the takeover of the Florida bank.

Renasant, a $4.3-billion regional institution based in Tupelo, reported $132.7 million in late loans and leases, up from $48.6 million in the third quarter last year. A total $67.1 million in troubled loans can be attributed to the July acquisition of Crescent Bank & Trust in North Georgia, the burden for which will be shared with the FDIC.

Cadence Bank, a $1.7-billion regional bank based in Starkville, showed $76.3 million in late loans and leases in the third quarter, up from $59.9 in 3Q 2009. Cadence, under an expired deadline to significantly increase its capital reserves, received shareholder approval earlier in the month for an acquisition by Community Bancorp, a Texas banking investment group.

Here is a further sampling of Mississippi banks and their 3Q delinquent loan pictures:

> Bank of Yazoo City, a $207.6-million institution with non-current loans and leases of $1.9 million, up from $1.3 million in the same quarter of 2009.

> BankPlus, a $2.27-billion institution based in Belzoni, with non-current loans and leases of $9.9 million, down from $19.7 million in the same quarter last year.

> The Peoples Bank, a $814-million institution based in Biloxi, with non-current loans and leases of $25.2 million, down from $26.5 million in 3Q last year.

For bankers, loan woes are all relative. Ray Britt, chairman and CEO of the $25-million Bank of Walnut Creek, is headed for the new year with zero late loans and leases. He on occasion has some loans out that are tardy in the 30 to 60-day range, “but probably not anything in the 100-day range,” he said earlier this month.

As head of the bank situated in the community of 500 people between Carthage and Forrest since 1968, Britt has acquired a feel for when a loan is going to go all the way bad. “I’ll charge them out before the end of the quarter,” he said.

With no commercial real estate lending to speak of, Britt’s loans are mainly made to farmers, merchants and individual account holders.

“We’ve been fortunate that we’ve been able to meet the needs of the community,” he said.

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