Toxic loans saddle banks with non-performing assets

Shopping for a vacation home on the Outer Banks? Hampton Roads Bankshares Inc. has one for sale in Waves, N.C., for $514,900.

Interested in buying commercial property? The parent of Bank of Hampton Roads and Shore Bank is offering a gutted building on Washington Street in downtown Suffolk for $125,000.

Hampton Roads Bankshares is promoting an array of bank-owned properties via the Internet in an effort to slash its nonperforming assets. A website linked to its bank subsidiaries describes more than 120 properties, including vacant lots on the Eastern Shore for single-family homes, a commercial tract in Wanchese, N.C., and 13 acres near Myrtle Beach, S.C., zoned for multifamily units.

Across Hampton Roads and the nation, many community banks are struggling to manage a rising tide of real estate loans on which borrowers can no longer make payments. Many sour loans often become bank-owned properties through foreclosures. Bad loans and foreclosed real estate - what banks call nonperforming assets - drag on a bank's earnings

and erode capital.

Managing such assets will challenge the health of some community banks for as long as the real estate market remains depressed. The homes, lots, buildings and other real estate can take a long time to sell and must be maintained in the meantime.

Troubled loans probably will prompt some institutions to tighten their lending policies, said Mohammad-Qamar Siddiqui, an economist with the economic forecasting and consulting firm IHS Global Insight. The reduced availability of credit, in turn, could slow the pace of economic recovery in the region, he said.

When Hampton Roads Bankshares reported a $96.2 million loss for the fourth quarter of 2009 two weeks ago, the company said it would be concentrating more heavily on managing its foreclosed properties. Getting the real estate off its books is crucial because nonperforming assets have been devouring its earnings and capital. At yearend, its nonperforming assets amounted to a potentially crippling 8.6 percent of its $2.98 billion in assets.

A handful of other local community banks have reported mounting financial pressure from nonperforming assets in recent months.

CNB Bancorp Inc., parent of Citizens National Bank in Windsor, said it suffered a $1.14 million loss for 2009 after setting aside $1.19 million for loan losses. The volume of its impaired loans jumped to $1.99 million at yearend, from $441,000 at the end of 2008, CNB said.

In Hampton, the parent of Old Point National Bank reported a first-quarter loss of $946,000 after making a $4.7 million provision for loan losses, more than four times its year-earlier provision.

"We have been lending in the commercial real estate segment, which continues to feel the impact of the recession," said Robert F. Shuford Sr., chairman and president of Old Point Financial Corp., in its report of first-quarter results.

Two of the region's community banks - Bank of the Commonwealth and Bank of Currituck - have come under pressure from regulators to change their lending practices in light of rising loan losses.

Norfolk-based Bank of the Commonwealth was told late last year to increase its loan-loss reserves and restate financial results for the first nine months of 2009. In its annual 10-K filing with the Securities and Exchange Commission, Commonwealth Bankshares Inc. disclosed that its bank subsidiary had been deemed to be in "troubled condition" by the Federal Reserve Bank of Richmond. Because of that designation, the bank is subject to greater regulatory restrictions and cannot pay dividends.

In April, the Federal Reserve issued an enforcement action against Bank of Currituck, demanding detailed plans for changes in the way it manages credit risk, underwrites loans and deals with credit losses.

In a report filed with the Federal Deposit Insurance Corp. earlier this year, the bank reported a $7.3 million loss in 2009 after it added $5.7 million to loan-loss reserves. As of Dec. 31, its foreclosed real estate stood at $8 million, or 4 percent of total assets.

Bank of Currituck's market includes parts of the Outer Banks that have been hit hard by the collapse in residential construction and depressed home sales.

Matthew Converse, president and CEO of the Moyock-based bank, did not return phone calls seeking comment on how the institution is addressing problem assets.

Some banks responded to the rise in their nonperforming assets by creating special teams to handle troubled loans and foreclosed real estate.

Last summer, Hampton Roads Bankshares began assembling a team of a half-dozen veteran bankers who worked with troubled assets for much larger institutions during the 1980s and '90s. The company also hired a manager with a three-

person staff to deal with its bank-owned properties.

"Once a bank owns the property, you still have to find a buyer before you've achieved your goal of moving the loan off the bank's balance sheet," said Bob Bloxom, chief credit officer at Bank of Hampton Roads.

That can be particularly difficult in markets where real estate values are depressed and buyers are scarce, he acknowledged.

The foreclosed real estate at Hampton Roads Bankshares consists of a mix of homes, other residential real estate and residential lots.

The company's marketing efforts have generated prospective buyers for some of the homes. Those homes priced below $300,000 will be purchased relatively quickly, Bloxom said.

However, more-expensive homes will remain on the market longer because lining up financing for jumbo mortgages, those for $417,000 or more, is still difficult. And the residential lots, he said, probably won't find buyers until home building rebounds.

Constantine Korologos, a managing director of Deloitte Financial Advisory Services, which advises banks on troubled assets, said there are investors with significant resources interested in buying foreclosed commercial properties. However, the pace of sales has been hampered by the sluggish job market.

"You still haven't had the employment growth" to support demand for retailing, he said. "And if people are not getting back to work, they are going to be uncomfortable buying a new home."

While dealing with their foreclosed assets, banks often weigh whether to unload properties quickly or hold out for an improvement in the market and the prospect of recovering more of their loan losses.

When Congress made sweeping changes to the federal tax code in 1986 and wiped out significant real-estate-related benefits, Bank of the Commonwealth ended up taking back some apartment buildings from investors. Rather than unload the properties immediately, Commonwealth managed them and eventually sold the apartments for a gain, said Edward Woodard Jr., its president and CEO.

That would be difficult to do today.

"There's probably a greater sense of urgency to get troubled assets off the books because of the regulatory environment," he said.

Commonwealth, which has expanded its special-assets department from one person to three, "will probably add two more people in the next 30 days," Woodard said. The department, he said, is likely to remain in place for a year or more.

In its 10-K annual filing with the SEC, Commonwealth Bankshares said its bank subsidiary had nonperforming assets of almost $89 million at yearend, almost 7 percent of total assets.

The bank, which reported having 39 bank-owned properties at yearend, currently has contracts on 16 properties, Woodard said.

"We still have challenges," he said, but "we're making good progress."

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com