Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, May 18, 1990 TAG: 9005180724
SECTION: EDITORIAL PAGE: A-12 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Medium
The bank holding company announced it had doubled its loan-loss reserve (the amount of capital it must hold back to cover potential loan defaults) from $70 million to $143 million. As a result, Dominion recorded a $14 million loss for this year's first quarter.
Such figures may give pause inside the bank as well as in the Roanoke Valley, where Dominion's fortunes are closely followed. Still, the report ought not to occasion much hand-wringing. The figures say far more about the peculiar condition of banking in general these days than about the strength or soundness of the Dominion edifice.
Indeed, the bank's loan-loss reserve stood at $13 million at the end of 1989. Had that amount remained in effect, bank officials said, they would have reported not a loss, but a net profit of $23 million in the first quarter.
This isn't to suggest that only an accounting quirk has swelled the loan-loss reserve. On the contrary. Dominion, like other banks across the country, has been hit hard by declining real-estate markets.
Lending for construction and commercial real estate accounts for a quarter of Dominion's loan portfolio. In its eagerness to find borrowers, the bank - like many others - has lent bundles for projects that have proved risky.
In every business cycle, real-estate markets tend toward the extremes of excess and contraction. Because the current business expansion has, nationally at least, lasted an unprecedented eight years, real estate escaped the purge that normally occurs every four or five years. Now the down-slope is slippery, and lending institutions are along for the ride.
Federal examiners have good cause, thus, to scrutinize banks more stringently. And they are doing so with a vengeance. Burned by their lax regulation of savings and loans and banks in the Southwest, the regulators aren't about to be singed again.
In Dominion's case, the transfer of income funds to capital followed a rigorous examination of its commercial real-estate portfolio by the comptroller of the currency.
Some griping about the abruptness with which regulators have changed the rules of the game is to be expected. But the comptroller's office, it should be understood, is cracking down on banks across the country now.
All banks undergoing the stricter scrutiny face losses. Dominion just happens to be the first major bank in Virginia to get hit.
That may not prove, in the end, so unfortunate. If loans go bad, the higher loan-loss reserve will help. If Dominion continues to collect on loans that the comptroller has categorized as risky, the bank will be in even better shape.
Eventually all banks - including Dominion's competitors - will face more conservative reserve requirements, and probably will post losses. Many won't fare nearly as well as Dominion has.
Prudence, sooner or later, will find its reward. As long as banks like Dominion aren't scared away from sound lending, the new regulatory vigilance will benefit everyone - despite the free flow, for now, of red ink.
***CORRECTION***
Published correction ran on May 25, 1990 on the editorial page\ Correction
DOMINION Bankshares' loan-loss reserve stood at $87 million at the end of 1989. A May 18 editorial stated the wrong figure.
Memo: correction