Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, August 22, 1993 TAG: 9308200012
SECTION: BUSINESS PAGE: B-1 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Medium
It was just last year that reports from the banks - and news stories about them - focused almost exclusively on troubled commercial real estate loans. For bankers the critical decision was how much money to set aside from income to protect the bank against possible and likely losses.
Now, with the economy recovering, attention has shifted rapidly to the amount of new commercial and consumer loans on the books. Banks are under public pressure to lend to small businesses. And that, after all, is how they earn profits.
So where have all the loan-loss reserves gone?
They still are on the financial statements, offsetting loans that are less and less in need of such support.
Reports flowing through the banking industry are that government regulators are taking another look at reserves. Now the view is to reduce them because high reserves understate a bank's earnings and book value, or the institution's hypothetical value if all its assets were sold off.
Banks, it is now said, are "over-reserved."
Officers of banks with a presence in Western Virginia have heard the reports, although they contend they're not faced with the situation.
Malcolm Murray, First Union Corp.'s chief credit officer, said regulators haven't told his bank to reduce reserves, even though money that's not allocated to protect specific loans now equals 20 percent of the value of all outstanding loans.
First Union's reserves of just over $1 billion exceed 100 percent of nonperforming loans, or those which earn no income for the bank.
Regulators "are raising the issue," Murray said, "and I think they are feeling a little bit funny suggesting that reserves may be high."
Even so, he said, "I frankly don't think that the regulators will take that as an aggressive concern."
Murray said First Union acquired banks that had large reserves, including Dominion Bankshares Corp., which had set aside $219 million at the time of their merger.
In past economic cycles, he said, banks have come out of recessions with high loan-loss reserves. These have dropped as economic conditions improve.
"It balances out over time," Murray said. "That will happen this time."
"We have heard they've been saying it to other people," said Wallace B. Millner III of Signet Bank about the regulators. "But they haven't said it to us."
Most of the reports, he said, mention national banks which are regulated by the Office of the Controller of the Currency. But Signet is a state bank and thus regulated by the Federal Reserve Board.
Millner, who is Signet's chief financial officer, said he questions how many of the reports are true and how much is speculation.
"Our reserves have come down in dollar amount over time," he said.
The provision, or the amount of money that is set aside from income to add to the total pot of reserves, is also "way down from last year" at Signet.
Even so, its ratio of reserves to nonperforming loans is 410 percent. The ratio to nonperforming assets is 199 percent. The reserve totals $258.6 million.
Millner recalled that Signet acted at the end of 1991 to set up a large special reserve for troubled commercial real estate loans.
As the bank has disposed of that real estate, he said, the loss on the sales has been charged against that special reserve.
The reserve is down, he said, "because we've been charging off real estate losses." He predicted it will fall further as the bank continues to sell off its troubled foreclosed properties.
Millner said Signet recently has been reporting "very good earnings with very high profit ratios." Hence, the bank is under no pressure from shareholders to report more income instead of taking reserves.
"We are very comfortable with our reserve level," Millner said. "I wouldn't characterize it as excessive. It's just about right.
"But as we dispose of property, you will see these reserves decline."
Richard Tilghman, chairman of Crestar Bank, called it "an emerging argument among regulators" as to whether banks are over-reserved. "There's been no formal analysis.
"We're not going to rush to draw down those reserves," Tilghman said. "We'll take the conservative path."
Crestar Bank is holding $213 million, or 2.95 percent of total loans. But it added just $3 million in the last quarter compared to $34.4 million a year earlier.
He would allow the money to be used for another purpose only if it were assigned on the books to a specific loan that moved from troubled to good status.
Otherwise, Crestar is not draining reserved money into income.
Crestar, he said, has had experience with both high and low reserves. "Highly reserved is better," Tilghman said.
Mag Poff covers banking, personal finance, insurance and advertising for the Roanoke Times & World-News.
by CNB