Kim Meader
Being ‘proactive’

Like squirrels gathering nuts for a long winter, banks across the country collected reserves at a record pace in the third quarter of the year as loan delinquencies surged higher.

Mortgage payment delinquency rates are higher than they have been in years, and non-current construction loans are up sharply from previous “historic lows.” With the Massachusetts housing market mired in a deep slump, area community banks – and regulators – are keeping careful watch on the performance of commercial loans related to apartment, condominium, and housing subdivision development and construction.

But reserves at banks across the country have not kept pace with increases in delinquent loans of all types, the Federal Deposit Insurance Corp. reported in its Third Quarter 2007 Quarterly Banking Profile of the 8,560 institutions it insures nationally.

Many of Massachusetts’ 181 FDIC-insured banks also have seen increases in non-current loans 90 days or more overdue, and have increased their reserves in the past year, according to FDIC data.

Some industry observers say the agency is growing concerned that the number of non-performing loans is at its highest level in more than a decade.

The FDIC reported that U.S. banks had set aside $16.6 billion in loan loss provisions as of Sept. 30 – more than double the amount they had accrued for that purpose one year ago and the most set aside in 20 years.

Non-current loans and leases at U.S. banks also saw their highest quarterly increase in the last 20 years as of Sept. 30, when they rose by $16 billion, or 23.8 percent, to $83 billion, the FDIC found.

Banks “provision” loans by putting a part of what they earn on each loan aside, with the amount reserved based on the risk they believe it entails. They provision more when they observe general risk such as a market slowdown or risk to a particular portfolio type, said Kim Meader, executive vice president of business lines at Salem Five Bank, which increased its reserves by $2.2 million in the past year.

“We wanted to be proactive rather than reactive,” he explained.

Meader said Salem Five recognized potential risk early and adjusted its loss provisions accordingly.

Other Massachusetts banks that increased provisions in the past year included Boston Private Bank & Trust Co., Wainwright Bank, Hingham Institution for Savings, The Needham Bank (the renamed Needham Cooperative Bank, which merged with Dedham Co-operative Bank in March), BankFive in Fall River (which acquired Luzo Community Bank in New Bedford in July), Greenfield Savings Bank, Flagship Bank and Trust Co. in Worcester and North Easton Savings Bank.

Eastern Bank, Middlesex Savings Bank, Rockland Trust Co., Hyde Park Savings Bank, Watertown Savings Bank and Central Bancorp, holding company for Central Bank in Somerville, were among those that reduced their loss provisions slightly.

Most non-current loans nationwide were residential mortgages, which rose by $7.5 billion, or 27.2 percent, and real estate construction and development loans, which rose by $3.6 billion, or 45.5 percent, during the last quarter, the FDIC found.

The Washington, D.C.-based Mortgage Bankers Association, an industry trade group representing 3,000 mortgage company and bank members, separately reported in its own Third Quarter 2007 National Delinquency Survey that residential mortgages reached their highest total delinquency rate since 1986 in September.

Red Flags

But most Massachusetts banks aren’t seeing that kind of delinquency. Salem Five’s Meader said the bank’s increase from $8.4 million to $15.9 million in non-current loans over the past year can be traced back to just “a few” large condominium or subdivision construction projects that are selling slower than expected. Hingham Institution for Savings Chairman, President and Chief Executive Officer Robert H. Gaughen Jr. said the bank’s $3.2 million in non-current loans – up from $167,000 last year – are the result of just two large construction loans that were more than 90 days past due in September.

“There was a subdivision and a large home,” he said. Both loans have since been paid off, he added.

Gaughen noted that Hingham Savings has not taken any actual losses on loans in more than five years, and Meader said Salem Five expects its handful of problem loans to be reduced by one-third by year’s end.

Salem Five’s other loan portfolios, including those in residential mortgage, commercial real estate, equipment leasing and aviation lending, are in “excellent shape,” he added.

Salem Five’s loan loss provisions now total $15.6 million, and Hingham Savings has $3.8 million on reserve.

Last month, Central Bancorp reported that its nonperforming loans totaled $9.3 million as of Sept. 30, 2007, compared to $1.6 million on the same date a year ago. The Somerville-based bank said the increase was primarily due to two construction loan projects nearing completion, and noted that the borrower on one of the loans had filed for Chapter 11 bankruptcy protection, which would “delay the ultimate repayment of this loan.”

The other loan was for two large homes on the market, or expected to go on the market soon, in an “affluent suburban location,” the bank reported.

However, Central Bancorp reduced its loan provisions for the quarter ended Sept. 30. “Based on recent company loan loss experience and trends in various categories of loans made by the company Â… management deemed it appropriate to record a reduction in the allowance for loan and lease losses,” the bank reported.

A Central Bancorp official said the majority of the banks loans are mortgages rather than construction loans.

A few Bay State banks, including Middlesex Savings, Rockland Trust, Boston Private Bank & Trust Co. and Wainwright Bank, experienced decreases in non-current loans. Hyde Park Savings Bank reported no non-current loans in 2006 or 2007.

Nine of the 15 banks Banker & Tradesman reviewed have increased the dollar amount of advances they take from the Federal Home Loan Bank in the past year. The Boston FHLB, which serves all of New England, had advanced banks $56.3 billion as of Sept. 30, 2007, a $19 billion increase compared to last December.

“Most of the growth occurred in August and September,” noted FHLB spokesman Mark Zelermyer. He said banks tend to take advances with short repayment terms, in response to their own balance-sheet demands.

Local bankers said the advances have less to do with loan loss than with immediate funding needs that are not being met because deposit dollars are scarce.

FHLB interest rates have, of late, been lower than the cost of accepting a borrower’s long-term deposit, noted Hingham Savings CEO Gaughen, which make FHLB loans more attractive.

Jon Skarin, federal legislative and regulatory policy director for the Massachusetts Bankers Association, said that while the FDIC is certainly keeping a close eye on Massachusetts’ real estate market and its effect on bank loan performance, the actual number of banks the agency may have red-flagged is quite short.

“It’s longer than it was five years ago,” he said. “But you’re still talking about just a handful of institutions.”

FDIC spokesman David Barr said non-current commercial loans and leases remain at “historically low” levels.

“Banks are in a much better position now, financially, than they were 20 years ago,” he pointed out. “They just went through six or seven years of record profits, and their capital position is at historically high levels.”

But the FDIC remains concerned with both mortgage and commercial real estate lending, Barr said. Commercial construction and development loans, which he described as “volatile,” are of particular concern for smaller, community banks because they are the “bread and butter” of those banks’ loan portfolio.

“A lot of banks are heavily concentrated in [commercial real estate lending],” Barr said, and “it takes a lot of mortgages to equal a [single commercial] loan gone bad.”