TRAVERSE CITY — A national bank evaluation firm downgraded its rating of Northwestern Bank after the local bank posted a loss of more than $900,000 in this year's second quarter.
Other Traverse City area banks held steady in the latest bank ratings released by Florida-based Bauer Financial Inc. But Northwestern slipped to a two-star or problematic rating from Bauer, the second time in the past year it downgraded Northwestern.
Current ratings are based on second-quarter financial data reported to the Federal Deposit Insurance Corp.
Northwestern officials blamed the quarter's losses on a steep increase in nonaccuring loans -- loans in which no interest or principal payments have been made for 90 days and lenders have no collateral to cover the amount owed.
Northwestern's FDIC filings show its nonaccuring construction and land development loans totaled nearly $18.8 million, more than four times what the bank reported a year ago.
Nonaccural loans for commercial properties totaled $16.7 million, while nonaccuring loans for residential construction topped $3.6 million, according to FDIC records.
Another national rating service, BankTracker from American University and news network MSNBC, showed Northwestern Bank's "troubled assets" totaled nearly $70.6 million as of June 30, more than double the $30 million reported a year ago. Troubled assets include loans that customers can't pay off and are secured by collateral that's worth less than the loan.
Northwestern spokesman Doug Zernow said "unusual circumstances" affected the bank's second quarter number. Its $900,000-plus loss was due to the bank boosting its loan loss reserves, a step he described as a "proactive" measure to cover bad loans.
"All businesses in the banking sector and the country are dealing with the challenging economy," he said.
Zernow wouldn't discuss details of Northwestern's escalating loan losses.
"It really wouldn't be appropriate to talk about specific projects or customers," he said.
Federal bankruptcy records list Northwestern Bank as a major creditor to Immanuel LLC of Traverse City, developers of the stalled Bates Crossing commercial project along M-72 in Acme Township. The bank filed a claim of more than $3.7 million against Immanuel last year, and court documents show Northwestern had more than $1.3 million in unsecured collateral for the loan.
Northwestern Bank's rough quarter is not related to its involvment in the stalled Petoskey Pointe project in Emmet County, Zernow said. The bank confirmed in February that it acquired the site of a long-stalled hotel and condominium development project in downtown Petoskey, but Zernow said that deal had "nothing to do with" the bank's pending losses.
Zernow said Northwestern remains in the black for 2011, with income of $237,000 as of mid-year. He expects Northwestern's balance sheet will improve in the second half of 2011, and said its capital ratios remain well above industry standards. The bank reported $5.2 million in income last year.
"We have tremendous liquidity," he said. "Our capital ratios are not only well above what is required, they are increasing."
All other Traverse City area banks retained the same ratings from Bauer, which listed them as good or adequate, other than Traverse City State Bank, which kept a 2-star rating.
Traverse City State Bank was placed under an FDIC consent order in 2010, a year after it posted a $1.6 million loss, but bank officials said they are meeting the FDIC's directives. They also expect Bauer to improve its rating based on third-quarter performance.
"We anticipate an upgrade," bank President and CEO Connie Deneweth said. "September's results are terrific for us."
Bauer ratings show a slight improvement in Michigan's banking health over the past year. Statewide, 42.4 percent of banks earned recommended ratings from Bauer at the end of this year's second quarter, compared to 39.1 percent a year ago. Banks with Bauer's two lowest ratings were at 14.4 percent, compared to 15.9 percent last summer.
On the web at www.bauerfinancial.com.