Fort Smith area avoids commercial loan woes; Metropolitan Bank not so lucky

by The City Wire staff ([email protected]) 184 views 

With one big exception, the Arkansas-based banks among the 447 U.S. banks analyzed by SMR Research Corp. scored well with respect to commercial mortgage holdings.

The big exception is Little Rock-based Metropolitan National Bank.

SMR released Jan. 12 its report, “The Commercial Mortgage Dilemma: Banking’s Next Credit Challenge,” which predicts that commercial mortgage defaults “will be highly elevated in 2010 and could wipe out profits at a number of U.S. banks.”

Stuart Feldstein, president of Hackettstown, N.J.-based SMR, said in the report that the serious commercial mortgage problem is not likely to endanger banks in the U.S. and around the world.

"If the economic recovery continues apace, the new commercial mortgage crisis may peak in 2010 and improve in 2011," Feldstein noted in the report. “The saving grace for the financial system is that most really large U.S. banks are modestly exposed.”

Except for, as noted above, Metropolitan.

METROPOLITAN TROUBLES
The bank has more than $1.53 billion in assets and about $1.03 billion in loans, with operations primarily in central and Northwest Arkansas. In 2004, the bank announced an aggressive move into the Northwest Arkansas market with 12 branches and a large regional headquarters building in Washington County.

But then the Northwest Arkansas real estate market began to buckle under the weight of millions of dollars in speculative commercial and residential development.

In June 2008, the bank was hit with an enforcement action by the Office of the Comptroller of the Currency. OCC officials found “unsafe and unsound banking practices relating to some aspects of credit risk management, capital adequacy, and concentration risk management at the bank.” At the time, the bank said about two-thirds of its loans were in Northwest Arkansas. The bank posted a second quarter 2009 income loss of $32.5 million and a third quarter net income loss of $13.7 million. The bank failed to meet capital requirements prescribed by the OCC as of Sept. 30, but said in its third quarter report it had “sufficient time to improve these ratios.”

It’s not going to be easy to improve those ratios in 2010, according to the SMR report.

The SMR calculates a bank’s score — which reflects the level of troubled commercial loans on the books — by analyzing its percentage of total bank assets tied to commercial mortgages and then factoring in the percentage of commercial loans that are more than 90 days delinquent. A low SMR score is a good score.

Metropolitan has a score of 818. By way of comparison, the Arkansas-based bank with the next highest score is Bentonville-based Arvest Bank which has a decent score of 99. Fort Smith-based First Bank Corp. scored 71.

“They don’t look too good in our scoring system,” Feldstein said of Metropolitan. “There were not many banks higher than that in the United States.”

Indeed, of the 447 banks analyzed in the SMR report, only six had higher scores than Metropolitan. (Metropolitan officials did not respond to a request for comment.)

Federal figures collected by Feldstein show that 46% of Metropolitan loans as of Sept. 30 were categorized as commercial mortgages (Includes construction and land loans on commercial properties and 5-unit and higher apartment buildings.) Of the commercial loans, 17.8% of those were 90-days or more delinquent.

Feldstein said that if half the commercial mortgages more than 90-days delinquent are losses, “the hit they (Metropolitan) would experience would be about four years of lost income.”

FORT SMITH REGION
Fortunately, conservative commercial lending principles in the Fort Smith metro area have allowed the area to avoid much of the commercial real estate problems seen in other parts of the state and nation, say two area bankers.

“We have very few problems in this (Fort Smith/Van Buren) market,” Blair Parnell, executive vice president at Bancorpsouth in Fort Smith, said when asked about the commercial loans held by the Tupelo, Miss.-based bank. “In our bank, we’ve had good results with the real estate lending that we have done in this market. … But our focus has not been on large, white-box tenants.”

The growing number of large, vacant buildings — Kmart, Michael’s, Price Cutter, Circuit City, just to name a few — around Fort Smith is a concern, Parnell admitted. However, he said area banks may not hold the notes on the large boxes.

“It is not uncommon for large projects to be financed by some lender other than the local community banks,” Parnell explained.

Craig Rivaldo, executive vice president of Arvest Bank’s operations in Fort Smith, said the Fort Smith area “has not been immune” to commercial mortgage problems but “by virtue of the fact this region has not had the population growth and the same volume of spec development, to the extent other areas of the state, we have fared better.”  

Rivaldo also says the large open buildings in the area has not gone unnoticed.

“The fact there have been restaurant, hotel and big box retail closings in the area does have every bankers attention. This should cause the area bankers to tighten up and be more prudent in their underwriting of commercial real estate,” Rivaldo said.

NATIONAL ISSUES
The SMR report indicates that none of the nation’s largest banks risk failure due to commercial mortgage defaults. The same is not true for smaller banks. At banks with less than $1 billion of assets, commercial mortgages recently were 32.5% of total assets, “a level of dependence six-fold higher than at big banks with $50 billion or more of assets,” noted an SMR statement.

Also, 154 of the 447 banks reviewed had “highly delinquent” commercial mortgages equal to 3% or more of their total assets.

“In a reasonably good year, banks earn profits of only about 1% of assets. Many of these institutions will be hard-pressed to make any money in 2010. Some could become insolvent,” according to SMR.

Other SMR notes include:
• The 90-day-plus delinquency rate on all commercial mortgages (including multi-family apartment building loans and commercial construction loans) was 5.59% on Sept. 30, up from 3.51% just six months earlier;
• The vacancy rate on apartment buildings had reached its highest level since at least 1965. Vacancy rates were high as well at shopping centers and office buildings;
• The total commercial mortgage loan market was $3.4 trillion as of the third quarter of 2009;
• The early-stage delinquency rate on commercial mortgages appears to have peaked in the first quarter of 2009;
• Overall delinquency and write-offs on commercial mortgages were still below levels seen in the last commercial lending crisis in 1991.

A Winter 2009 Federal Reserve Bank of St. Louis report by Michelle Clark Neely says banks in the Eighth District — covers all of Arkansas, southern and easter Missouri, south Illinois, south Indiana, western Kentucky, the western third of Tennessee and north Mississippi — are in better shape than banks in other districts but are seeing “increases in nonperforming rates across all categories” of commercial real estate (CRE) loans.

“As of Sept. 30, CRE loans made up 43.5 percent of total bank loans at District banks yet accounted for 63.4 percent of all nonperforming loans,” Neely noted in the report, adding that continued high unemployment rates in the bank district will make the problem more difficult for banks.