Five-year law concerns bankers dealing real estate

Lots at Beaver lake, high-end condos just off Dickson, storage buildings on Joyce Ave., a strip center in Prairie Grove and a slew of lots scattered from Gravette to Goshen are listed for sale by the local banking sector.

That’s right, community banks are active players in the real estate business. Not by choice they say, but trying to manage their way out of what has become a very lengthy recovery following a real estate bust.

More than five years ago, local residential and commercial real estate markets stalled which left bank balance sheets littered with real property from loans gone bad.

The local banking sector still holds more than $400 million worth of real estate on their books as property taken back in the past five years. And time is ticking down for some banks who are approaching a five-year deadline to move them from their balance sheets.

State law (A.C.A. § 23-47-508) requires real estate that comes back to the bank from foreclosure shall not be held as an asset for a longer period than five years.

“The bank commissioner is authorized to grant an extension of the holding period not to exceed five additional years, or for shorter periods as circumstances warrant, based upon her discretion,” noted Arkansas State Bank Deputy Commissioner Susannah Marshall.

Marshall said as individual banks seek extensions, the commissioner can grant them on a case by case basis.

Some local banks say they have already asked and received extensions. Others say they will have more assets in the five-year window later this year and plan to seek extensions unless they can sell the property.

Arkansas Bank Commissioner Candace Franks cautioned in a recent newsletter that banks should not expect an automatic extension, which raises some concern in the local banking community.

Federally regulated banks also have a five-year limit for holding real estate on the books.

NEED FOR EXTENSION
“I would like to see regulators start thinking about extending the five-year limit before the majority of banks in this region have more assets crossing that five-year line. The local real estate correction began in 2007 and banks starting getting property bank in larger volumes in 2008. The last thing the region needs is forced liquidation if banks can’t get the extensions,” said John Dominick, a banking analyst and consultant. (He is a also finance professor at the University of Arkansas and a board member of Signature Bank.)

Dominick says property values are starting to stabilize and that momentum would be lost if a flood of inventory hit the market at once bearing fire sale prices.

Among 18 local community banks analyzed by The City Wire the cumulative assets classified “other real estate owned” or OREO totaled $444.24 million. A year ago the same 18 banks held $462.84 million in OREO on their books.

Bank insiders expect it will take several more years to rid their balance sheets from real property from failed projects such as the Legacy Building Condominiums in downtown Fayetteville.

This high profile building was taken back by lenders more than two years ago and Metropolitan National – lead lender – still lists 21 condos for sale ranging in price from $289,000 to $629,000 on the bank’s website.

HIGHER CONCENTRATIONS
The cumulative OREO accounts for 1.34% of the 18 banks’ total assets in the local financial sector. At the state level, the same OREO percentage was 0.96% at the end of June.

Dominick said the local region’s higher concentrations have pushed the state levels up in recent years. In 2009 the OREO concentration levels were 0.56% of total assets among all banks across the state.

And while about a third of the local banks kept their OREO percentage level with a year ago and another 22% reduced their holdings, roughly 45% are still struggling with very high levels.

Pinnacle Bank in Rogers posted the highest level at 15.55% as the bank shows $13.705 million in OREO property against total bank assets of $88.115 million as the end of June. A year before the bank had $8.657 million in OREO with $94.784 million in assets.

The bank has had two top management changes in the past 18 months and remains under a regulatory enforcement action. Bank management did not return a phone call and message left Friday (Sept. 8).

Dominick said OREO is a drain on bank profitability and while some local institutions are working their way out of difficult situations, other banks affected later are still taking property bank.

“By the time a bank gets a property back they have already marked it down substantially from the time the loan was originally booked. But the losses don’t stop as there are legal costs with recovery, new appraisals, insurance and marketing costs and upkeep until it can be sold,” Dominick said.

METROPOLITAN TROUBLES
Metropolitan National Bank shows $94.030 million of OREO on its books. This accounts for 9.21% of the bank’s total assets. While the bank has the second highest OREO concentration in the region, it declined from 9.67% a year ago.

The Little Rock-based bank aggressively loaned money in Northwest Arkansas when it expanded into the region in 2005. Since 2008 the bank has been under regulatory orders to shore up its balance sheet.

Susie Smith, spokeswoman with Metropolitan National, said the bank is in favor of extending the five-year rule because it makes good business sense to allow time to maximize the values for property that is bank owned.

To date, she said the bank has not applied for extensions on real estate properties as none have been necessary. Looking ahead Smith said 6% of OREO on the books will hit the five-year mark in 2013, and 16% in 2014.

“The bank would ask for an extension of time for unsold ORE properties at the five year point as needed,” Smith said.

Signature Bank CEO Gary Head said he will also seek extensions as the need arises, and can only hope they would be granted given the approval process is somewhat subjective.

“I do know taxpaying property owners all across Northwest Arkansas wouldn’t be happy to see banks dumping real estate on the market because of some arbitrary rule,” Head said.

Signature bank showed $25.56 million in OREO on its books as of June 30, which comprised about 5.11% of the bank’s total assets.

He said Signature Bank continues to work with its borrowers and regulators to do the best it can at accurately pricing and trying to sell its real estate holdings.

“There is no magic formula, it just takes time for the market to absorb this overhang of projects. We wouldn’t have them on our books if there was decent demand,’ he said.

WORKING IT OUT
Scott Hancock, executive vice president at Liberty Bank in Springdale, says banks don’t want to be in the real estate business and they are working incredibly hard to whittle down their real property holdings.

“We don’t have any properties in the five-year window at this point, and we have done a pretty good job moving a number of assets off the books in the past 12 to 18 months,” Hancock said.

Liberty had $33.621 million in real estate on its books as of June 30. Hancock said that covers the entire state, but somewhere between 40% to 45% of the total is located in Northwest Arkansas.

Hancock said the bank has been able to move the single family homes pretty, and took over the construction and management for a condo project in West Fayetteville – The Pines at Springwood. The bank has contracted with a local builder to do the work. He said the total project calls for 50 units, 18 existing, 12 under construction with four pre-sold. Hancock anticipates it will take about two years to build out and sell this asset.

Dominick says banks are building on empty lots they own in an effort to move the property.

Legacy National Bank CEO Don Gibson said he requested and received an extension this year for one property that’s been on the books for five years.

“We have been able to move some of the OREO but of course large parcels of raw land take longer. We have 75 acres that was part of the Grand Valley project  the City of Springdale is considering for the new park voters approved on the east side of town,” Gibson said.

MAKING HEADWAY
A few banks in the region have made big headway at moving their OREO concentrations down in the past year.

Parkway Bank in Rogers made the biggest reduction in OREO concentration from a year ago. CEO Bob Taylor said the bank has been able move some large pieces such as an apartment complex and an office building. The bank had $3.097 million OREO at June 30, this comprised about 2.55% of its total assets.

A year earlier Parkway had $6.985 million in OREO which accounted for 6.12% of the bank’s total assets.

“About one-third of the property we have now are lots at Beaver Lake. We are prepared to wait until demand picks up in that area. Should we need an extension, we will be asking for it,” he said.

Bank of Fayetteville CEO Mary Beth Brooks said the regulators she deals with know firsthand the properties the bank holds.

“In every audit they go over the OREO and make sure the property has been recently appraised and proper write downs taken if necessary. They have driven some of the properties and I expect will give extensions if they are needed,” Brooks said.

The Bank of Fayetteville had $9.164 million in OREO, down from $15.181 million a year ago. The bank’s concentration levels dropped to 2.38% from 3.70% in June 2011.

“We work very hard to sell what we have, and like every other bank hold our breath that we don’t have take anymore back,” Brooks said.

COSTS ACCUMULATE
The Federal Deposit Insurance Corp. reports banks across the nation continue to feel negative impacts from real estate loans turned OREO.

Just because the property can be sold doesn’t mean banks win much in the process. U.S. banks on the whole lost $4.633 billion in sales of OREO last year. That was on top of $4.716 billion lost in 2010.

For perspective, prior to the recession in 2008, U.S. banks profited $116 million from OREO sales in 2007. Dominick said the $444 million OREO sitting on area bank books likely stated out at two to three times that amount in loans granted by local lenders.

“The amount of loan write downs have been monumental in the past few years for those properties tagged as OREO. And banks are still having to set aside higher provisions against future losses,” Dominick said.

Head said one property in Signature Bank’s OREO holdings appraised at $4 million five years ago when the loan was made. The most recent appraisal on the same property was $1.2 million.

“It’s my sincere hope the five-year rule is extended because bank’s shouldn’t be forced to give property away because it couldn’t be sold during the worst economy since the Great Depression,” he said.