Bank?s Charge-offs Indicate Credit Quality, Aggressiveness

Of the 27 privately held banks in the six-county Northwest Arkansas market, 14 showed decreases in their charge-offs from 2002 to 2003.

Only one, First National Bank of Fort Smith, reported a positive recovery for net charge-offs to loans in the same period.

Sam M. Sicard, president of First National Bank of Fort Smith, whose bank showed a 674 percent decrease in charge-offs for the 2002-2003 period, said his bank had a large recovery in 2002 of a previously charged-off loan. Sicard said the $534,000 in charge-offs on his 2003 books are more typical of his bank.

According to the Federal Deposit Insurance Corp., net charge-offs to loans is “gross loan and lease-financing receivable charge-offs, less gross recoveries, (annualized) as a percent of average total loans and lease- financing receivables.”

In other words, it’s the percentage of loans the bank charges off annually, compared to the good loans it has made.

Jeff Dunn, chairman and CEO of Bank of Arkansas N.A. in Fayetteville, said a bank’s charge-offs are an indicator of how well the bank manages its portfolio and the overall quality of credit it assumes.

“If you’ve got bad loans, you’ve got more charge-offs,” he said.

Dunn said the other side of the coin is that charge-offs can also be an indicator of a bank aggressively pursuing market share by loaning to marginal customers. He said that’s one reason why bank examiners keep a watchful eye on institutions and their portfolios.

Several area bankers also agree that a bank’s percentage of net charge-offs to loans is a more telling number than the dollar values of charge-offs.

“There can be year-to-year blips in the numbers,” said John Lewis, chairman and CEO of The Bank of Fayetteville N.A. “Sometimes a charge-off with collateral can be misleading because of the sale of the collateral in a successive year.”

For that reason, the list “Leading in Losses,” on page 31, is intended to be a snapshot of the area’s banking charge-offs rather than a forecast of any one bank’s operations.

Lewis said a bank’s loan-loss allowance is the amount of money a bank keeps on hand to offset its losses.

“It’s a shock absorber,” he said.

One bank, First State Bank in Fayetteville (based in Lonoke), reported neutral charge-offs to loans for 2003.

Another, Arkansas State Bank of Siloam Springs, reported net charge-offs of 170 basis points, or 1.7 percent, for 2003.

Inspection of Arkansas State Bank’s loss charge-offs totals show the bank came within $30,000 of meeting its own loss allowance of $1.74 million.

The bank had significantly fewer net charge-offs to loans for 2002, reaching 11 basis points. Not shown in the chart is its loss allowance of $1.8 million for 2002.

Further investigation on the Federal Deposit Insurance Corp.’s Web site showed that $1.69 million of Arkansas State Bank’s 2003 charge-offs were for commercial and industrial loans.

ASB’s total recoveries for 2003 were $291,000 compared to $16,000 for 2002.

Arthur Morris, president and CEO of Arkansas State Bank, didn’t return phone calls for comment.

The bank reporting the greatest dollar amount of charge-offs was Fayetteville-chartered Arvest Bank Group Inc. The bank reported $15.69 million in dollar-valued charge-offs for 2003, or 0.41 percent of its loan portfolio. This is consistent with 2002’s 0.42 percent.

Total recoveries for Arvest were $3.54 million for 2003 and $2.60 million for 2002.