Northwest Arkansas? 2Q Past Dues Rise 4 Percent

(Click here for a chart compiling past due loans of Arkansas banks.) 

Northwest Arkansas’ bankers say the sky is not falling.

But there’s a cloud of past due loans that are casting a fairly dark shadow on some institutions, and everyone wonders when consolidation will begin.

Twenty-two banks doing business in Benton and Washington counties had a combined $198 million worth of loans on their books that were not accruing interest as of June 30.

According to uniform bank performance reports filed with the Federal Financial Institutions Examination Council, the collective value of loans in those banks’ nonperforming columns are up 4.3 percent from $189.7 million at the end of the first quarter and up 98 percent from the same period a year earlier.

If nonperforming assets from the area’s three savings associations are included, the total value of loans not collecting interest is $221.9 million.

On Aug. 22, the Federal Deposit Insurance Corp. said past dues nationally were up more than 10 percent from the previous quarter so by comparison, Northwest Arkansas fared well.

Recently appointed state bank commissioner Candice Franks and several area bankers are bullish on the region and the economy.

“The market is soft up there,” Franks said of the past dues. “We’re seeing a not unexpected fallout from that.”

But the banking environment as a whole is in good shape, she said. “We don’t feel like there’s anything that our banks aren’t going to be able to work through.”

Whether directly or indirectly related to past dues remains to be seen, but visible signs of area bank “fallout” in recent months include:

• The forced resignation of three executives from Parkway Bank of Rogers on March 19.
• Foreclosures by Metropolitan National Bank of Little Rock for more than $11.8 million from Fayetteville developer Tom Terminella and his partners on May 30.
• ANB Financial NA of Bentonville entered into an enforceable agreement with the Office of the Comptroller of the Currency, its federal regulator, on June 25. The agreement focuses on ANB’s risk management of its loan portfolio, mostly as it relates to real estate loans.
• Foreclosures by First Western Bank of Booneville against developer Mitchell Massy and partners for a total of $5.23 million on Aug. 14.
• The resignation of Joe Mills, president and CEO, and of Kevin Beasley, executive vice president, of startup Pinnacle Bank of Rogers on Aug. 16.
• Officials with the FDIC held a meeting with area bankers and Arkansas State Bank Department officials on Aug. 22 to discuss the region’s economy and the banking climate. About 15 banks were represented at the meeting.

On Aug. 20, Mark Mizelle accepted a job as the president of Harrison-based Community First Bank’s Benton County operations, leaving his role as the eastern president of Liberty Bank of Arkansas.

Mizelle said the move does not reflect negatively on Liberty, but was a good opportunity for him personally.

2Q Numbers

The Federal Deposit Insurance Corp. defines nonaccrual assets as, “total assets, which are no longer accruing interest. Total assets include real estate loans, installment loans, credit cards and related loans, commercial and all other loans, lease financing receivables, debt securities and other assets.”

Therefore, nonaccural (or nonperforming) status can be a barometer of a bank’s overall health. But banks vary drastically in asset size so the ratio of nonperforming assets to loans is more telling than the value of its nonperforming loans.

The 22 banks selected are locally chartered or otherwise Arkansas-based banks with a significant presence in Northwest Arkansas as of June 30, 2006. Public banks such as Bank of America NA were deliberately omitted because local data is not available.

Many banks have a significant book of business outside the two-county region and not all of their nonperforming assets are in Northwest Arkansas.

Of the 22 banks, only five had ratios below 1 percent and 10 had ratios above 3 percent.

Nationally, commercial banks with assets from $1 billion to $10 billion, had a nonperforming ratio of 0.87 percent as of June 30, up from 0.59 percent a year earlier, according to the Federal Deposit Insurance Corp.

Arkansas state-chartered banks had a collective ratio of 1 percent of loans 90 days past due or in nonaccural status on June 30, up from 0.82 percent for the same period in 2006. In the second quarter of 2005 the ratio was 0.99 percent.

First State Bank of Lonoke had 0.05 percent of its loans in past due and nonperforming status, the best performer of the group.

“We just work really hard to manage our credit. We’ve been through these cycles before,” said David Estes, FSB’s president and CEO.

ANB Financial had a 6.03 percent ratio and about $53.2 million in loans in nonaccrual status, the highest ratio of all the banks.

Despite having loan production offices in Utah, Idaho and Wyoming, Dan Dykeman, chairman and CEO of the bank, said “90 percent” of the bank’s problem loans are in Northwest Arkansas.

“Our past dues are higher than we’d like, but it’s manageable,” Dykema said. “We’re not really having trouble selling stuff when we get it back.”

The bank’s “other real estate owned” has ballooned to $11.5 million at the end of the second quarter, up from $5 million at the end of the first quarter.

Still, only 1.19 percent of the loans in the total portfolio of those 22 banks are in nonaccural status.

Total charge-offs for the group of banks for the second quarter were at $25.2 million, which is about 0.15 percent of the groups’ net loans.

“Every bank’s got past dues – that’s part of the business,” said Gary Head, chairman and CEO of White River Bancshares, the holding company for Fayetteville’s Signature Bank of Arkansas.

“It’s about making sure you don’t get caught up and get your money back,” he said.

Signature had a middle-of-the-road nonaccrual ratio of 2 percent, and Head said the startup bank’s charge-offs to date have been small.

Out-of-Area Banks

George Gleason, chairman and CEO of Little Rock-based Bank of the Ozarks, said the bank has been very fortunate to have good asset quality.

“We work very hard at underwriting and structuring our loans and being proactive with the borrower,” he said.

Gleason wouldn’t say how much of BOZ’s nonaccruals were in Northwest Arkansas, but said the bank views this corner of the state as “the most challenging” of its various locations.

Gleason also credits diverse market locations as one factor to the bank’s overall health.

Wallace Fowler, chairman and CEO of Liberty Bancshares of Jonesboro, said most of his bank’s problem loans are in Northwest Arkansas. Liberty is a top performer, with only 0.77 percent of loans in nonaccural status, but Fowler expects a sizable “hiccup” of a foreclosure in Northwest Arkansas to hit Liberty’s third quarter books.

“We start hounding for renewal notices long before they start hounding us,” Fowler said.

Bill Scholl, president of First Security Bancorp of Little Rock, said companywide, past dues are about the same in all its markets.

Officials from Fayetteville-chartered Arvest Bank, which has significant business in Oklahoma and the Arkansas River Valley, said all its markets are about the same in terms of percentage.

Metropolitan National Bank of Little

Rock declined comment on its nonperforming assets.

Every banker said they were bullish that the market will turn around, but how soon is anyone’s guess. Most agree consolidation in inevitable.

“I’m tired of hearing about how bad [the market] is … I want to hear about how lucky we are,” Head said.

His point rings true with most bankers. Second quarter numbers from the Skyline Report and Streetsmart Data Services show absorption is better, but slow.

Meanwhile, bankers are lukewarm on the third quarter.

There were a combined $149.7 million in loans that were 30 days or more past due in banks’ collective second quarter portfolios, not including the three thrifts. So the third quarter depends on how well recovery efforts go in September, they said. n