Northwest Arkansas Feels OREO Crunch

Northwest Arkansas is considered home to the state’s largest concentration of property taken over by banks. That designation is borne out on the balance sheets of area lenders through a line item known as “other real estate owned” – OREO.

The OREO tally for Arkansas banks active in the Benton and Washington county markets ballooned by nearly 80 percent in one year, increasing from $214 million in 2008 to more than $384 million last year.

Parkway Bank of Rogers started this year with an OREO count of more than $7.8 million, about 6.8 percent of the bank’s total assets. Among Northwest Arkansas lenders, that OREO ratio was second only to Pinnacle Bank of Rogers at nearly 7.8 percent.

“For a bank our size, we do have a lot of OREO,” said Bob Taylor, CEO of Parkway Bank. “Like all banks, we have too much right now. We’re fortunate that we didn’t have any land loans out there.”

The carrying cost of land is nominal, but raw land rarely generates income. Such properties can be more difficult to sell, and current appraisals can slash valuations. About a third of Parkway’s OREO portfolio is tied to the Breckenridge apartment project in Rogers, Taylor said.

“We hope to get it up to 70 percent occupancy, so we are able to move it,” he said. “We’ve had some inquiries, but the offers were at a price where I just can’t let it go.”

The bank has sold off four different OREO properties totaling $1.3 million, including the 5,000-SF Haest/River Valley Building in Lowell. Bought by the United Way of Northwest Arkansas, the building was Parkway’s second-largest OREO property.

“We’ve had a little bit more OREO come on the books, so we’re at about $6.5 million today,” Taylor said. “We have written down properties to a value, so we’re not having a lot of additional losses once we sell.”

While the region’s skyrocketing real estate market was brought back to earth, its vibrant economy is helping speed recovery.

First Federal Bank of Harrison started the year with OREO holdings of more than $35 million, dominated by residential land, lots, subdivisions and houses in Benton and Washington counties.

“About 90 percent of our OREO properties are in those two counties,” said Larry Brandt, CEO of First Federal. “That’s where our issues are.”

When needed, the thrift has been willing to reduce prices to attract buyers and move property off its books.

“We’ve been very successful,” Brandt said. “We’ve sold a lot of it. We sold $10 million of OREO in 2009. That’s a significant amount. We have sold or put under contract to sell $2 million to $3 million so far this year.”

Part of the company’s strategy to work through its inventory of residential lots is to partner with local builders. An example of that is the Cobblestone subdivision in western Fayetteville.

The thrift sold one partially completed phase of the project to homebuilder Mark Marquess, providing financing for the deal as well as construction funding for homes.

Marquess has sold more than a dozen homes starting at $139,500 during the past several months. The activity has filled vacant lots with houses and provided sales momentum for First Federal to convert 120 Cobblestone lots into cash.

Brandt doesn’t see the ebb and flow of real estate owned by First Federal slacking this year, and that’s not necessarily bad news, either.

“We feel like there is going to be some migration into OREO from nonperforming loans,” Brandt said. “That is a good thing in a way because we can market the property and move on instead of having it tied up in bankruptcy or foreclosure.

“We like to think the worst is behind us in 2009, and we’re looking for better things in 2010.”

First Security

The OREO portfolio at Searcy’s First Security Bank, which stood at more than $24 million at year-end, is composed mostly of residential property, with the bulk of that in Benton and Washington counties.

“Most of ours is going to be completed residential property, which is easier to work with,” said Reynie Rutledge, CEO of First Security. “We’ve sold some houses and are leasing some. We can continue doing that until the market improves.

“We have been put in a position, through strength of earnings and capital, so we can hold it and not be forced to dump it and sell at distressed prices.”

While the bank has embraced the residential rental business to generate income and work through its OREO holdings, Rutledge said it wouldn’t become part of the company’s long-term business plan.

“Real estate has always been good, and it will come back,” he said. “We don’t mind holding property until the market improves.

“If the value goes down, you have to write it down. I don’t think anyone holding property today can avoid having to write down property.

“I’m sure everyone has had the opportunity to do that. We want to make sure that property is carried on our books at current market value or less.”

Rutledge reports that market conditions are improving, but he is concerned there will be more financial casualties in the coming months.

“Things are looking up; however, it’s not turning on a dime or turning quickly,” he said. “We continue seeing a lot of customers who have done a great job of hanging on, but it’s getting harder for them.”