Economy helped Arkansas banks reduce real estate owned by $123 million last year

An improving economy around the state, steady demand for housing in Northwest Arkansas and commercial expansion there and in central Arkansas helped banks in 2015 sell 29% of unwanted property from their holdings.

The property is technically known as “Other Real Estate Owned” (OREO). At the end of 2015, 104 Arkansas banks held $302 million of OREO on their books, 29% less than they in the prior year, according to the Federal Deposit Insurance Corp. Banks with assets over $100 million (77 of them) had $272 million in OREO on their books at the end of 2015, down 30% from $396 million held a year earlier.

A banking rule that requires banks to sell OREO assets after five years is not playing that much into the declining numbers according to several bankers surveyed by Talk Business & Politics. Luther Quinn, deputy bank commissioner for Arkansas, said bankers can ask Commissioner Candice Franks for an extension for up to five years or the assets can be transferred to the bank’s holding company after five years without an extension. National banks make their extension requests with the Office of the Comptroller of Currency.

Don Gibson, CEO of Legacy Bank of Springdale, said in years past he might have asked for extensions but only after he adequately marked the asset to market and was marketing it for sale. Legacy Bank has slashed its OREO by 50% over the past two years, holding $3.675 million as of Dec. 31, 2015. Gibson said real estate prices are moving in the right direction and active demand is helping the bank move the majority of OREO off its books.

“We have some residential lots in Grand Valley by the new city park in East Springdale as well as some lots in the Hamptons subdivision near Stone Creek Country Club. We have some more strategic commercial acreage that is starting to draw more interest as well,” Gibson said.

Jim Taylor, a regional banking executive with First Security Bank, said one big reason banks in Central and Northwest Arkansas are seeing OREO numbers decline is because the firehose that was filling the OREO bucket has reduced to a slow trickle in recent years.

“Banks are not foreclosing on nearly as much property and that alone is helping them clear out the assets they are holding now that real estate prices are improving,” Taylor said. “We also did not dump a lot of our real estate holdings back in 2009, 2010 and 2011 when the market was low. We had the capital to hold them longer and we did so until the market recovered.”

First Security Bank reduced its OREO to $9.325 million at the end of 2015, well below the $16.097 million in 2014, and the $22.826 million in 2013. Taylor said much of the property taken back in prior years was in Northwest Arkansas and Central Arkansas where the bulk of the building demand occurs. He said because those markets are also stronger, OREO from those regions are also easier to move.

“Bankers and developers today also have the recent memories of foreclosures and falling real estate prices to hopefully help them from making the same mistakes which created the housing bubble,” Taylor said.

Arvest Bank slashed its OREO holdings by 58% last year. The bank reported OREO of $23.647 million at the of 2015, down from $56.285 million at the same time in 2014.

“We are simply selling off more OREO as a result of increased economic activity taking place in our various communities … improved building demands,” said Craig Rivaldo, president for Arvest Bank in Benton County.

First National Bank of Fort Smith and its subsidiary FNB-NWA reported just $182,000 in OREO at the end of 2015. Sam T. Sicard, CEO of First National Bank, said most of the OREO assets were transferred to the bank’s holding company and do not show on the bank call reports. At the end of 2014, FNB had $4.793 million of OREO on its books. Sicard said while several assets were transferred to the holding company, most were subsequently sold.

Rob Husong, regional president for FNB-NWA, said of the OREO at the holding company, most has been sold or written down. He said the demand for ready-to build lots is steady, but other property like subdivisions still needing infrastructure will take more time to move. He said that is the type of property most likely to be held at the holding company level.

John Dominick, a banking consultant and director at Signature Bank, said lots in active subdivisions are among the easier to move. He also banks have more leeway today working out situations with troubled borrowers instead of foreclosing than five years ago.

Signature Bank has held its OREO fairly steady at $17 million for the past three years. Dominick said the bank has moved a fair amount, but taken on just about as much as it’s moved. He said the bank recently held a showing of all of its OREO to try and further market the holdings.

The bulk of Signature’s OREO is wrapped up 3 commercial lots in West Fayetteville near Owl Creek Elementary. This property is listed of $12.5 million on the company’s marketing website. The bank also owns 19.4 acres near the Don Tyson Interchange on the east side Interstate 49 in Springdale. This property is valued at $2.75 million.

The bankers agreed that in 2016 they expect to see little OREO move into their holdings and they expect to continue moving assets off the books as the demand continues.