Three Arkansas banks face fatally low capital, and credit issues remain for Pinnacle, Heartland banks

Arkansas’ banking sector has seen improved profits amid lower loan delinquencies, rising real estate prices and growing demand for commercial and residential construction sectors. But three small banks continue to struggle with triple-digit Texas Ratios through the first half of 2016.

Texas Ratios refer to the amount of non-performing loans divided by loan reserves and capital equity. A ratio more than 100 is considered a warning sign and indication of credit troubles.

While Pinnacle Bank in Rogers and Heartland Bank in Bryant continue to have Texas Ratios slightly above 100%, Allied Bank in Mulberry is in the most serious situation with a ratio triple the caution level. As of June 2016, following are the ratios for the banks: Allied Bank, Mulberry, 379%; Pinnacle Bank, Rogers, 116%; and Heartland Bank, Little Rock, 102%.

Allied Bank saw its delinquencies increase to more than $5.13 million as of June 30. The bank incurred a $4.495 million loss in the first half of 2016, more than double the loss the bank took last year. Capital equity fell critically low to $1.321 million in June,  putting the capital ratios below the threshold for bank closure.

Dr. Tim Yeager, Arkansas Banking Chair at the University of Arkansas, said when the Tier 1 capital ratio falls below 2% the situation to raise capital is dire from a regulatory standpoint. The 1.8% Tier One ratio of Allied Bank dropped below the 2% mandated level as of June 30. He said in such cases the holding company is mandated to raise capital or the Federal Deposit Insurance Corp. (FDIC) will take control when it becomes clear a bank can’t raise its critically low capital. The bank also is in violation of a cease and desist order from the State Bank Commission which calls for Tier 1 capital to remain above 10%.

Allied Bank’s holding company Acme Holdings is in the midst of Chapter 7 liquidation after failing to reorganize its debts in a Chapter 11 filing in 2014. The bank trustee could be looking for a way to sell the bank to the highest bidder in order to satisfy the secured loans made by the holding company.

Danville-based Chambers Bank contested Acme’s bankruptcy filing because Chambers is on the hook for more than $6.013 million in secured loans made to the bank and holding company between 2009 and 2010. Allied Bank also tried to sell three of its branches last year to Today’s Bank. This deal would have raised approximately $2 million in additional capital and lowered the bank’s assets by $53 million. However, Chambers objected to the sale, leaving Allied Bank in the low capital position, according to bankruptcy filings made public earlier this year.

Other debtors (unsecured) to ACME Holding Company include: Ayxs Corp., $2 million; Trust Preferred Securities, $3.29 million; and the U.S. Treasury perpetual preferred stock, $6.5 million.

The bankruptcy liquidation of the holding company could mean the trustee solicits bids for the bank asset as was done in the 2013 liquidation of Rogers Bancshares, the parent of Metropolitan National Bank. There is no indication from the bankruptcy court docket when such an action might take place. People familiar with case say the delay could be related to the court’s ability to find a suitor or being able to establish a true value for the one asset, the bank itself.

Some in the banking community have said Chambers Bank was once in negotiations to acquire Allied Bank’s holding company and by default the bank. In December 2012 Chambers Bank came to the rescue of Decatur State Bank that was on the verge of closure because of low capital levels. Like with Allied, Chambers Bancshares, largely owned by John Chambers of Danville, purchased the holding company and 80% of the Decatur State Bank. Sources said Chambers Bank was on the hook for several million dollars in loans made to Decatur Bank holding company. That was money which would have been lost in total if the bank had been allowed to fail.

Allied Bank’s assets have shrunk down to $66.336 million, and as of June 30 the bank has more than $9 million in other real estate owned on its books, in addition to the $5.13 million in delinquent loans. With capital levels down to $1.8 million, and more write downs likely the bank could be closed by regulators at any time.

PINNACLE BANK
Losses at Pinnacle Bank of Rogers are moving in the right direction with the bank showing $99,000 in non-performing loans as of June 30. Loan delinquencies are down from $432,000 reported at the time last year. One area of concern remains the bank’s real estate holdings on its books which was valued at $13.181 million as of June 30. Real estate holdings are down from $15.692 million, a year ago. It is the bank’s real estate holdings that continue to cause its Texas Ratio to be elevated.

Rising real estate prices are a positive for area banks, according to Dr. John Dominick, banking professor at the University of Arkansas, He said the banks hammered when real estate prices cratered following the Great Recession have largely been able to set aside reserves to cover those losses. He said with prices rising the risks associated to more loan write downs has somewhat diminished.

He said that doesn’t mean bank underwriting can be any less stringent and if banks want to benefit from escalating prices they would have to order a new appraisal of the property they on hold their books and if the value is higher the bank can also make an upward adjustment. He said the real danger with rising prices is the over exuberance that has the ability to convince some bankers to take more risks on loans than is prudent.

Pinnacle Bank has been through the worst of its loan issues and in 2016 began to grow the bank again with assets rising to $92.094 million as of June 30. The bank had net income of $54,000 through the the first half of 2016, down from $140,000 earned in the same period last year. The bank was able to grow its equity capital to $10.403 million, up from $9.671 million a year ago. Pinnacle Bank has a Tier One capital ratio of 10.83%, only slightly lower than the 11.46% rate of its peer group.

HEARTLAND BANK
Bryant-based Heartland Bank also is dealing with higher loan delinquencies through June. The bank reported non-performing loans rose to more than $29 million, up 494% from June 2015. The bank’s real estate holdings were valued at $918,000 as of June, down slightly from $1.368 million a year ago.

The hefty loan losses have curbed earnings to just $530,000 through June of this year, compared to $3.675 million earned in the same period a year ago. The bank’s assets are valued at $233.795 million as of June 30, down from $242.109 million a year ago.

The bank is in the midst of raising $3 million in addition capital because of the increase in problem assets. Those losses stem from energy-industry related loans. The bank has raised $200,000 of its $3 million goal, according to a recent federal filing with the U.S. Securities and Exchange Commission.