Loan delinquencies remain problems for Pinnacle Bank, Allied Bank

Despite a healthy banking climate across the nation and in Arkansas, recovery for some institutions has been slower than others. Pinnacle Bank of Rogers and Allied Bank of Mulberry remain saddled with too many unperforming loans.

Pinnacle has assets of $88.184 million and earned net profits of just $140,000 in the first half of this year. The bank’s profits tumbled 47% from the $264,000 it had earned in the same period of 2014. In the second quarter period, Pinnacle Bank earned net profits of $68,000, compared to $182,000 earned in the same quarter last year.

Allied Bank with assets of $105 million posted a $266,000 loss through the first half of this year, following a $30,000 profit booked in the first quarter. This compared to $460,000 that Allied Bank lost in the first half of 2014. 

Part of the reason the banks are struggling to grow profits is linked to their delinquent loan portfolios.

A metric that measures financial soundness among banks is the “Texas ratio,” which takes the amount of a bank's non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the firm's tangible capital equity plus its loan loss reserve. A ratio of more than 100% or (1:1) is considered a warning sign, according to Investopedia.

Pinnacle Bank’s Texas ratio as of June 30 was 151.47%. Allied Bank had the second highest Texas Ratio among state banks at 147.72%. Peer banks had Texas ratios ranging between 3% and 7%.

This comes at a time when the overall banking sector is performing well. The Federal Deposit Insurance Corp. reported Wednesday (Sept. 2) that commercial and savings banks across the U.S. earned aggregate net income of $43 billion in the second quarter, rising 7.3% from a year ago. Much of the gains resulted from better quality loan portfolios which has meant banks can direct more money to the bottom line instead of into a loan loss reserve.

"Bankers generally reported another quarter of higher earnings, improved asset quality, and increased lending," FDIC Chairman Martin Gruenberg said in the release. "There were fewer problem banks, and only one bank failed during the second quarter.”

The asset quality among community banks across the nation improved for 21 consecutive quarters, according to the FDIC report. The report also said there are still 228 banks on the FDIC Problem List, down from 253 banks to start the year and a peak number of 888 problem banks in the first quarter of 2011.
Banks on the “problem” list tend to shrink assets given that they are not making as many new loans and are unable collect on the ones they have. Total assets of problem banks fell from $60.3 billion to $56.5 billion during the second quarter, according to the FDIC.

Allied Bank reported $3.635 million in loans delinquent more than 90 days. The bank also had $2.706 million in loans that were between 30 days and 89 days delinquent as of June 30. The bank has set aside $2.228 million in loss reserves. The bank also reported $11.159 million in real estate loans that it has already foreclosed on and taken back on its books.

A year ago Allied Bank had non-accrual loans of $3.603 million with $720,000 in loans that were past due less than 89 days. The real estate on its books totaled $9.960 million as of June 30, 2014. 

In Rogers, Pinnacle Bank made progress collecting on its seriously delinquent loans. The bank had $432,000 in non-accrual loans as of June 30. There were another $771,000 in loans past due between 30 – 89 days. The bank has $2.137 million in seriously past due loans in the first quarter of this year. Pinnacle also has $15.692 million in other real estate on its books. This is down $20 million reported a year ago.

Allied Bank’s parent, Mulberry, Ark.,-based Acme Holding Company, is in Chapter 7 bankruptcy and the court appointed trustee is seeking a buyer. If a buyer can’t be found, the trustee will hold an auction and the bank will go to the highest bidder.

John Dominick, banking professor at the University of Arkansas, said Allied Bank has faced several unfortunate situations dating back to a fraud case around 2011. He said real estate loans had also been problematic for the Mulberry Bank, some of which were located in Northwest Arkansas. (Dominick has advised Allied Bank as a consultant prior to the holding company’s bankruptcy filing.)

He said Pinnacle Bank in Rogers also had its share of real estate woes just like nearly every bank with a large amount of loans made during the real estate boom.

“Property values are coming up again, the real estate market and the Northwest Arkansas economy is stronger today, but it can take banks a few years to write down and provide for loan losses made several years ago,” Dominick said.

He expects to see more bank consolidations involving small institutions in the coming months. Dominick said small banks that continue to shrink their assets like Pinnacle and Allied also face other challenges.

“When the good loans in their portfolios pay off, these shrinking banks will see their credit quality continue to decline. It’s a double whammy because bank income can be restricted and provisions to loan losses will likely rise at the same time,” he added.