Bankers Stand Steadfast

It’s not yet clear if there will be a banking backlash from an oversupply of developed real estate in Northwest Arkansas. With flat interest rates, a glut of projects, increased competition for business and at least one builder bailing on creditors, a few lenders have a case of the jitters.
And one newcomer, Parkway Bank in Rogers, has recently switched gears by rearranging its top-tier executives after a bad year.
But for most area bankers, fear is assuaged by an unflappable faith in the economy and the people doing business in the market.
A January survey of credit managers nationwide by the Federal Reserve Board said that demand for both commercial and residential loans was weaker in the fourth quarter of 2006. About 25 percent said they were tightening lending standards on commercial real estate, but only 15 percent said they were putting a shorter leash on residential lending.
Several market bankers polled basically echoed their national peers.
“The market is as good as it’s ever been in terms of growth, stability and economic vitality,” said Dan Dykema, chairman of ANB Financial NA of Bentonville. “The press has sort of grabbed onto this real estate bust, but there’s not really a bust. It needs absorption. The market’s not bad.”
In terms of risky loans, it may still be a year or so to tell who’ll bear the brunt of competitive lending. A look at the balance sheets of many of the area’s top lenders and of the startup banks reveals no major red flags in terms of charge-offs, though some are being nipped in the rear by the Betty’s Homes Inc. Chapter 11 filing last fall.
But that’s a relative drop in the bucket compared the potential in problems assets, many said.

Residential Reality
According to RealtyTrac Inc. of Irvine, Calif., residential foreclosures in Benton and Washington counties for 2006 were worse than the statewide trend.
In 2006, there were a total of 1,473 foreclosures in the two-county market, up almost 6 percent from the year prior, against the state’s 2 percent decrease for the same period. Benton County alone had a 14 percent spike year-over-year.
The combined counties made up 13 percent of the statewide foreclosures in 2006.
Residential foreclosures were up almost 30 percent nationwide, so the market isn’t out of whack. But in the two-county market, there have already been 502 foreclosures in the first quarter, about a third of 2006’s total, so 2007 isn’t trending well on the residential front.
“We’re not sitting on anything. Our real estate is about where it was a couple of years ago,” Dykema said.
Mary Beth Brooks, president and CEO of The Bank of Fayetteville, said her bank hasn’t taken any houses back either, but she knows of two that the bank will probably have to deal with in the near future.
“Is there a panic? Right now some people are panicking, but we’re not,” Brooks said. “We are concerned…keeping an eye on it.”
The bank had already tightened its belt a little in 2006, easing off construction loans by about 19 percent.
“We’ve got a real healthy bank right now,” said Bob King, executive vice president of loans at BOF.
The bank’s past due and nonaccrual assets are beating the national trend by about 1.5 percent, he said. BOF’s $288 million loan portfolio is about 60 percent commercial and about 40 percent residential, he said.
“You listen to your long-term winning customers, if they say ‘you need to pull back,’ then that’s what I’ll recommend we do,” King said.
Gary Head, chairman of Signature Bank of Arkansas, said he has five houses in the Betty’s Homes ordeal, but they were all finished out and he will eventually get them back with a chance to recoup losses.
“We’re a reflection of our clients — hopefully we can be patient with all our customers,” Head said. “I’ll remind you that the longer I loan you money, the more I make.”
Signature has only had $21,000 in charge-offs since it opened its doors in May 2005, Head said.
Aaron Nickell, owner of Aaron Nickell Homes Inc. of Lowell specializes in building spec homes in the $120,000 to $150,000 range and has about 134 units in his inventory.
Nickell won’t say things are great for his firm — he had 55 employees a year ago and has nine now, and he’s diversified into commercial construction — but he’s holding his own.
Home sales picked up quite a bit last summer (to about 15 units per month) and he expects the same this summer, he said.
He’s not asking any lender for money right now, Nickell said.

Parkway Plotz
Jerry Sadler, CEO of Parkway Bank, said the mid-March management shakeup at his bank was indicative of the need to change its business plan. Parkway needed to “cut our overhead and change our strategies,” he said.
At least four top-tier executives who helped start the bank’s Northwest Arkansas division — including market president Jerry Carmichael, Barbara Davidson and Bruce Branch — are no longer at the bank.
One, Gary Kleck, has since landed at startup Legacy National Bank in Springdale, where he will be a lender.
Sadler wouldn’t share specifics, but likened the old approach to a rifle and the new to a shotgun.
The bank showed net income of negative $789,000 as of Dec. 31, a loss from 2005’s positive $109,000. The bank’s return on assets dropped to a negative 0.52 percent after enjoying a positive 0.17 percent ROA in 2005.
Its 2006 charge-offs were $214,000.
Sadler admits a new-to-the-market bank that’s building business and offices should expect some losses up front, but he’s been working in the market for three full years, he said.
As for rumors of a sellout, Sadler said, the owners had been approached and said “no.”
“We are full-steam ahead,” he said.
But plans to build two more branches around Rogers have been put on hold for the time being.

Consensus
The general consensus among many bankers is that a bank or two will get gobbled up somewhere along the line, though which is anyone’s guess.
No one really thinks a failure is forthcoming.
One banker, who didn’t want to be identified, said, “there were plenty of branches in Northwest Arkansas five years ago.”
And the competition keeps getting tougher.
“I would bet you that everyone’s problem assets are higher than they were two years ago,” Dykema said.
Head, whose bank has a 1.25 percent loan loss allowance said, “When we get caught up on loan loss reserves, we ought to be doing as good as some of these other cats.”
“We came here for the long game and we feel like we’re in the middle of it,” he said.