3Q Delinquent Loans up 39.8 Percent at 22 Banks

A recent scan of classified ads is telling of the credit woes many bankers are feeling as 2007 draws to an end.

ANB Financial NA of Bentonville had placed ads seeking a credit administrator, an internal auditor, a senior commercial credit officer and a special assets work out loan manager. Presumably, all positions are related to dealing with its past due and nonaccrual loans valued at $145.3 million – 8.19 percent of its portfolio – as of Sept. 30. That total was up 41.8 percent from $102.4 million in problem loans as of March 31.

“It is what it is and it’s just a matter of working through it,” said Dan Dykema, chairman of ANB Bancshares Inc. “The faster the [real estate] oversupply is taken care of, the better we’ll do.”

ANB is an extreme example, but most Northwest Arkansas lenders are feeling the pinch.

Twenty-two banks doing business in Benton and Washington counties had a combined $265.2 million worth of loans on their books that were not accruing interest as of Sept. 30, up 34 percent from $198 million at the end of the second quarter and up 39.8 percent from the first quarter. Fortunately for 21 banks, and unfortunately for Dykema, more than half of that rests on ANB’s books.

According to uniform bank performance reports filed with the Federal Financial Institutions Examination Council, the collective value of loans in those banks’ nonperforming columns are up 125.5 percent from $117.6 million for the same period in 2006.

If all three “problem” columns – loan values in 30-89 days past due, 90 days past due and nonaccruals – are tallied, those 22 banks are dealing with $519.7 million in troubled debt as of Sept. 30. That’s up from $368.4 million in the first quarter, or about a 40 percent increase this year.

In all, most Northwest Arkansas banks saw an increase in delinquent loans and foreclosure activity.

Dykema said the bank can only foreclose on and sell property so fast, and the oversupply has added to ANB’s other real estate owned line.

And when a bank is hit with a lawsuit countering its foreclosure, such as ANB was (to the tune of $20 million) on Oct. 17, “it just adds that much more time to the process,” he said.

Concern, Not Crisis

Candace Franks, Arkansas State Bank Department commissioner, said despite the ballooning nonaccrual and past due numbers, there is not a crisis in the state.

“Yes, the numbers have [risen] and yes, the we do have concerns,” she said. “We don’t have any kind of crisis concerns – they’re ‘work through’ concerns.”

The ASBD has three different types of orders, none of which are public documents, so Franks couldn’t divulge which banks have received reprimands.

But she said, statewide there were two banks on the ASBD’s “problem list” in the spring. Now there are 10. Of those 10, Frank emphasized, none are in a critical situation.

When pressed about what would classify as “critical,” Franks said all the banks on the list are taking corrective action on their respective challenges and that keeps them from being in peril by ASBD standards.  

Franks said a ratio of 3 percent or greater in total past dues and nonaccurals is a red flag.

Fifty percent of the banks included on the chart below meet that criteria and two others are close to 3 percent.

Luther Guinn, chief examiner with the ASBD, said anything above 1 percent in the nonaccural column is also a red flag. Fourteen banks fall into that category.

Nationally, the FDIC reported on Nov. 28 that loans 90 days past due or in nonaccrual status were up by 23.8 percent to a total of $83 billion, the highest since 1992.

Patrick Edwards is a partner in The Toltec Financial Group, a risk management and loan portfolio consulting firm with offices in Little Rock and Memphis. Edwards has also been a bank regulator and a banker and witnessed first hand the savings and loan bailout in the mid- to late-1980s.

“I would say that I don’t view what’s going on in Northwest Arkansas as anything comparable to the S&L crisis,” he said.

Jim Huntzinger is an executive vice president and chief investment office for BOK Financial Corp. in Tulsa. The publicly traded holding company operates Bank of Arkansas NA, Bank of Oklahoma NA and banks in Fort Worth and Phoenix, a market that has experienced severe busts.

He also was a banker through the S&L scandal and, like Edwards, thinks the current climate is far from a repeat. But, Huntzinger said, some banks won’t be able to ride out the correction. 

Ross Waldrop, senior banking analyst in the division of insurance and research at the FDIC, said in all, Arkansas banks are on par with the rest of the country.

He only saw two indicators that were significantly different: charge-offs, which were about half of the national average, and an increase in noncurrent real estate loans (3.11 percent in Arkansas versus 1.85 percent nationally).

The FDIC’s “problem list” of banks is up to 65 nationwide, but that’s out of more than 8,600 banks, he said.

“There don’t seem to be any indicators of a wave of failures,” Waldrop said.

Troubled Times

Of the 22 banks included in the chart, many have significant business outside of Benton and Washington counties.

For the last two quarters, Little Rock-based Bank of the Ozarks and Metropolitan National Bank and Searcy-based First Security Bank have declined to calculate how much of their problem loans are in Benton and Washington counties compared to their other markets.

A spokesman for Fayetteville-chartered Arvest Bank – which has significant business in Fort Smith, central Arkansas and Oklahoma – has only said that the bank’s nonaccruals in the two-county area are proportionate to nonaccruals in its other markets.

Chambers Bank of North Arkansas has 6.16 percent of its loan portfolio in past due or nonaccrual status.

The bank is owned Chambers Bancshares Inc. of Danville, which also operates Chambers Bank chartered in that town.

The Danville bank had $16.7 million in loans in its 30-89 past due column at the end of the third quarter, and 7.25 percent of its total portfolio was in past dues or nonaccurals.

John Ed Chambers, chairman and CEO of Chambers Bancshares, said some of Danville’s past dues are from loans made in Benton and Washington counties and from participations with other banks.

“We’re a $500 million bank parked in a 2,000 population town, so we’ve got to get out and do some things,” he said.

“We’re victims of the real estate market [in Northwest Arkansas] … We still have a very good bank and are working with folks to work out of a tough situation,” he said, referring to both banks. 

Scott Franklin, the newly appointed president of Pinnacle Bank of Rogers, said his bank is working with its delinquent customers too. The bank has $8.7 million in nonaccruls and $1.1 million in OREO.

“We don’t have many houses – we’re optimistic … You’ve got to sit on them for a while and wait for the market to normalize,” Franklin said.

Jerry Sadler, CEO of Parkway Bank in Rogers, said most his bank’s problem loans can be pinned on home loans, but only about half of those were speculative homes. 

“We feel like we’re reaching the bottom,” Sadler said. “We’ve had close to 80 percent of our loans reviewed by outside regulators and independent outside auditors.

“If we feel like we’ve got a loss, we’re allocating reserves and trying to work it out.”

Springdale-based Legacy National Bank’s total nonaccruals and past dues were 9.14 percent of the bank’s loan portfolio, with about $19 million in value.

The bank had no loans in its 30-89 past due column.

Don Gibson, CEO of Legacy, said his bank’s nonaccruals are mostly attributable to the downturn in the real estate market.

“We are making a profit – and that’s about four times what it was last year – and we’ve been aggressively funding our reserves,” he said.

It will just take time for the market correction to level off on the balance sheets, he said.