Community Banks Still Have a Long Way To Go with OREO

OREO (other real estate owned) levels have declined among community banks since the third quarter of 2011, but the current levels are still higher than they were before the start of the financial crisis in 2007.

That trend is included in the latest issue of Central Banker, a quarterly overview of policies, initiatives and news affecting financial institutions in the U.S. Federal Reserve Bank’s Eighth District, which includes all of Arkansas and parts of six other states.

According to the report, as of the third quarter of 2012, community banks in the Eighth District had 1.06 percent of their assets in OREO.

Nationwide, community banks had only 0.85 percent of their assets in OREO, classified as property held by banks as the result of a foreclosure or a deed in lieu of foreclosure. Many of these holdings are construction or land development properties

Many banks are still trying to reduce those elevated OREO levels, but it is a challenging process given the conditions of the real estate market.

Ross Mallioux, the market president for Benton and Washington counties for Little Rock-based Bank of the Ozarks, said the OREO levels in the Northwest Arkansas market are beginning to improve in single-family properties, followed by income-producing commercial properties.

“Favorable mortgage rates have helped banks liquidate homes,” he said. “And investors are looking for good income-producing properties, too. There’re favorable commercial rates and plenty of money available for those projects.”

The local conditions and challenges are not necessarily relevant, however, for BOZ, which had just 0.34 percent of its assets in OREO as of Dec. 31.

The report also suggests the cost of maintaining and disposing of OREO can cause a bank’s performance to drag significantly.

For example, vacant subdivisions still must be maintained, and the various city governments in Northwest Arkansas stay on subdivision owners to keep them mowed.

That, along with the real estate taxes and other expenses, can be expensive — and ongoing.

One local banker added that it boils down to a business decision for the bank — the cost to hold OREO versus the loss to discount and liquidate the property.

Nationally, community banks incurred $1.38 billion in annualized OREO expenses, effectively cutting six basis points from their ROA.

In the Eighth District it was slightly worse, with banks losing $35 million on OREO, trimming seven basis points off their ROA.

That kind of impact illustrates, the report concludes, how important it is for banks to effectively market OREO holdings to prospective investors.