Economic woes impact area banks

This is the toughest operating climate I have witnessed in 28 years in banking.... - Gary Head

— Editor’s Note: Northwest Arkansas Newspapers looked at 18 local community banks and analyzed their 2009 financial results, from the smallest to the largest bank doing a majority of their business in Benton and Washington counties.

First Federal, Priority Bank and United Bank, while local, are not included in the report because they have slightly different reporting requirements asformer savings and loans.

Community banks across Northwest Arkansas continue to swallow hefty real estate losses, pushing bottom-line profitdown 63 percent last year.

Among 18 banks doing business in Benton and Washington counties, the combined net income for 2009 was a paltry $64 million, compared with $176 million earned in 2008, according to reports recently filed with the Federal Deposit Insurance Corp.

The economy is only partly to blame for the losses and most bankers admit exuberant lending in profitable times is also a major culprit.

While the loans were made, the land purchased and construction either completed or halted, these local banks still awaited payment for more than $558 million at the end of 2009.

These nonaccrual loans increased 129 percent from 2008, prompting the banks to set aside $343.5 millionin loan loss reserves, money that did not flow through to earnings last year.

“If we added the provisions for loan losses to the 2009 earnings, the banks would have had a banner year. But until they write down, sell off or collect payment on delinquent real estate loans, their profits will suffer,” said Tim Yeager, Arkansas Bankers Chair at the University of Arkansas.

The loss provisions act as a buffer against future loss of capital should the banks not be able to collect on the outstanding debt.

“In 2009, banks had no choice but to ramp up loss reserves, given the broad weakness in the economy,” Yeager said.“Regulators want to see banks cut their losses and move on. That doesn’t mean the profits will return right away. The first sign of healing will be two quarters or so of banks reporting fewer nonaccruals and shrinking bank-owned assets.”

At the end of 2009, the banks held a combined $296 million in real estate assets that they took back from delinquent borrowers. This compared to $137 million in other real estate owned the prior year.

Taking the real estate back doesn’t come cheap. The 18 banks together spent more than $16.8 million in legal fees last year, according to disclosures made in their reports.

Yeager said the banks are managing through their real estate problems but still need an improved economy, job losses curtailedand consumer confidence restored before they can say this crisis has truly passed.

Six Winning Hands

A few bright spots shone in the overall dismal banking climate in 2009.

First Security Bank, Signature Bank, Bank of Arkansas, Liberty Bank, Bank of the Ozarks and Chambers Bank each reported higher year-over-year profits, despite the challenging economy.

Signature Bank led the group with the largest turnaround in profits. The bank posted net income of $1.06 million, up 240 percent from the $311,000 made in 2008.

Signature President Gary Head deemed 2009 as a small blessing for which he is grateful but was careful to say none of the banks in this region are ready to celebrate just yet.

“It’s no fun to watch your friends and customers struggle. This is the toughest operating climate I have witnessed in 28 years in banking,” he said. “We have budgeted for a similar 2010 market.”

It’s not so much that banks don’t want to lend money, Head says, there just aren’t that many consumers willing to take on more risks, which is keeping loan demand at a minimum.

Harold Crye, owner of Memphis, Tenn.-based Crye Leike Real Estate firm, said he recently secured a construction loan to build the company’s new Bentonville office, thanks to Signature Bank.

“I haven’t yet been able to get construction financing for our Siloam Springs facility. It’s incredibly tough to get a construction loan in this market to build commercial real estate,” Crye said.

Yeager said that isn’t likely to change because many community banks, still recovering from residential market blows, have now been hit with commercial real estate concerns from rising vacancies.

He expects the commercial market to bottom some time later this year while the residential market slowly improves.

Four Standing Pat

Four of the local banks surveyed made money in 2009, albeit less than their 2008 profits. Arvest, Simmons First National, Decatur State Bank and First State Bank of Northwest Arkansas each held their own amid rising loan delinquencies.

These four banks range in size from $10.6 billion in assets at Arvest, the region’ largest, down to the smallest First State Bank of Northwest Arkansas, with $73.5 million.

“Profits are not a reflection of size, but good management and a bank’s exposure to the troubled real estate market, said John Dominick, banking professor at the University of Arkansas.

He said none of the local banks are immune to troubled real estate loans made during profitable times of expansion, which is an important function of community banks.

David Short, president of Arvest Bank in Bentonville, said its customers are struggling in this weaker economy and the bank has to account for a higher degree of risk.

“We aggressively identify problem loans and waste no time in writing down their values. We have putloans on nonaccrual status if we think there is an outside chance the loan won’t pay back,” Short said in November.

Arvest Bank noted a $12.56 million write down in the value of the real estate it took back in 2009 as appraisal values plunged

Dominick said Arvest and Simmons First National also benefit from having diversified loan portfolios outside the immediate region.

First State and Decatur State have higher loan percentages tied directly to Northwest Arkansas, one of state’s hardest hit areas with respect to plunging real estate values.

Eight Losing Ground

Eight of the banks surveyed posted a combined loss in 2009 of $103 million, of which $80.16 million is attributed to Metropolitan National Bank.

The losses cost the banks $77.5 million in equity capital, which is the lifeblood of a bank’s operation.

Dominick said when losses eat into capital the banks become more vulnerable and are apt to draw regulator attention.

At least three of these banks have been under some type of formal regulatory order since 2008. Metropolitan, Legacy National Bank and Parkway Bank each came under federal regulatory orders following the failure of Rogers-based ANB Financial.

The Arkansas State Bank Department does not make its enforcement orders public for state regulated banks, but said the number of banks under informal or formal orders jumped from 8 to 15 from June 2008 to the end of 2009.

Metropolitan and Pinnacle Bank each suffered the steepest erosion of capital following last year’s losses.

Analysts estimate Metropolitan is $40 million short of the capital it needs to be in compliance with its order. The bank has said it is working to restore compliance, but offered no details.

Pinnacle Bank had $10.84 million in equity capital at the end 2009, which is almost as much as the $8.68 million the bank had tied up in real estate it owned.

The Bank of Fayetteville and Pinnacle Bank were among the profitable ranks just one year ago, but hefty loss provisions, charge-offs and growing delinquencies wiped out earnings and eroded capital.

Yeager said the majority of local banks have enough capital to withstand the crisis.

Legacy, in Springdale, remains well-capitalized in spite of heavy losses in back-to-back years. President Don Gibson attributed the bank’s $4.4 million loss in 2009 to lower appraisals on $16.6 million in collateral property at risk of default and $8.24 million of real estate owned by the bank.

The lackluster results have not hindered the bank’s plans to continue investing in the region with the building of a permanent branch in East Springdale on the corner of Robinson Avenue and Butterfield Coach Road.

Gibson is optimistic about the longer term perspective for Springdale and the rest of Northwest Arkansas.

“It’s going to take more time to digest the real estate losses, but we are continuing to build for the future,” Gibson said.

Area, Pages 6 on 02/24/2010