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Arkansas banks see sour loans drop 21%

By David Smith

This article was published December 23, 2012 at 2:37 a.m.

— Over the past five quarters, Arkansas banks have reduced their nonperforming loans by 21 percent, a drop that pleases federal regulators.

A nonperforming loan is one for which 90 days or more have passed without a bank collecting a payment.

Arkansas’ 126 banks had about $1.4 billion in nonperforming loans in the second quarter last year, the most recent peak, and reported about $1.1 billion as of Sept. 30, according to statistics supplied by the Federal Reserve Bank of St. Louis.

The latest figure is an average of more than $8.7 million in bad loans per Arkansas bank.

“What I like is that the level of nonperforming loans is moving in the right direction,” said Julie Stackhouse, senior vice president with the St. Louis bank. “It’s reducing. We still have a fair bit of other real estate that needs to be liquidated. But in short, we’re not seeing many new problem loans come onto the books.”

There are a few reasons why nonperforming loans are declining, Stackhouse said.

The tightening of lending standards is one reason poor loans are not as common.

“It’s just not as easy to get a loan today,” Stackhouse said. “And many people would say, ‘Thank goodness for that.’ It was way too easy before.”

Another reason is that there is a hesitancy for well-established businesses to borrow now, she said.

“There is uncertainty about the strength of the economy going into 2013,” she said. “Also health care [costs] come up as an area of concern.”

The drop in bad loans is one of several areas of improvement for Arkansas banks, said Tim Yeager, associate professor of finance at the University of Arkansas at Fayetteville.

Net income is up at Arkansas banks, with the 126 institutions earning a total of $502 million through September, the highest nine-month profit in more than 10 years.

A large source of noninter- est income at Arkansas banks is deposit charges, Yeager said. That’s because deposits are at significantly high levels because customers want to keep their money safe in this economic environment, he said. Deposits are insured by the government for up to $250,000 for each account.

And banks have been able to sell mortgages at a higher profit than they have in recent years, Yeager said.

There are at least two major challenges facing Arkansas banks, Stackhouse said.

One is adjusting to the myriad new regulations facing banks.

“It’s just hard to integrate new regulations, whether it is capital changes or anything that the Consumer Financial Protection Bureau may issue next year, and we do expect new regulations from them,” Stackhouse said.

The second major challenge, Stackhouse said, is the low interest rate environment that banks are facing. The Federal Reserve stated Wednesday that it intends to keep interest rates very low until the U.S. unemployment rate drops below 6.5 percent — unless inflation rises significantly. The unemployment rate for November was 7.7 percent.

“It is very challenging for banks to continue to operate at historic profitability levels in this low-rate environment,” she said. “That’s going to continue into next year.”

The number of problem banks in the country, according to the Federal Deposit Insurance Corp., has dropped from 772 to 732 in the past five quarters. The FDIC does not identify the banks it considers to be problem institutions.

That is the lowest number of such banks in the country since 2009, when the recession ended.

In Arkansas, only three banks have a “Texas ratio” above 100 percent, considered a measure to determine the most troubled banks in the country. The Texas ratio indicates how a bank’s capital is affected by nonperforming loans and other nonearning assets.

According to the Federal Reserve, those three banks are Decatur State Bank, with a ratio of 295.61 percent; Metropolitan National Bank of Little Rock, with a ratio of 168.99 percent; and Pinnacle Bank of Rogers, with a ratio of 162.26 percent.

Decatur State Bank’s parent company was sold to Chambers Bancshares of Danville in recent weeks, John Chambers, the firm’s chief executive officer, said this month.

About 10 percent of the 7,180 banks in the country are considered to be problem banks.

Overall, the banks in Arkansas have fared well over the past two years, said Garland Binns, a Little Rock banking lawyer.

“Banks in Arkansas over the last two years have shown consistent improvement, even though there are those banks that are having problems,” Binns said.

Business, Pages 67 on 12/23/2012

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