LITTLE ROCK The number of nonperforming loans - those more than 90 days past due - is shrinking at banks in Arkansas’ metropolitan areas, according to fourth-quarter financial data from the Federal Reserve Bank of St. Louis.
The drop is a good sign for the banks, said Michael Pakko, chief economist at the Institute for Economic Advancement at the University of Arkansas at Little Rock.
“Regardless of how the [loans] were resolved, whether they were written off or put back into performing status, this is a sign of strength for the banks,” said Pakko, who was an economist at the St. Louis Fed before joining UALR’s faculty. “It means they’ve come to terms with the situation. The fact that [bad loans] are going down is a sign that the market is improving.”
Of the 44 banks based in Arkansas’ seven metro areas - Little Rock, Northwest Arkansas, Fort Smith, Hot Springs, Jonesboro, Pine Bluff and Texarkana - nonperforming loans as a percentage of total loans have fallen at 25 banks since 2009, the year the national recession ended.
Of the banks that have seen an increase in nonperforming loans over this period, at four of them - Bank of the Ozarks in Little Rock, Centennial Bank in Conway, Arvest Bank in Fayetteville and Simmons First National Bank in Pine Bluff - it was primarily because they took advantage of the Federal Deposit Insurance Corp.’s sales of failed banks.
But nonperforming loans are not as critical at those four banks because the FDIC agreed to protect those banks from 80 percent of the losses they may incur from acquired loans.
“The FDIC indemnifies the losses, but nonperforming loans are still counted on the books in these [government] reports,” Pakko said. “But the banks’ own financial statements show much lower nonperforming loan ratios because they don’t include the indemnified losses.”
Subprime lending, the declining real estate market and the failure of large investment firms led to the recession from December 2007 to June 2009, which contributed to the failure of more than 250 banks in the country since Jan. 1, 2010.
When a bank writes down a bad loan, the loan is reduced to the fair market value of the property or project, said Gary Corner, a senior examiner at the St. Louis Fed.
“And if the bank can sell [the property] at a reduced value in the market, then presumably the project at the lower value can perform,”Corner said. “And that gives the bank more dollars to invest back into its local market.”
Banks across the country are seeing a trend of modest reduction in the level of nonperforming loans, said Julie Stackhouse, a senior vice president with the St. Louis Fed.
“What we don’t know is to what extent that level is due to collections, which would be the preferred way, or to what extent it is due to charge-offs, which is writing down loans, or to other sales,” Stackhouse said.
Arkansas has had issues in banking, but “nowhere near what has happened in other parts of the country,” Stackhouse said.
The economy - and specifically the real estate market - in Northwest Arkansas has been a major cause of nonperforming loans for banks throughout the state. Banks in northeast Arkansas, central Arkansas and southern Arkansas have made loans in Northwest Arkansas that have gone sour.
But the economy in Benton and Washington counties is slowly improving, Stackhouse said.
“You’ve got a decent economy in Northwest Arkansas,” Stackhouse said. “And a decent economy is always going to be helpful in terms of ultimately moving real estate.”
The challenge is that the housing industry is still very soft, Stackhouse said.
“And so the pace at which we will see progress in that real estate is still very uncertain,” she said.
Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas at Fayetteville, said there is still a huge amount of vacancies in commercial real estate in Northwest Arkansas.
“There is so much space that even if there are improvements in the unemployment rate, it’s still going to take a long time to get levels down to what we saw before the boom ended,” Deck said.
Deck agrees that the Northwest Arkansas economy is improving gradually.
“But there isn’t a silver bullet that will solve the problem,” Deck said.