Banks have flocked to northwest Arkansas in recent years because it has been the fastest-growing region of an otherwise slow-growing state.
But in their rush to build assets there and justify branch expansion, banks appear to have been too aggressive in making residential construction loans.
By all accounts, Benton and Washington counties have become overbuilt, and the result is that residential development has come to a virtual standstill and that banks doing business there are struggling to collect on construction loans.
The share of noncurrent loans at some banks that operate in those counties was as much as four and five times the national average at the end of the third quarter, according to Federal Deposit Insurance Corp. data.
Legacy National Bank, a Springdale start-up that opened in 2005 and has four branches in the two counties, had a noncurrent-loans-to-total-loans ratio of 5.58% at Sept. 30, up from 0.02% the year earlier.
Most observers expect weak conditions to persist at least through the end of the second quarter. Few banks have reported fourth-quarter earnings yet, but last week Iberiabank Corp. in Lafayette, La., announced that its nonperforming loans had grown by 72% during the quarter, largely due to the soft real estate market in northwest Arkansas.
Iberiabank, with $4.8 billion of assets, entered Arkansas just last year when it bought two banks there.
Of course, northwest Arkansas is hardly the only region in the country with an excess of newly built homes. In once booming pockets of Florida, Georgia, California, and other states, residential construction has all but ground to a halt as the markets work through the oversupply — and banks are paying the price.
But northwest Arkansas — home to such corporate giants as Wal-Mart Stores Inc., J.B. Hunt Transport Services Inc., and Tyson Foods Inc. — had been viewed as recession-proof, said Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas.
“In 2001, when everyone else was going through a recession, northwest Arkansas barreled ahead,” she said. “In this region there was an overwhelming sense that you couldn’t lose no matter what projects you put up. … There was a sense that demand was growing and would continue to grow at an ever-increasing rate.”
Residential overbuilding started with a shortage of high-end homes, as executives moved to the area looking for houses priced at $350,000 and more, several in the area said. Builders and developers hurried to fill the shortage, and banks hurried to satisfy lending needs.
“You had too many banks wanting to get established and get a foothold in the market, and that made all of us, me included, too aggressive in our lending,” said John Hampton, the chairman and chief executive officer of the $310 million-asset First Western Bank in Booneville. “We had too much competition resulting in too much easy money, and therefore marginal projects were financed that might not have been financed otherwise.”
From July 1, 2004, to June 30, 2007, the number of branches in the region grew by 31%, to almost 200, FDIC data showed.
A bank that was very active in adding branches in the two counties was Bank of the Ozarks in Little Rock, which has added nine in the last three years.
George Gleason, the chairman and CEO of the $2.6 billion-asset company, said asset quality has not been a problem — its ratio of nonperforming loans to total loans at Dec. 31 was 0.35% — but that growth in the region has been harder to come by than expected.
“We’ve simply not seen as many good, new business opportunities as we would have had if the strong growth continued,” Mr. Gleason said this week.
The Skyline Report, sponsored by the university Center for Business and Economic Research and Arvest Bank in Fayetteville, monitors regional market conditions. Its most recent report, using third-quarter data, shows Washington County had a 50-month supply of houses and Benton County had roughly a 40-month supply. A market is considered to be in equilibrium with a 24- to 26-month supply, said Ms. Deck.
“In northwestern Arkansas we have seen a residential real estate construction that is disproportionate to our fantastic job growth,” Ms. Deck said. “The metro area is still doing well, but the housing and growth in new subdivisions outpaced that … it is almost entirely a supply-driven issue.”
The U.S. Census shows population in Benton County grew almost 30%, to 196,000, from 2000 to 2006. Washington County’s population rose 18%, to 186,000, during the period.
Regional growth is expected to remain strong, and a declining number of building permits issued — off roughly 50% since 2005, to 852 permits in Washington County and 1,381 in Benton County last year — is helping the area work through the housing oversupply, said Jeff Collins, an economist and partner in Streetsmart Data Services in Johnson, Ark.
Candace Franks, the Arkansas banking commissioner, said the increase in problem loans is a market correction, not a crisis.
“It has been something that we watched for a while because there has been such a growth in the residential market up there,” she said, referring to northwest Arkansas. “It is definitely a work-through situation because, particularly in northwestern Arkansas, the economy is still very good.”
Iberiabank inherited its problem loans when it bought Pulaski Bank and Trust Co. in Little Rock early last year. (It also bought Pocahontas Bancorp Inc. in Jonesboro last year and merged the two under the Pulaski name.)
“Pulaski had quit lending to this area about a year and a half prior to the acquisition,” said Daryl Byrd, Iberiabank’s president and CEO. “They had stopped before we acquired them, but inventory levels became worse than they expected and we expected.”
Iberiabank has yet to report fourth-quarter earnings, but in a preannouncement on Jan. 8, it said that it expects to take a $3.6 million loss provision for the quarter, due mostly to the Arkansas acquisitions.
Since the Jan. 8 announcement, Iberiabank’s shares are down nearly 9%, to $41 late Thursday.
Several banks in the region reported noncurrent loans above the 1.08% national average.
At First Western, noncurrent loans in the third quarter increased to 4.74% of total loans, up from 0.78% the year earlier. Still, Mr. Hampton, the CEO, said he does not expect large losses because property prices remain largely unchanged.
“Of the foreclosures we have taken back, we have sold 80% and, as a group, have not lost money on what was sold,” he said. “While there will be foreclosures, we look for total losses to be less than 5% of the loans we take back.”
Mr. Hampton added that the rest of the region’s economy appears to be doing well.
“It will take a while before residential loan demand comes back, but on the other side we see commercial growth continue to be nice, steady, and strong,” he said.
