2Q Non-Performing Loans Up

As could attest Ryan Yates, president of commercial lending and operations at Pryor-based First Pryority Bank, it’s easier to dig into a challenge if the right team and strategy are on hand.
In its second quarter Uniform Bank Performance Report, UBPR, per the Federal Financial Institutions Examination Council, FFIEC, nearly 16 percent of a $77.8 million loan portfolio is in the past due and nonaccruing loan columns on First Pyority’s books.
The bank, which operates a branch in Tulsa at 10632 S. Memorial Drive, ranks last in Tulsa Business Journal’s listing of Oklahoma-based banks with branches in the Tulsa MSA, numbering 48, ranked according to the percentage of total loans and leases that are past due or non-performing.
“We are trying our damnedest to turn this thing around,” Yates said, noting that most of the bank’s delinquent loans have already been charged off against the loss reserve, income and capital and are “substantially improved.”
Though First Pryority isn’t the only Tulsa-area bank to batten down the hatches – American State Bank and Arkansas Valley State Bank are also seeing large delinquent loan-to-net loans and leases ratios – many are enjoying rates of less than one-half of a percent. American Bank & Trust, 1st Bank of Oklahoma, Osage Federal Bank, Community Bank and Union Bank at Chandler are top performers.
To rejoin the ranks of institutions in good standing, First Pryority, a party to a written agreement with the Federal Reserve and the Oklahoma State Banking Department as of March 30, is working with examiners, consultants and attorneys to help defray the majority of the damage done by what Yates called, “commercial loan customers who knowingly and unethically misled the bank about various lending matters.”
“You can imagine the focus has shifted from being able to do day-to-day business and trying to cultivate the relationships that are profitable for the bank, and even those who are currently customers – it has been hard to be attentive to those needs while we’re dealing with this mess,” Yates said.
During the last 10 months, “we’ve made huge strides in our process and review of doing loans,” he said. “We have completely overhauled the loan policy. We have done a phenomenal job of putting together all of the check points to prevent something like this from ever happening again.”
Yates’s move to First Pryority generated a buzz in the local banking community as he was hailed as a person who could restore the centenarian bank’s history as a profitable institution.
While that buzz helped Yates secure a seat in Tulsa Business Journal’s 2008 40 Under 40 class, Yates has put his plan to put the bank on the road to recovery in motion.
“It isn’t going to be a quick fix. You can’t fix something that was created over a two- or three-year period and fix it overnight. I can’t do that, and Gary [Shamell, First Pryority president] can’t do that. Unfortunately, sometimes time is the best healer of wounds. That’s the case here. It’s going to take time.”
Though First Pryority, which has taken its losses upfront and charged off against its loss reserves, income and equity capital to help minimize the 2007 lag, is an extreme example, most banks with branches in the Tulsa Metropolitan Statistical Area, which includes Tulsa, Creek, Osage, Wagoner, Okmulgee and Rogers counties, are feeling the pinch.
Sixty-two banks doing business in the Tulsa MSA are holding the bag on $15 billion in loans not accruing interest, according to bank-wide figures per second quarter call reports from the banks.
That’s up 165 percent from the $5.68 billion in nonperforming loans for the same period in 2007.
With national money center and regional banks and stripped out, 52 Tulsa- or Oklahoma-based banks, Bank of Oklahoma not included, are seeing $318.5 million in loans not accruing interest for the same period.
The 2Q 2008 nonperforming loans figure for those 52 banks is up 193.5 percent from $108.5 million in bad loans during the same quarter last year.
If loan values 30-89 days past due, 90 days past due and nonaccruals are tallied, Tulsa’s local 48 banks are dealing with nearly $319 million in troubled debt as of June. 30.
While income and equity figures took hits in 2007 and early this year, Tulsa area-based banks have beefed up loan loss provisions 119.8 percent since June 30, 2007, while state banks packed away nearly 10.8 percent, regional banks with 115 percent and national banks with 660 percent.
The noncurrent loans rate nationwide was 9.45 percent for the first quarter of 2008, while the rate for Tulsa’s local banks during the second quarter of 2008 was 2.81, with $179 million in loans not accruing interest as of June 30.
In all, half of Tulsa’s local banks saw an increase in non-performing loan activity, while 11 of the 14 state, local and national banks with Tulsa branches saw increases.
At the end of the first quarter, statewide noncurrent loans and leases compared to total loans stood at 1.33 percent, compared to Tulsa’s local banks at 2.81 percent at June 30, according to the Oklahoma State Banking Department. Statewide loss reserve compared to total noncurrent loans and leases rates stood at 86.68 percent at March 30, while Tulsa banks saw a smaller safety net at 9.61 percent at the close of the second quarter.
Oklahoma Bank Commissioner Mick Thompson, at the post for 16 years, stressed that “Oklahoma banks are strongly capitalized and well-positioned to handle any downturn in the state’s economy, something that is not foreseen in any economic forecasts,” he said in a release.
“The FDIC’s recent conservatorship of IndyMac Bank in California is only one of 8,494 depository institutions operating throughout the country and represents only .2 percent of banking industry assets,” he said. “The overwhelming majority of banks in this country and in Oklahoma are safe and sound.”
“Oklahoma has not experienced a bank failure in 16 years and the industry in Oklahoma is well-capitalized and strong.”
The Oklahoma State Banking Department cannot disclose the safety and soundness condition of any particular institution under its jurisdiction.
While many banks are rallying loan loss provisions, several to the tune of 300-500 percent more than 2Q 2007 levels, some are seeing improved performance out of their loan portfolios.
At the top of the list is American Bank & Trust Co., headed by long-time Tulsa banker Frank X. Henke III, which saw a 98 percent improvement on its nonperforming loans. The bank’s past due and non-accruing loans account for just .2 percent of its net loans and leases.
The bank’s loan underwriting standards emphasize borrower quality – character, profit history, business plan expectations and probability – but “you have to recognize that you can’t be right 100 percent of the time,” said Frazier Henke, vice president/director, commercial lending, American Bank and Trust Co.
The bank shows a total of $120,000 of troubled debt on its books for 2Q 2008.
“Problem loan workouts require a disproportionate amount of time and effort, which is considerably less productive than managing a high quality portfolio, so those numbers are always a concern,” he said.”
“We try to stay on top of those loans,” said W. David Roberts, the 14-year president and CEO of Community Bank, 104 S. Main St. in Bristow, which primarily deals in commercial lending.
Community Bank saw complete alleviation of its loans in nonaccrual during the second quarter year-over-year, and its past-due loans make up .39 percent of its net loans and leases, ranking the bank fourth in the listing of Tulsa area-based banks’ loans performance.
Loan officers at Community Bank are working with delinquent loan customers, “requesting that they develop a plan; we’d rather have something that they can work up. If it’s something that’s workable with the bank also, then we can sit down and develop that together.”
Roberts doesn’t buy into the bank-trouble scare, saying, “we benefit from Tulsa’s economy, and right now Tulsa’s economy is still pretty strong.”
The problems loans on the books at Community Bank are commercial, mainly for what Roberts called “operators, or people in construction-type work.”
“Any time a loan goes past-due, it’s serious. But we feel like they’re all workable at this stage.”
Roberts attributes the growth of the bank when most others are feeling the pinch to a conservative strategy.
“We are conservative, we’ll be the first to admit,” he said. “We try to pay attention to our details, whether that be on expenses or on the income side.”
Community Bank hasn’t suffered the woes of the real estate market.
“Being a conservative lender, we require a 10-15 percent equity position on our real estate.”
Except for one rookie loan officer, the commercial lending department at Community Bank is staffed by veterans of the banking industry with eight years or more of experience.
“There is no question, that contributes to our success,” Roberts said. “They know our customers, and they know our customer base.”
Oklahoma’s banks are tied to every part of the state’s economy, Roberts said, “and we’re like everybody else. We try to read the signs. We get a lot of mixed signals.
“I think you’ll see a bit of a plateau for at least the next six to eight months. I think you’ll see a little bit of a decline in Oklahoma’s economy.”
“I think Tulsa and Oklahoma’s economy continue to be pretty strong. I wouldn’t say robust, but they are strong economies.”
“Conservative” is the name of the game in keeping loans out of those “bad” columns in the uniform bank reports, said Janet Gotwals, president of the Tulsa branch of Union Bank at Chandler, 5623 S. Lewis Ave., which serves mostly small-to-medium-business owners, as well as start-up consumers, real estate, new construction and commercial.
Union Bank ranks fifth in the loan performance listing, with troubled debt at $353,000, non-performing loans improving nearly 66 percent year-over-year, and past due and non-accruing loans rating a low .43 percent of the bank’s loan portfolio.
“We’ve never done 100-percent financing of any kind,” Gotwals said. “You’re not supposed to do that, according to the regulators, but banks do it. We’ve got really good, solid lending practices. We’ve got a great customer base.”
Gotwals said many banks get into trouble when they start throwing around bricks and mortar, trying to grow for growth’s sake.
“That creates pressure on officers to make loans. If they do that, they risk and lower their lending standards. It’s a practice of a bigger bank.”
Many of those banks “don’t spend a lot of time advising their customers. I actually talk people out of borrowing money. It’s not always a good thing for the customer,” Gotwals said.
“A lot of people say, ‘If you’re not making any charge-offs, that means you’re not making enough loans.’ It’s a weird philosophy. You do have to take risks to get a reward, but I just don’t like to take any risk.”
Gotwals owes the bank’s successful loan portfolio to experienced lenders, she said.
Gotwals doesn’t think the current banking environment is any reason for alarm, “but we do need to be cautious, and we need to counsel these consumers and businessmen how to make their businesses better without borrowing everything.”

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