Page 8
The Banker’s Advocate
State Bank Department
Hot
RATIO
Topic
Continued from Page 3
Continued from Page 1
noncurrent loans within
credit portfolios through- Arkansas commercial
out the state. banks recorded an aggre-
According to aggregated gate return on assets of
data for all commercial 0.75 percent through
banks with main offices in March 31. This repre-
Arkansas, the ratio of sents a decrease of 8 basis
ALLL to Noncurrent points compared with
Source: FDIC Statistics on Depository Institutions
Loans decreased from ROA for 2008. out for call report pur-
The bite of the continu-
0.93:1 at year-end 2008 to Furthermore, the March poses. Consequently, it is
ing recession is leaving
0.78:1 on March 31, 2009. 31 ratio includes realized impossible to identify spe-
marks even in Arkansas –
In addition, at year end gains on securities of $9.2 cific items driving fluctua-
where the effects have
2008, 60 of the 137 com- million. This represents tions in this line item.
been moderate relative to
mercial banks based in the 9.60 percent of net in- However, one has to
most of the country – as
state had ALLL-to- come. only look at the aggre-
more borrowers had trou-
Noncurrent Loan ratios of Earnings in the first gated balance sheet of
ble servicing their debt in
less than 1:1. As of quarter were pressured by Arkansas commercial
the first quarter. The non-
March 31, 2009, 61 of 135 a continued compression banks to make an edu-
current loan ratio in Ar-
commercial banks had of net interest margin, and cated guess.
kansas commercial banks
ratios below 1:1. increasing levels of loan- The aggregate balance
increased from 1.66 per-
This may give some loss provisions and over- of Other Real Estate
cent to 2.12 percent dur-
indication of an equity head expense. Owned (OREO) in-
ing the period.
adjustment – through Regarding the latter, the creased by $54.9 million,
“Back to the basics”“Back to the basics
more provisions expense aggregate Efficiency Ratio or 20.78 percent, in the “Risk management” is a
and lower net interest in- of commercial banks first quarter. basic concept but an ex-
come – if market condi- based in Arkansas jumped These assets are the tremely difficult task. For
tions do not improve or from 64.39 percent at source of continuing ex- community bankers, the
perhaps worsen in some year-end 2008 to 68.18 penses, including depre- task requires management
areas of the state. percent just three months ciation in the holding pe- of both sides of the bal-
Separately, in the Bank later. riod following foreclosure ance sheet.
Department study, loan- A primary reason for and the initial write-down For most banks, the
loss provisions as a per- this increase is non- charged to the Allowance highest-impact factor is
centage of net loan interest expense. Ex- for Loan and Lease loan quality.
charge-offs were calcu- pressed as a percentage of Losses. On the front end, what
lated for same-rated banks average earning assets, And these expenses are could be more basic than
in 2007 and 2008. non-interest expense in included in “other non- pulling a credit report?
The findings support Arkansas commercial interest expense.” Underwriting a credit
the ability and willingness banks rose by 14 basis Given the “domino ef- should include global
of better managers to re- points in the first quarter. fect” of a weak economy cash-flow analysis – in-
serve for risk. This increase, in turn, is on residential and com- cluding an assessment of a
Some managers have attributable to a large de- mercial real estate – and borrower’s balance sheet
used this ratio along with gree by an escalation in on those who borrow to liquidity – and a pricing
increases in adversely criti- the category, “other non- own, sell or develop it – policy that reflects risk.
cized loans as a basis to interest expense.” it’s likely OREO balances When appropriate, reason-
increase provisions and Dozens of expense on the collective balance able loan covenants
boost overall ALLL levels items are lumped into this sheet of Arkansas com- should be required and
in anticipation of increas- component of overhead mercial banks will con- strong credit enhance-
ing losses. expense and not broken tinue to increase.
See HOT TOPIC, Page 9
June 30, 2009
Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10