Loan Loss Models Vary Bank-by-Bank

Loan Loss Models Vary Bank-by-Bank

Proportionally, no other Arkansas bank committed more to its loan loss reserves during the first quarter than DeWitt Bank & Trust.

The $118.7 million-asset lender’s allocation of the equivalent of 6.63 percent of total loans to its loan loss reserves ranked the highest among 104 banks.

That dedication to potential loan losses has no correlation to DeWitt Bank’s profit picture. The Arkansas County lender generated consecutive annual profits throughout the post-2008 era.

Nor does the level of loan loss reserves have any connection with its noncurrent loans. The bank recorded a measly $26,000 in nonaccrual loans in its March 31 call report.

That super-low number produced another No. 1 for the bank: the highest loan loss allocation relative to nonperforming loans: a whopping 9,415.38 percent.

While its current stance might be considered ultra-conservative, DeWitt Bank’s loan loss allocation topped 8 percent several times during the past 10 years.

Since 2006, total loans at the bank have fallen from a pinnacle of $78.9 million at Sept. 30, 2007, to less than $37 million as of March 31.

The big allocation to loan loss reserves is something that regulators suggested about 15 years ago, said David Jessup, CEO of DeWitt Bank & Trust.

“That number today reflects an allocation that was made back then,” he said.

The Arkansas banks with the 10 highest ratios of loan loss allowance to total loans represent a broad spectrum of financial institutions, ranging from huge to small and profitable to unprofitable.

That broad assortment illustrates that, when it comes to reserving for loan losses, the equation varies from bank to bank.

“There is no set formula,” said Susannah Marshall, deputy bank commissioner. “But it has to be commensurate with a loan portfolio’s risk profile. It has to be tailored to that specific bank and that bank’s specific market.”

Determining that risk profile is open to interpretation at each bank.

“It is not objective,” said Reynie Rutledge, CEO of Searcy’s $4.9 billion-asset First Security Bank. “It is subjective. I follow the more conservative end. If you have a fault for too much loan loss reserve or too little, I want to fault on too much reserve.

“I’m not saying I have too much reserve. But I don’t want any surprises.”

First Security is among the biggest and most profitable banks based in Arkansas, and Rutledge isn’t shy about hedging against market uncertainties.

“If you end up with some unexpected loan losses, you have to dig deep and do a one-time allocation,” he said. “We put some money in loan loss reserves every month, and I hope I don’t have any unexpected problems. But if I do, I have them covered. ”

Among other billion-dollar banks in Arkansas, the closest to Rutledge’s 2.91 percent reserve is First National Bank of Paragould at 1.69 percent and Farmers Bank & Trust of Magnolia, 1.64 percent.

The two smallest loan loss reserve ratios among the state’s biggest banks are at Little Rock’s Bank of the Ozarks, 0.67 percent, and Pine Bluff’s Simmons Bank, 0.68 percent.

Loan Loss Reserve Ratios

  Loan Loss Allowance/
Total Loans
Loan Loss Allowance/
Nonperforming Loans
Total Loans*
DeWitt Bank & Trust 6.63% 9,415.38% $36,926
Allied Bank, Mulberry 5.15% 31.25% $48,363
First Arkansas Bank & Trust, Jacksonville 4.01% 78.11% $413,494
Helena National Bank 3.36% 230.41% $64,130
First Delta Bank, Marked Tree 2.94% 191.83% $16,780
First Security Bank, Searcy 2.91% 473.44% $2,035,902
Central Bank, Little Rock 2.85% 0% $63,904
Heartland Bank, Little Rock 2.83% 17.42% $183,170
Little River Bank, Lepanto 2.81% 40.58% $10,960
Pinnacle Bank, Rogers 2.79% 330.7% $43,998

* In thousands. All numbers as of March 31.
Source: Federal Deposit Insurance Corp.