Banks across the Natural State are posting the best profits in three years and Northwest Arkansas’ market is no exception, though it’s still working through an overhang of problem real estate loans.
Benton and Washington counties are two of most competitive areas for bankers anywhere in the state. With 38 banks at last count, many lenders say they are battling tooth and nail for a handful of quality loans in a slow economic climate.
From First Security — one the region’s largest banks — down to one of the smallest — Parkway Bank — lenders say they expect the remainder of 2012 to closely resemble what they have seen thus far through nearly two quarters.
Jim Taylor, president of First Security for this region, is modest about the bank’s stellar start this year. The bank set the bar high in terms of profitability with a return on assets of 2.37% against the state average of 0.96%. The industry benchmark is 1%.
Tim Yeager, Arkansas Bankers Chair at the University of Arkansas, said banks across the state and the region are posting healthier balance sheets which is also translating to more retained profits as they have fewer problem loans than in past years.
Statewide, the percentage of non-accrual loans averaged 3.4% of the total loans as of March 31, down from 3.86% the year before, according the state banking profile released last week by the Federal Deposit Insurance Corp.
Taylor said roughly 25% of First Security’s assets are located in Northwest Arkansas, but all of their business is within Arkansas and growing at a healthy clip in spite of heated competition.
First Security posted net income of $24.035 million in the first quarter, up 18.5% from a year ago and a 71.4% gain from the same period in 2010. The bank’s assets grew to $4.057 billion by March of this year, up 12.8% from a year ago.
Arvest Bank has the largest deposit marketshare in Northwest Arkansas and also continues to grow profits with net income of $25.028 million in the first quarter up 10.5% from a year ago. With $12.627 billion in assets Arvest is roughly three times the size of First Security.
The majority of banks in Northwest Arkansas are mid-size community banks with a majority of their loans in real estate because they pack in more yield potential than consumer or small business lending.
In recent years many of those real estate loans did not pan out as planned forcing banks to write down loan values and set aside reserves to cover losses.
Many banks in the middle have also found it necessary to shrink asset size to hoist up capital ratios in the face of higher charge-offs.
Last year 16 banks surveyed in Benton and Washington counties charged off $142.099 million in delinquent debt and declined more than 36% from the prior year. Charge-offs continue to decline in 2012 for most of the banks in the local market.
Much of that property is now showing up as “other real estate owned” and slowly being moved off bank books.
Signature Bank is making steady progress posting first quarter profits of $552,000 with $2 million budgeted for this year. In the first quarter of 2011, the bank pocketed $238,000 reversing a $3.46 million loss in the same period of 2010.
“It’s not great, a bank of our size should be retaining far more earnings but we are happy to again be moving in the right direction given the severity of the lingering recovery. Many of our customers are still scared to death to borrow despite the cheapest money they have ever seen,” said Gary Head, CEO of Signature Bank.
Don Gibson, CEO of Legacy National Bank in Springdale, said profits are improving in 2012. The bank posted net income of $153,000 in the first quarter. Through May, Gibson said net profits were roughly $354,000.
“This recovery is not robust by any stretch but we are seeing some modest improvement in loan demand among our customers,” Gibson said.
Legacy National grew assets to $263.368 million as of March 31, up 4.28% from the prior year. In the past two years the bank reduced its non-accrual loans by 39% to $6.935 million.
Gibson said most new loans are competitive but the bank has managed to grow business by lending to custom home builders, small businesses and some owner/occupied real estate projects.
Not all the banks in the middle have returned to profits. Metropolitan National Bank posted first quarter losses of $1.041 million, an improvement from $4.053 million lost in the prior year period.
Analysts say Metropolitan’s management has made great strides in the right direction, despite serious capital shortfalls.
Metropolitan National has shrunk its assets by 29% in the past two years. As of March 31 the bank reported assets of $1.023 billion. Along with fewer assets, the banks has also reduced its seriously delinquent loans by 50% in the same time frame. Metropolitan still had $76.750 million in non-accrual loans at the end of March.
All three of these mid-size banks are operating under regulatory enforcement actions, along with a half dozen or so others doing business in Northwest Arkansas.
Parkway Bank of Rogers is on the backside of an enforcement action it shook off in 2011. The small bank has $122.127 million in assets and posted net profits of $182,000 in the first quarter of this year. Aside from a 21.3% increase in year-over-year profits the bank also managed to cut its “other real estate owned” by 50% in the past two years.
“We had OREO (other real estate owned) of $3.8 million at the end of quarter and have seen that improve since March. We have been fortunate to sell a large apartment complex and make a nice loan out that deal as well. We’ve also moved two large tracts of land — 20 and 70 acres,” said CEO Bob Taylor.
Parkway also cut its non-accrual loans by 83% in the past year. At the end of the first quarter the bank had $402,000 in seriously delinquent loans. Bob Taylor said loan demand is soft and when there is a good quality piece of business to bid, there are multiple banks vying for it.
“The competition is fierce,” he said. “I have never seen money cheaper in my life time, and there just aren’t enough takers.”
He said there is still a lot of money sitting on the sidelines and he doesn’t expect that will change until after the November elections.
“We can live with whatever happens in November, but many businesses and consumers are carrying a wait-and-see attitude with respect to their spending,” Bob Taylor said.
Bankers, regardless of the size of the institutions, all work from basically the same interest spreads — the difference between what it costs them to borrow and rates at which they can lend that money out.
Craig Rivaldo, market president for Arvest Bank in Fort Smith, said the stronger banks are flush with liquidity, but net interest margins are hindered because there are not enough folks seeking loans. Rivaldo and bankers don’t see that trend reversing anytime this year.
Within the past two weeks with financial markets roiling across Europe the 10-year U.S.Treasury yields fell to their lowest level in history. Rivaldo said this provides good and negative consequences for consumers and bankers alike.
“Lower rates have allowed many homeowners to lower their interest rates and refinance their home loans. It has been a record year so far for Arvest in refinance activity. But it’s a negative for many consumers who are on fixed income or depend on their interest income to survive. They’ve seen substantial reduction in their income,” Rivaldo said.
Bob Taylor said one-year certificates of deposit are paying just under 1% while tying money up for three to five years pays roughly 1.25% and the income is taxable