Community banks come in all shapes and sizes but they share a common mission regardless of stature as these financial institutions provide commercial and personal banking needs for local residents.
The local banking sector returned to reasonable health last year after fending off system weaknesses linked to the recession of 2008 and the real estate bomb that destroyed subsequent profits.
In 2012, 17 banks surveyed by The City Wire returned net income profits of $328.274 million, a 14.5% improvement over 2011. These banks are either based in Northwest Arkansas or have a large branch presence in the local market. The first six banks were reviewed here in the first of three stories published Monday.
The next six banks in this series are deemed mid-size community banks with assets ranging from $800 million to 250 million.
Chambers Bank, Signature Bank, Bank of Fayetteville, First Western, Legacy National, and First State (Lonoke) comprise the six banks outlined in this report.
Together these institutions earned $8.059 million in net income during 2012. This was a marked improvement from the $1.022 million net loss the same banks recorded in 2011, according to their call reports on file with the Federal Deposit Insurance Corp.
While the larger bank group earned $315.711 million during 2012, the average year-over-year returns were higher for individual banks in this middle group.
All but one bank in the six, posted strong net income gains from 2011. For instance, Chambers Bank reversed a $5.47 million loss in 2011 to pocket $9.11 million by the end of 2012. This was a $14.58 million swing in profits over a 12-month period.
On the flip side, Signature Bank was the laggard in the middle group posting a net loss of $7.3 million to end 2012. A year earlier the bank posted net profits of $1.03 million.
Banking analyst Tim Yeager, Arkansas Bankers Chair at the University of Arkansas, said banks will often make large provisions for loan losses at the end of the year, to put them in better standing for profits going forward.
Signature made a provision for loan losses in the amount of $13 million during 2012, and the bank reported goodwill-related losses of $1.7 million linked to a branch sale in Brinkley, Ark, according to CEO Gary Head.
REAL ESTATE CONCERN
One issue raising concern from state regulators in late 2012, was the high levels of real estate remaining on bank books statewide.
Toward the end of 2012 state-chartered banks had $548 million in real estate holdings on their books. Since 2006 real estate owned by state banks rose from $46 million, according to the Arkansas State Bankers Association newsletter.
Adding to the concern was $805 million in non-accrual real estate loans likely to feed the REO pipeline through 2013.
While all of the six banks in this report are not state-chartered, it is no secret that real estate dominated a lion's share of bank loans made in Northwest Arkansas between 2005 and 2012.
In fact, commercial real estate loans continue to be a main source of loan growth for those banks actively lending in 2013, according to Don Gibson, CEO of Legacy National Bank in Springdale.
Together the six mid-size banks in this report held $121.878 million in real estate owned on their balance sheets. REO was down year-over-year for four of the banks, while Chambers and First State Lonoke added to their holdings by $18.4 million and $1.4 million, respectively.
Gibson said Legacy Bank was able to move a little of its real estate holdings off the books in 2012, incurring about $900,000 in additional write downs to get the property sold.
“For the longest time the REO bucket was filling up faster than banks could find buyers. But some of the property is starting to move now and flow into the bucket has slowed to a trickle,” Gibson said.
In the past year Legacy reduced its REO from $9.195 million to $7.686 million, and one of the parcels liquidated was purchased by the city of Springdale for a new park near Don Tyson Parkway.
Gibson said it will take more time sell off the two developments and some raw land still on the bank’s books.
Signature Bank continues to work through a handful of loans that went south much later in the economic recovery phase than most.
“Five years ago these loans were A rated but as the recovery lingered, some borrowers have held on to the point of near bankruptcy,” Head said.
As noted, Signature posted a net loss of $7.3 million last year, after the bank set aside $13.02 million in loss reserves and a $1.7 million loss linked to “Goodwill."
He said the $13 million set aside for loss reserves in 2012 was a move to give the bank a fresh start in 2013.
“We are making money so far with January in the books. While one month, does not a year make, it’s good to be positive and we feel the banking industry in general has turned the corner toward more normalized profits in 2013,” Head said.
Non-accrual loans totaled about $24.3 million at the end 2012, down slightly from the $25.9 million reported in 2011.
“We are hopeful 2013 we will back in the black ink because on the whole business is improving in the region,” Head added.
BANK OF FAYETTEVILLE
Mary Beth Brooks and company nearly doubled the profits at the Bank of Fayetteville during 2012.
The bank reported net income of $2.03 million, up 97% from the $1.06 million pocketed in the prior-year period.
Fewer provisions for loan losses clearly helped boost profitability last year. The bank reduced provisions by $2.85 million in the year-over-year period as non-accrual loans where cut in half in the same timeframe.
Banking analyst John Dominick said Brooks and the bank employees have well managed the institution through a rough economy.
With assets of $364 million, normalized profits would be roughly $3.6 million annually and it appears the Bank of Fayetteville is well on its way.
Booneville-based First Western Bank earned $2.05 million in 2012, versus $1.5 million in 2011. This was a 36.6% annual increase in net profitability.
With assets of $277 million, normalized profits would be roughly $2.8 million annually, within eyesight of the 2012 results.
First Western pared down charge-offs and provisions for loan losses, which helped improve the bank’s bottomline profitability by $733,000 during the year.
The bank reported $796,000 in non-accrual loans, down about $200,000 from the end of 2011.
FIRST STATE LONOKE
In 2012, First State of Lonoke enjoyed a 109% turnaround in bank profits. The bank reported net income of $1.035 million versus $494,000 the year before.
Charge-offs and provisions for loan losses were reduced by $2.23 million between 2011 and 2012 years ended..
There are two areas still needing work in this bank’s balance sheet; non-accrual loans of $703,000 and another $21.94 million of real estate owned by the bank at the end of 2012.
With assets of $262 million, normalized profits would be somewhere between $2.65 million.
Analysts like Dominick say it takes time for banks to work through large troubled loan portfolios. He said heavy REO loads will likely to weigh on earnings for several more quarters for a number of local banks, including First State Lonoke.
In 2012, Chambers Bank faced a regulatory order because of rising non-performing loans in the Northwest Arkansas market, but that didn’t stop John Chambers and company for turning the ship around.
Chambers reported net profits of $9.11 million last year, as provisions for loan losses subsided by $15.4 million from the prior year.
Chambers still faces roughly $15 million in non-accrual loans, with $52 million in real estate sitting on the balance sheet. Non-accruals were even with last year but the REO levels rose by $20 million from 2011.
Springdale-based Legacy Bank had one of its best years during 2012 posting net income of $1.13 million, a 209% turnaround from prior-year results.
Gibson said the bank is ginning on all cylinders and returned to normalcy of sorts growing its loans by $16 million in the past year. He said the improved earnings were a direct result of lower provisions for loan losses and charge-offs and the results could have been better had the bank not used earnings to eradicate a few problem assets.
“I would rather deal with problems out of earnings than tap my shareholder’s equity, so we continue to put money aside in reserves just in case we need it,” Gibson said.
With assets of $262.5 million, Legacy is among of handful of local banks that grew larger in the past year, as most continue a shrinking posture.
“We are starting to see some competition on loan bids and that’s a sign the overall banking sector is more healthy. As competition increases we expect loans margins to compress some in the back of this year,” Gibson said.
But he is optimistic 2013 will be a better year for Legacy and the banking sector in Northwest Arkansas.
CHAMBERS $791 million in assets
2012: $9.111 million
2011: $-5.477 million
SIGNATURE $499.6 million in assets
2012: $-7.309 million
2011: $1.031 million
BANK OF FAYETTEVILLE $364.2 million in assets
2012: $2.032 million
2011: $1.031 million
FIRST WESTERN $277.7 million in assets
2012: $2.052 million
2011: $1.502 million
LEGACY NATIONAL $262.5 million in assets
2012: $1.133 million
FIRST STATE LONOKE $262.2 million in assets
2012: $1.035 million