It’s not a bank’s size that determines its profitability, but rather how well management holds expenses down, creates new lending opportunities and collects timely payments on the loans already on the books.
Local bankers say it’s easier said than done, but 2012 financial results indicate banks large and small are holding on to more profits amid a slow moving economy.
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.
This is the last of three stories published this week which compares local bank performance in 2012 against the prior year. This story examines the region’s five smallest banks which returned cumulative net profits of $4.509 million last year, a gain of more than $17.5 million over the steep losses recorded in 2011.
To call 2012 a “turnaround year” is an understatement for a number of the region’s smallest banks.
This cohort includes: Bank of Gravett, Decatur State, Parkway, Pinnacle and First State NWA.
Together these five institutions have cumulative assets of $538.07 million and returned a net income of $4.509 million giving the cohort a cumulative return on asset of 0.84%.
The industry benchmark for profitability is a return on asset (ROA) of 1% and while the group as whole fell a little short of that metric, three of the five banks did achieve an ROA better than 1% during 2012.
One year ago the ROA metric for this same group was in negative territory because of a $14.2 million loss recorded by Decatur State Bank. Several banks from this group said 2012 was better for sure, but no one was ready to gloat saying there is still ample work to be done in moving non-performing real estate off bank books.
As a group these five banks held $34.79 million in real estate on their balance sheets. While a few of banks made forward progress in the total holdings rose from $28.81 million in 2011.
Candace Franks, director for the Arkansas State Bank Department, noted in October that other real estate holdings were a major concern going forward for many state-regulated banks.
Bob Taylor, president of Parkway Bank in Rogers, said while his bank was able to cut its REO almost in half from 2011, the $3 million still on the balance sheet is a drain on earnings.
“We continue to work hard to move these non-performing assets off the books, because that is $3 million that can’t be loaned out or put to work generating future profits,” Taylor said. “We are seeing higher real estate appraisals and that is definitely helping curb write-downs.”
The Bank of Gravett also reduced its REO properties during 2012. The bank reported real estate owned of $546,000, down from $1.829 million a year earlier.
David Bordovsky, president of Pinnacle Bank, said he is keenly focused on reducing REO holdings this year as there are more interested buyers in the local marketplace than in recent years. According to FDIC reports, Pinnacle Bank had assets of $87.45 million at the end of 2012, the bank also held roughly $20.9 million in other real estate owned.
Bordovsky assumed the leadership role at Pinnacle Bank in June 2011 and spent several years as a private loan broker and consultant working via contract with the FDIC on bank closures.
FIRST STATE NWA
The smallest bank in the group, First State NWA, had the biggest profitability margin in 2012 among the 17 banks surveyed.
Led by Larry Olsen, First State NWA showed assets of $85.02 million as the end of 2012. The bank pocketed $2.071 million in net profits giving it a stellar 2.44% ROA, the highest of the 17 banks surveyed by The City Wire.
A modest Olsen agreed the bank had a good 2012, but said he had budgeted for minimal growth in 2013.
First State NWA has a strong balance sheet with roughly $1 million in non-accrual loans, down slightly from 2011. As loan quality improved, the bank set aside less money for reserves, which allowed more profits to flow to the bottomline.
Earnings also benefited from some loans the bank acquired at a discount and sold for profit in 2012, allowing First State NWA to recapture roughly $250,000 in previous charge-offs and loss provisions.
Olsen declined to provide any comment on loan sale.
He describes a very competitive market place for new loans, saying there is some cannibalization among competitors at work, underbidding interest rates and gambling the Federal Reserve will keep rates low for the next two years or so.
“This is just taking overall margins lower for the whole banking sector,” he said.
Olsen said gridlock in Washington has plenty of businesses still sitting on the sideline because they lack the confidence or security to expand.
One of the best turnaround stories in the local banking sector belongs to Bob Taylor and Parkway Bank. While nearly a dozen local banks have come under enforcement actions since 2008, Parkway Bank is the only one to shake those orders so far.
Taylor said they were one of the first to find trouble and consequently the first one out.
Analyst John Dominick gives Taylor a lot of credit for turning the Parkway ship around, saying it’s not an easy task citing the sluggish economy of the past few years.
Parkway had assets of $119.5 million at the end of 2012 and net income of $1.261 million. This gives the bank a solid 1.06% ROA – ahead of the 1% industry benchmark.
“We are pleased with those results and have budgeted for just a little growth in 2013 because good loans are hard to find.” Taylor said. “Banks around here are flush with deposits and not that many opportunities to make larger commercial loans, which is creating a competitive climate and squeezing loan margins.”
Parkway’s profits rose 139% last year, as the bank’s charge-offs were drastically reduced. In fact, the bank recaptured $82,000 from previous debt charged off. This is money that helped to boost overall earnings.
At the end of 2012, Parkway had non-accrual loans of $1.36 million, up from $404,000 a year earlier.
Taylor said the bank has reserved adequately for all of its risk-related loans.
BANK OF GRAVETT
The Bank of Gravett posted net income of $688,000 last year, up from $599,000 recorded in 2011. This gives the bank an ROA of 0.49% with room for improvement to reach the benchmark 1% across the industry.
Several factors worked together to boost earnings last year. The bank cut its loan loss provisions by more than $300,000 and charge-offs were $1.6 million less in 2012 than the prior year.
Non-accrual loans also subsided by nearly $1 million from 2011 levels, The bank had $1,57 million in non-accrual loans at the end of 2012.
Between 2011 and 2012 the Bank of Gravett shrunk its assets by more than $6 million from fewer loans and less real estate holdings on the books.
Pinnacle Bank of Rogers posted net profits of $156,000 last year, wiping away a net loss of $1.116 million in 2011.
Bordovsky said the positive results were a move in the right direction but there’s still work to do.
Pinnacle reduced its non-accrual loans from $6.86 million down to $1.13 million during 2012. While the distressed loans subsided, the bank’s real estate holding increased by roughly $6 million over the past year.
Pinnacle’s assets totaled $87.459 million at the end of 2012, shrinking from $93.293 million from the prior year.
DECATUR STATE BANK
The story at Decatur State was a wild one in 2012, the bank faced dire capital shortages after booking a $14.2 million loss in 2011.
Distress calls were made by regulators and two suitors came to the rescue. Near the end of 2012 the Decatur Bank was acquired by Chambers Bancshares giving the anemic institution new life.
In 2012, the bank posted a net profit of $333,000 and held back making additional provisions to loan losses because of its capital shortage.
During the year the bank reduced its non-accruals by more than $13.6 million leaving them about $9 million in seriously delinquent loans.
The bank recaptured $33,000 in past charge-offs which also helped the bottomline.
Decatur Bank got the financial stability it needed from its new holding company, Chambers Bancshares, and will continue to operate independently of the larger Chambers Bank.
Decatur Bank remains under enforcement actions and will continue to work through its problem assets, while gradually rebuilding its capital base.
The bank’s equity capital totaled $4.53 million at the 2012, leaving its key capital ratios well below normalized ranges.
A sister institution – Grand Savings Bank of Grove, Okla. – was also included in the acquisition by Chambers Bancshares. A notice of acquisition of control was recently posted by a local investment group attempting to acquire Grand Savings Bank from Chambers Bancshares.
The local investor group includes Anthony and Suzanne Steele, Rex and Carolyn Grimsley, Gary and Jan Anderson, Steve and Jacqueline Zimmerman, Guy and Eiizabeth Cable, Kirby and Robyn Lane, Tyler and Patricia Steele and Roland and Betty Julian.
Chambers Banschares Chairman John Chambers did not return three messages left at his office this week regarding the Grand Savings Bank deal or the recent financial results at Decatur State Bank.
Bank of Gravett $140.9 million in assets
Decatur State $135.2 million in assets
2011: $-14.228 million
Parkway $119.5 million in assets
2012: $1.261 million
Pinnacle $87.45 million in assets
2011: $-1.116 million
First State NWA $85.02 million in assets
2012: $2.071 million