Banks across Benton and Washington counties posted wider profits through the first half of 2013, compared to last year, but it could be 2015 before profit levels normalize, experts said.
A dozen banks in the region — large and small community banks — posted cumulative net income profits of $141.122 million during the first and second quarters of 2013. Profits rose 47.8% from the same period in 2012, as some banks reversed losses and most have shored up balance sheet and loss reserves.
The banks surveyed for this report include: Arvest, Legacy National, Bank of Fayetteville, First Security, Decatur Bank, Liberty Bank, Pinnacle Bank, Parkway Bank, Bank of Gravett, Signature Bank, Chambers Bank and Metropolitan Bank. These institutions represent a cross sampling of the local banking sector and their improving results help to support a healthier Northwest Arkansas economy.
Even though the local banks are making money again, their profits remain muted from compressed operating margins related to interest rate spreads and higher overhead costs to comply with ongoing regulations. Gary Head, president of Signature Bank, said historically banks have operated on a 4% net interest spread, which has been squeezed down to 2% or 3%.
Talk of the Federal Reserve tapering back their open market purchases later this year is a sign the overall economy is gaining strength. But, if rates continue to rise, bankers said their own net interest spreads could further contract as long as rates are moving upward.
“Local banks are seeing higher profits this year largely because they have already dealt with making the necessary provisions for the delinquent loans on their books. When banks don’t have to set aside large loan loss provisions, that money can go straight to the bottomline,” said John Dominick, banking professor at the University of Arkansas.
The banks in this report set aside a total of $21.324 million in loan loss provisions this year. Last year the same banks put back $47.51 million toward loan loss provisions in the first six months of the year. The banks charged off charged-off $40 million in bad debt in the first two quarter of 2013. The losses compared to $129.66 million charged-off through June of 2012.
“We are going to see bank profits continue to rise this year in what looks like a sharp manner, but most of that is directly related to them making lower provisions. Growth should taper down next year and if the economy continues to slowly improve, profits could normalize by 2015,” Dominick said.
Community banks make their money from loans made and repaid in a timely manner. But bankers in this region agree the climate for making loans is quite competitive.
“We are out there beating the bushes and making loans, but the overall demand for money is still quite timid, despite the very low rates,” said Don Gibson, president of Legacy National Bank.
Legacy was one of five banks out the 12 that made more loans this year, than last.
Legacy, $202.5 million, up 18.2%
Chambers, $647.49 million, 15.8%
Parkway, $79.224 million, up 13%
Arvest, $8.162 billion, up 5%
Liberty, $1.872 billion, up 3.8%
First Security bank reported stable loans with those a year ago. The five other banks shrunk their loan portfolios from a year ago.
Although the bankers admit there is active competition for the loans, that is nothing new in the Northwest Arkansas market. Bankers said consumers and business owners just don’t have the confidence they need to borrow money today.
“We have seen our customers work diligently to strengthen their balance sheets over the past few years and they are very cautious about taking on more debt to expand at this time,” Gibson said.
His comment echoed those from Richard Fisher, president of the Federal Reserve Bank of Dallas, who spoke last week at Wal-Mart’s U.S. Manufacturing Summit in Orlando. Fisher said business owners and manufacturers he’s talked with in the past two years are confounded by the uncertainty in fiscal and regulatory policy. He said businesses are not taking advantage of the cheapest money supply in the country’s 237-year history, largely because they remain cautious because of taxes and unwanted regulation.
Rosalind Brewer, CEO of Sam’s Club, said recently that small business owners across this region and the nation report serious concerns about the U.S. economy, health care costs and other regulatory burdens upon their businesses.
REAL ESTATE OWNED (REO) HOLDINGS
Real estate makes up a large percentage of the loans made by local banks and rising residential home values is also helping to boost bank profitability.
The banks in this report shed $111.59 million in real estate owned (REO) from June of 2012 to June of this year. Nearly all of the banks were able to move some of their property in the past year. That said, these banks were still carrying real estate valued at $245.179 million on their balance sheets, according to the filings with Federal Deposit Insurance Corp.
Legacy slashed its REO by 46% from a year ago. Gibson said the bank had written down real estate values over the past few years to the point where the prices were attractive for some properties.
Signature Bank also whittled down its REO holding some 16% in the year-over-year period. Head said the bank has three properties under contract now and hopes to get that moved by the end of the year.
“Banks have been able to sell the homes, and most of what is left is raw land and some commercial property at this point. We are seeing more interest in bank-owned property in recent months, but no one that I know, is accepting low ball offers,” Head added.
Dominick said the banks would like to sell their REO holdings, but they are not likely to now take huge discounts given they have already marked the values down to appease their regulators amid lower appraisals.
Now that residential property values have begun to stabilize and even appreciate in some areas, the steep write-down in those values have subsided. The commercial market continues to lag behind.
While the banking sector as a whole is showing marked signs of strength, the banks in this report posted mixed individual statistics in year-over-year period. This is another sign of the wobbly economy as not all business sectors, including banking, are seeing uniform recovery rates.
Eight of the 12 banks in this report made more money than last year, roughly one-third of which reversed steep losses to do so. Three of the 12 banks reported lighter earnings this year and one bank posted a net loss.
One of the key metrics used to measure a bank’s profitability is its return on assets. The ROA metric indicates how well the bank manages its assets, regardless of its size. The industry benchmark ROA is 1.0% and over the past few years that metric has been hard for many banks to achieve with larger losses and lighter loan demand. One-quarter of the banks this report achieved or exceeded the 1.0% benchmark through the first half of this year.
First Security Bank had the highest ROA in the group at 2.36%. The Bank of Fayetteville also climbed back into this elite group posting a ROA of 1.08%, up from 0.03% just one year ago. Arvest Bank improved its ROA to 1.02% in the period, up from 0.40% last year.
Four other banks in the group achieved ROA levels of 0.70% or better. Those banks include Liberty at 0.87%, Parkway at 0.80%, Chambers at 0.74% and Legacy National at 0.70%.
Dominick said each quarter that these banks continue to post positive earnings, their ROA levels will increase. When losses are incurred, ROA levels fall and it takes time for them recover.
It’s been nearly six years since the local real estate bubble erupted ahead of the national recession and banking crisis of 2008. Profits are returning for most of the local banks, but insiders agree profits are still no where near historical levels.
2013 NET PROFIT / LOSSES (January through June)
Bank of Fayetteville: $1.814 million, up 5,930%
Arvest Bank: $69.646 million, up 54.6%
Parkway Bank: $474,000 up 45.3%
Liberty Bank: $12.403 million, up 7.07%
First Security Bank: $50.314 million, up 3.2%
Signature Bank: $536,000, reversing $15.82 million loss
Legacy National: $933,000, reversing $1.792 million loss
Metropolitan National: $1.944 million, reversing $1.464 million loss
Bank of Gravett: $139,000, down 56.5%
Chambers Bank: $3.383 million, down 34.6%
Pinnacle Bank: $77,000, down 68.3%
Decatur Bank: $-464,000, down 131%