Arkansas bank profits up in second quarter; loan losses stifle recovery

Second quarter earnings for Arkansas banks has jumped 25% from the previous year, according to FDIC’s quarterly banking profile, yet loan losses continued to mute a full upturn in the state’s financial sector.

For the period ended June 30, the Federal Deposit Insurance Corp.’s quarterly report showed that Arkansas banks earned $210 million compared to $168 million a year ago. When compared to the previous quarter, profits at FDIC-insured Arkansas banks and savings institutions were up 76.5%.

Overall, FDIC-insured banks and savings institutions across the U.S. reported an aggregate profit of $21.6 billion in the second quarter of 2010, the highest quarterly earnings total since the third quarter of 2007. The $26 billion improvement in the second quarter compares with the $4.4 billion net loss the industry posted in the second quarter of 2009.

"This is the best quarterly profit for the banking sector in almost three years," FDIC Chairman Sheila C. Bair said in a statement. "Nearly two out of every three banks are reporting better year-over-year earnings. As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend."

Despite the improvement, earnings remain below historical norms.

"Without question, the industry still faces challenges. Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high," Bair said.

For example, Arkansas’ 132 FDIC-insured banks earned $262 million in the second quarter of 2007. Additionally, loan-loss provisions in Arkansas remain near record levels and the number of federally-insurance institutions in the state continue to decline — with 31 banks dropping off the list in the last five years.

Given those economic uncertainties, Bair added, "we believe all banks should continue to exercise caution and maintain strong reserves."

According to the FDIC, although almost two out of every three banks across the U.S. increased their loan-loss reserves in the quarter, the industry’s total reserves declined by $11.8 billion (4.5%), as a number of large banks reduced their loan-loss provisions.

The ratio of reserves to total loans and leases fell from 3.5% to 3.4% during the quarter, however, this is still the second-highest ratio in the 63 years for which data are available.

In Arkansas, total loan and leases reserves grew 14.2% year-over-year from 1.69% to 1.93%, indicating that asset quality of loan portfolios at local and regional banks remains problematic.

Nationwide, Bair said the number of banks on the FDIC’s "Problem List" rose from 775 to 829. Forty-five insured institutions failed during the second quarter. Arkansas banks have managed to stay off the FDIC’s notorious "failed bank list" more than two years after the spectacular collapse of Northwest Arkansas-based ANB Financial in May 2008.

Meanwhile, total insured deposits across the U.S. declined by 0.7% ($39 billion) during the quarter. The Deposit Insurance Fund (DIF) balance is still operating in the red, but improved from negative $20.7 billion to negative $15.2 billion during the second quarter.