NWA bank profits improve amid fewer charge-offs

It’s been a long four-year recovery for Northwest Arkansas’ banking sector, but 2012 looks a bit brighter as local banks made steady progress last year.

The 16 community banks surveyed in Benton and Washington counties cumulatively pocketed $171.912 million in net income last year, a 112%  turnaround from 2010, according to info from the Federal Deposit Insurance Corp.

The local banks are instep with a national trend according to FDIC Acting Chairman Martin J. Gruenberg. He said 2011 represented the second full year of improving performance by the country’s banking system. For the full year, income at all banks insured by the FDIC totaled $119.5 billion, up 39.8% compared to 2010. Only 15.5% of U.S. banks reported a loss in 2011, down from 22.1% in 2010.

Overall, he said banks reported higher positive aggregate earnings while the numbers of “problem'” banks and failures declined by 1.08%. Loan balances also increased in the final three quarters of the year.

Gruenberg also noted that insured institutions of all sizes continued to make substantial progress in improving their profitability.

LOCAL PERFORMANCE
The local bank profits came after the 16 banks set aside $157.325 million to loan loss reserves and charged-off $142.099 million in delinquent debt. Both loss provisions and charge-offs declined more than 36% from the prior year.

All but three of the 16 banks retained profits last year, which is a positive sign of a strengthening sector, according to Tim Yeager, Arkansas State Bankers Chair at the University of Arkansas. He said fewer non-performing loans and an overall boost in loan quality are the reasons for the fatter bottomline.

Among the 16 banks non-accrual loans totaled $504.690 million at the end of 2011, but this important metric declined 9.43% from the prior year. Non-accrual loans are the last step before bank charge-off, usually more than 90 days delinquent and the least likely to be collected.

Gary Head, president of Signature Bank, said the difference in his bank’s turnaround is directly related to customer stability. Signature reversed a $15.82 million loss in 2010 to keep $1.03 million in profits a year later.

“There were fewer catastrophes and charge-offs to overcome in 2011. And even though the year was profitable for us. It is still a long way from good,” Head said.

He has forecast a $2 million profit in 2012 for Signature bank, given the economy continues to rebound.

“We think the real estate market has found its bottom and we see fewer people giving up and walking away from property, which a definite positive for lenders,” he said.

Don Gibson, president of Legacy Bank in Springdale, echoed Head’s sentiment.

“Credit seems to be stabilizing and that is allowing banks to work out some problem loans without having to charge off the debt. We see a little better loan demand for new construction, though it’s not robust by any means,” Gibson said.

Legacy National also erased a $1.792 million net loss in 2010 to earn $366,000 in 2011.

“We expect future growth to be slow given that it must happen in the new, tougher credit culture,” Gibson said.

LOSING GROUND
While profits are returning for the majority of local banks, that wasn’t the case for Decatur State, Metropolitan National and Chambers Bank. All three of these institutions are operating under consent orders from federal regulators and each posted net losses in 2011.

Decatur State Bank felt the heaviest blow in 2011, charging off $14.65 million in non-performing real estate loans. This hefty loss resulted in a $12.68 million income deficit for the bank in 2011.

Industry analysts say Decatur State is skating on thin ice as the recent losses have eroded the bank’s equity capital to unsafe levels relative to the risk still evident on the bank’s balance sheet. Equity capital is the lifeblood of a bank. It buffers losses and is essential for bank solvency.

The capital shortfall at Decatur State is dire. Analysts say the bank must raise at least $12 million in added capital to appease regulators in the coming days or find some way to collect on $20.98 million in seriously delinquent real estate loans.

The biggest problem a bank can face is serious capital deficiencies at a time when losses are escalating, said University of Arkansas banking professor and analyst John Dominick.

“The bank has serious problems facing a mountain of nonpaying loans relevant to the capital and reserves it has on hand,” Dominick said.

A key ratio bank examiners use to measure liquidity indicates Decatur State’s problem assets are more than 150% of the reserves available to cover the bank’s potential losses. The industry benchmark for healthy institutions is 25% or below, according to bank analysts.

Decatur Bank had a management change in June, promoting Mark Londagin to president and board chairman. Londagin is serving in dual management roles with the Grand Savings Bank of Grove, Okla., a sister bank to Decatur State. He said the management team was consolidated as a result of financial problems at Decatur.

Londagin did not return calls Monday, but he said in November bank management was working closely with its board to reverse the recent trend that resulted in heavy losses, in addition to raising needed capital reserves.

Chambers Bank returned a net loss of $5.477 million in 2011 after it set aside $17.3 million to boost loan loss reserves. Unlike Decatur State, Chambers does not have a capital shortfall and maintains adequate reserves for its risk exposure.

Metropolitan National lost $4.81 million last year, an improvement from a $12 million earnings deficit in 2010. The bank remains short the equity capital that regulators ordered it keep in 2007. The bank’s troubled asset ratio is in excess of 200%.

Gruenberg said as bank balance sheets have strengthened the number of institutions on the FDIC's "Problem List" declined from 844 to 813 during 2011. This is the smallest number of "problem" banks since first quarter of 2010. Eighteen insured institutions failed during the fourth quarter. For all of 2011, there were 92 insured institution failures, compared with 157 failures in 2010.

Northwest Arkansas still has roughly a dozen banks operating under some form of regulatory enforcement actions by state or federal regulators.

PROFIT LEADERS
While 80% of the banks surveyed made money in 2011, only two of them reached normalized profits with respect to return on assets. The ROA is an industry measuring stick used to show how well management uses assets to generate net profits for shareholders.

In normal economic times the industry ROA benchmark is 1%.Two local banks surpassed that mark in 2011, despite the fact the economy has not yet returned to normal growth patterns.

First Security Bank led the pack with an ROA of 2.31%, up from 2.05% in 2010. The bank posted strong earnings of $87.686 million, up 31.10% from 2010 levels.

First State Bank Northwest Arkansas also posted a strong ROA of 1.08% in 2011, although the bank saw an 46% reduction in net income from the year before.

The FDIC reported the average ROA  among all federally insured banks rose to 0.76% at the end of 2011, from 0.64% a year before.