Finances improve among struggling banks, but not all are clear of oversight

Community bank soundness is another sign of the local economic recovery in Benton and Washington counties as well as the Fort Smith metro area. Through the first quarter of 2014 the majority of local banks are profitable, but a few remain in troubled waters given their high Texas Ratios — a standard measure of a bank’s credit troubles.

The Texas Ratio looks at a bank’s non-performing assets and loans delinquent 90 days or more divided by tangible capital equity and loan loss reserves. A ratio of more than 100, or 1:1, is considered a warning sign, according to Investopedia.

HIGH AND ELEVATED TEXAS RATIO NUMBERS
222.15% – Pinnacle Bank in Rogers
126.35% – Allied Bank in Mulberry

Other local banks with elevated Texas Ratios of more than 50% include:
57.91% – Signature Bank of Fayetteville
55.59% – First State Bank of Lonoke
61.43% – Chambers Bank of Danville
77.67% – Decatur State Bank, Decatur

Each of the above listed banks remain under enforcement actions by federal regulators because of their higher ratios of non-performing loans to the bank’s overall capital equity levels. That said, all but one of the six banks listed each returned profits in the recent quarter and ended 2013 on a positive note.

NET PROFITS
Signature Bank
1Q 2014: $473,000 
Fiscal 2013: $1.044 million

Chambers Bank
1Q 2014: $2.547 million
Fiscal 2013: $4.349 million

Decatur State
1Q 2014: $1.158 million
Fiscal 2013: $1,100

First State Lonoke
1Q 2014: $164,000
Fiscal 2013: $254,000

Pinnacle Bank
1Q 2014: $8,200
Fiscal 2013: $158,000

Allied Bank Mulberry
1Q 2014: $18,000 loss
Fiscal 2013: $3.121 million loss

SLOW RECOVERY
The financial health of the Northwest Arkansas banking sector is recovering and helping to fuel bank mergers among some of the distressed banks in need of capital infusion. Metropolitan National, Decatur State and First Community Bank of Crawford County were among merger deals completed in 2013.

John Dominick, a bank consultant and professor of finance at the University of Arkansas, has said the banking climate is improving in Northwest Arkansas, the most competitive market in the state. He said it takes time for banks to work through the high levels of real estate remaining on their books following the local housing and commercial building booms and busts in the past decade.

He said local banks are making money again, but some are having to set aside large reserves for potential loan losses and that is expected to continue for a few more quarters. These provisions to reserves come at the expense of higher profits but are required by regulators closely watching a handful of local banks still operating under enforcement actions.

Other banking analysts say more mergers are likely, particularly with smaller family owned banks being bought by larger institutions like Simmons First National, Home Bancshares, Bank of the Ozarks and Arvest, all of which completed acquisitions in recent months.

Mark Saunders, managing director for Bank Street Partners, recently told The City Wire that with fewer bank failure deals to acquire through FDIC actions, aggressive banks are seeking strategic acquisitions to help them grow regional market share. He said the timing is ripe for more consolidations of smaller banks that cropped up in the past decade with plans to sell when valuations rose.

Saunders said the small banks have a tougher time competing on loans, and their regulatory oversight costs are rising to the point where earnings are squeezed.

FIS RATINGS
Another rating indicator for banks on the watch list of federal regulators is the FIS Rating, which evaluates a bank’s liquidity, asset quality, capital adequacy and earnings. 
The overall rating is determined by weighting the individual component ratings. The best score that can be achieved is 1 and the worst score is 5.

By FIS standards Allied Bank and Pinnacle Bank each rank poorly at 4.19 and 4.15, respectively, at the end of the first quarter of 2014. Those rankings were the same to end 2013.

Signature Bank had a FIS Rating of 3.8 at the end of the first quarter. Chambers Bank had a rating of 3.54, the Bank of Fayetteville’s rating was 3.48 and Arvest was 3.52. At the high end of the rating, First Security posted a 1.56.

In the Fort Smith metro area FIS Ratings ranged from 3.59 at Benefit Bank to 2.93 at First National Bank of Fort Smith.