Despite the economic strength of Northwest Arkansas, the region’s banking sector didn’t have a solid financial performance for the first half of 2015. Bankers and industry watchers say profit growth is slowing amid hyper competition and added regulatory costs associated with Dodd Frank legislation.
Through June the cumulative net earnings of the eight community banks polled by The City Wire totaled $98.571 million, falling 16.7% from the $118.424 million reported the first half of 2014. The City Wire looked at a sampling of small, median and large institutions either based in Benton and Washington counties, or have a large presence in the region.
Lowell-based Arvest Bank, by far the largest institution in the group, was the main reason overall profits have declined in the past year. Arvest Bank’s total net income through the first half of this year was $32.895 million, down 44.7% from a year earlier. Without the negative pull from the Arvest shortfall, the other seven banks profits rose 12% in the year-over-year period.
MIDSIZE BANK PROFITS
Fayetteville-based Signature Bank ($493 million in assets) led the group’s profit growth with $1.266 million in net income, rising 70% from the same two quarters in 2014. A glance into the bank’s financial filings with the Federal Deposit of Insurance Corp., indicate that Signature has reduced its non-current loans by 66% from a year ago. In June the bank’s credit losses turned positive by $173,00 in loan recoveries, compared to losses of $467,000 a year ago. The bank also grew its average loans to $391.85 million, up 1.8% from a year ago.
That said, the bank continues to wrestle with real estate it can’t sell. These non-performing assets were valued $17.76 million in June, rising 2.42% from the $17.34 million reported a year ago.
“The economy is better today and Signature was one of the last banks in this region to run into the ditch over some non-performing real estate loans which have now largely abated. This year we have just now gotten through some of the those 2010 and 2011 real estate deals and we expect the rest of 2015 to be produce better returns for the bank,” said Signature CEO and President Gary Head.
Two of Signature’s peer banks relative to size and location also reported positive numbers through the first half of this year. Springdale-based Legacy National Bank ($330 million in assets) saw its net profits rise 11% this year, over a year ago. Legacy reported net income of $1.098 million, compared to $981,000 a year ago.
Legacy grew its loans 11% to $242.185 million through June. CEO Don Gibson said commercial, agricultural and custom residential lending are sweet spots for its growing business year-over-year. Gibson said the bank’s consumer lending has been weaker and even though consumers are spending a little more, deposits are also growing. Gibson is also pleased with the way real estate on the bank’s books is moving which he attributed to more business investment and lot absorption.
Legacy Bank’s other real estate holdings were $3.93 million as of June 30, down from $5.469 million a year ago.
The Bank of Fayetteville ($345 million in assets) reported a flat first half with net profits of $1.266 million, up 0.95% from a year ago. The local bank is in the process of being acquired by Farmers & Merchants Bank of Stuttgart in an all cash deal expected to close by before the end of the year.
Bank of Fayetteville is in strong financial shape facing non-accrual loans of just $473,000 as of June 30. This is down from $1.881 million a year ago. The bank also sold off a good chunk of its real estate holdings over the past year. The bank held $3.396 million in other real estate through June, down from $5.252 million a year ago.
SMALL BANK UPDATE
The two small banks in the sampling —Parkway Bank of Rogers and Today’s Bank —had mixed results. Both institutions have between $100 million and $130 million in assets and each managed to grow assets from a year ago.
Parkway Bank grew its net profits double-digits to $497,000 in the first half of this year. This small boutique bank grew its total loans to $90.6 million as of June 30, a gain of 10.7% from a year ago. At the same time, Parkway trimmed its non-current loans to $323,000 in June. Other real estate owned totaled $1.26 million, down 44% from a year ago.
“The local market has rebounded and is flourishing. We are restricted by our small capital size but continue to find enough commercial construction projects to grow our loans year-over-year. We have noticed a slight decrease in residential building demand in the past 30-to 45-day period. Perhaps that’s because the availability of lots in popular neighborhoods have waned. I understand there are three to four new subdivisions on the planning boards at this time and we expect some early development to take shape later this fall,” said Bob Taylor, CEO and president of Parkway Bank.
He said Parkway Bank’s operations in the first half of 2015 have exceeded budget by 25%, which Taylor said is expected to continue through the balance of 2015.
Huntsville-based Today’s Bank, with a new branch in Springdale and a large presence in Fayetteville, experienced a substantial rise in its non-current loans in the recent quarter. Delinquent loans totaled $2.439 million, versus $660,000 a year ago.
The bank also took back more real estate rising to $1.596 million, up from just $77,000 a year ago. This rise in non-performing assets curbed profits in the first half of 2015. Today’s Bank earned $755,000, down 36.7% from the $1.194 million earned a year ago.
LARGE BANK UPDATE
The three large banks in this report are vastly different in size and scope. Arvest, with $15.5 billion in assets and spread across four states, saw a large rise in its credit losses which totaled $9.139 million in the first half of this year. A year ago, the bank had positive credit recoveries of $2.068 million.
Over the past year Arvest has downsized its non-current loans to $110.642 million, from $172.332 million as of June 2014. Its real estate holdings have also been downsized to $47.810 million, versus $59.774 million a year ago.
A large mortgage lender as well, Arvest reports its foreclosures are down to $4.873 million from $7.419 million a year ago.
In Benton County specifically, CEO Craig Rivaldo told The City Wire that Arvest has had quality loan growth in 2015, especially starting in the second quarter of the year. Some of that demand was an uptick in consumer loan growth following a recent marketing promotion, he said.
Searcy-based First Security Bank has a large presence in Northwest Arkansas. The bank ($4.626 billion in assets) is historically a profitable institution. Through the first half of 2015 the bank posted net earnings of $52.610 million, up 9% from a year ago.
The bank grew its average loans to $1.861 billion, up slightly from a year ago. Its non-current loans totaled $17.423 million, rising from $11.752 million a year ago.
Its other real estate owned was reduced to $12.237 million as of June 30. The bank shaved $7.668 million from its non-performing real estate holdings over the past year.
The First National Bank of Fort Smith, parent company of First National Bank of NWA, also posted strong year-over-year results. First National ($1.209 billion in assets) earned $8.97 million in the first half of this year, up 29.4% from the same period in 2014.
Those results include the bank’s large presence in Fort Smith and its four branches in Northwest Arkansas. The bank’s total loans were valued at $756.196 million, versus $762.287 million a year ago. While overall loans shrunk a bit over the past year, the delinquent loans increased 14.7% to $11.984 million, according to the bank’s FDIC filings.
One big improvement in the bank’s financial balance sheet was a reduction of other real estate owned. The bank showed real estate held valued at $791,000 as of June 30, down from $8.901 million a year ago.
Officials at banks of all sizes have plenty to say the added costs they face relating to implementation of the Dodd Frank legislation.
Gibson, at Legacy Bank, said the added compliance has ratcheted up operational costs in extra personnel, more processing and oversight. Specifically he said service levels, especially with real estate transactions, are much more complex and take longer to comply under the new regulatory guidelines.
“This bill is bad for both community banks and for the consumer,” Gibson said.
There were a lot of issues that Dodd Frank created for money center banks like Bank of America that are being applied to small community banks, he added.
Taylor at Parkway said the regulations are onerous on small institutions and will likely force more consolidation across the state and nation before the year ends. He said the added regulatory hoops have made it harder to make loans in small communities like Portland, Ark., population 500, where hardworking folks rely on their local banks to finance a new washer and dryer purchase, for instance.
“When the local bank can’t help these folks, they turn to unregulated lenders at much higher interest rates and even payday loans, a completely predatory model,” Taylor said.
Head, at Signature Bank, said home loans are much harder to come by now than they were 10 years ago. While mortgage regulation was too lax in those days, the tighter regulation has gone too far the other way. He said those without W2 income have a harder time getting a home loan. For instance the guidelines want lenders to assure that the borrowers will have the needed income in five years down the road, which is nearly impossible to forecast as consumers change jobs more frequently than in prior generations.
Garland Binns, attorney with Dover, Dixon, Horne, agreed that the Dodd Frank Act has and continues to cause smaller banking institutions to have greater overhead costs in complying with the requirements placed on banks.
“This causes community banks to either consider acquisition of another community bank in order to become larger in order to reduce overhead compliance costs, or alternatively to consider selling to another bank,” Binns said. “The compliance costs for a $100 million community bank are basically the same as those of a $400 million community bank. Both in Arkansas and throughout the United States, consolidation will continue in the banking sector at a moderate pace.”
Rivaldo said Arvest has experienced added expenses associated with staffing related directly to Dodd Frank compliance.
“The regulations expect banks of all sizes to have the same expertise regardless of resources. This makes it very tough on the smaller banks to provide the necessary level of expertise,” he said.
Rivaldo agreed that the law will result in more consolidation with smaller banks.
The bankers and analysts on the whole have a positive outlook for the back half of this year. Gibson said the biggest threat he can see to a positive overall year would be “loose competition for loans in both structure and pricing.” Head said loan demand through July has been good, but not great.
“Our operations are running ahead of budget this year and we’re pleased with the first two quarters. We are optimistic Northwest Arkansas will have ample opportunities to grow,” he said.
Rivaldo said the cost to maintain compliance, tighter net interest margins, continued competition from out of market sources from internet are the biggest threats to profits this year in the banking sector.