Arkansas banks post 9.9% annual profit gain, small banks see incomes decline

The 104 banks with operations in Arkansas were responsible for a 9.9% overall gain in profits in 2015, compared to the net income generated by 109 Arkansas banks in 2014. Consolidation in this financial sector continues to reduce the number of active bank filings amid ongoing charter consolidations due to mergers and acquisitions.

The Arkansas banks earned $887 million in net income last year, compared to $807 million earned in 2014, according to the Federal Deposit Insurance Corp. Not all the banks had banner years amid lower gross margins, higher regulatory costs and market volatility in equities, but the sector had respectable overall returns.

The banks grew their total assets to $75.393 billion in 2015, rising 15% over the $65.486 billion in 2014. They held loans worth $49.69 billion, compared to $40.855 billion in 2014. At the same time banks shed more than $123 million of repossessed real estate from their books in 2015, leaving them with owned real estate worth $302 million.

Consumers saving more money helped the banks grow their cumulative deposits to $61.251 billion, up 14.59% from the prior year. Meanwhile, equity capital, which indicates financial strength, increased by $1.43 billion in the year-over-year period. This increase primarily relates the solid earnings growth. The 104 Arkansas banks held more than $9.394 billion of equity capital in 2015, increasing from $7.963 billion in 2014, according to the FDIC report.

The financial sector employed 20,128 workers in 2015, up compared to 18,772 in 2014, despite the fewer number of banks. Bankers have told Talk Business & Politics they have added staff in the past two years to handle more filing responsibilities and increased paperwork related to the regulatory requirements.

Bank industry watchers say regulation is costing U.S. community banks an estimated $4.5 billion annually, or 22% of their net income. A report conducted in late 2015 in conjunction with the Federal Reserve Bank of St. Louis and the 21st Century Community Banking survey.

Tim Yeager, banking and finance professor at the University of Arkansas, said banks operating in Arkansas are in much better financial shape than they were before the meltdown in 2008. He said most banks have been forced by regulators to increase their equity capital through higher provisions to loan loss reserves in recent years which offset earnings, but also is providing a better cushion against future loan losses. He said banks saw a lift in earnings in 2015, partially because they already carry adequate reserves and more of their profits is flowing through to the bottom line.

Yeager said the overall economy has some momentum and banks, particularly those with loan operations in high growth areas of the state, are poised in 2016 to see improved loan demand that should fuel higher earnings.

“I think banks will increase their balance sheets and book more loans this year than last. Those higher loans should drive continued profits,” he said.

Toward the end of 2016, Yeager said banks may also see slightly higher interest rates on the fixed income side of their businesses, which could increase loan rates as much .25%. He said this alone would give banks more cushion between what they are paying depositors and charging borrowers.

The FDIC report divided the banks into two categories; those with less than $100 million in assets and those with more. There are 27 banks with assets less than $100 million and together they earned $12 million in 2015, down from $18 million earned the prior year. The smaller banks also shrunk total asset size to $1.777 billion, down from $1.84 billion in 2014. Loans totaled $966 million last year, compared to $998 million in 2014. The small banks had $202 million in repossessed real estate on their books at the end of 2015, down from $215 million in the prior year. Total deposits held among the 27 banks was $1.51 billion in 2015, down from $1.55 billion the year before.

This report indicates the smallest of the state’s banks continued to reduce their size and reel in the number of loans made which hindered their profitability given that fixed expenses are rising with higher regulatory costs. Experts say this is likely to fuel more consolidation of smaller banks in the future.

There were 77 banks in Arkansas with assets over $100 million and those banks grew earnings in 2015 to $875 million, up 10.89% from 2014. The banks grew total assets to $73.616 billion, up 15.6% from the prior year. The banks made a total of $49.69 billion in loans last year which was $9.832 billion more than 2014. Deposits grew to $59.741 billion, compared to $51.901 billion in the prior year period.

Lastly the larger banks moved more than $124 million of repossessed real estate from their balance sheets in 2015, leaving them $272 million.