Northwest Arkansas banking sector sees mixed profit levels during 2015

Four of the five large-to-medium size banks based or active in Benton and Washington counties surveyed by Talk Business & Politics reported modest to steady net income growth throughout 2015. This better-than-average year also described the cumulative results of 104 banking institutions conducting business in the Natural State.

The cumulative total profits for the Arkansas banking sector equaled $887 million for all of 2015. Profit rose 9.91% from the $807 million earned during 2014, according to a recent report from the Federal Deposit Insurance Corp. While the cumulative sector increased, not all banks showed year-over-year profit gains.

Banks with assets below $100 million – the 27 smallest financial institutions in Arkansas – earned $12 million last year, down from $18 million reported in the prior-year period. The remaining 77 banks earned profits of $875 million, up 8.42% year-over-year, according to the FDIC data.

The cumulative profits reported by the five banks active or based in Northwest Arkansas – Arvest, First National Bank of NWA, First Security, Legacy, and Signature – totaled $195.234 million last year. Profits overall were down 13.48% from the prior year period. The reason this cohort showed weaker earnings was related to lower profits from Arvest Bank, the largest financial institution in the state with a home base in Bentonville. Arvest reported net income of $66.336 million in 2015, down 36.92% from the $105.166 million earned in 2014.

“Arvest’s overall 2015 financial results were negatively impacted by continued low interest rates, regulatory environment and other pressures. The interest rate environment limited our earnings in 2015. With continued pressure on net interest margin and other assets which were impacted by movements in interest rates,” said Craig Rivaldo, president for Arvest Bank Benton County. “As a privately-held company, Arvest focuses on long-term growth, stability and positive earnings in its areas of business rather than emphasizing single year performance.”

He said the bank does not break out earnings by its separate markets but speaking for Benton County, Rivaldo said 2015 was a “solid year.”

“We had quality growth in all areas including: loan growth, deposit growth, and household growth. And 2015 was one of the better years in regard to loan growth and earnings for the Benton County region.” Rivaldo said. “For 2016, our anticipation is for Benton County to have another solid year.”

SOLID MID-SIZE RESULTS
Without the Arvest earnings, the other four banks in this report earned cumulative profits of $128.898 million last year, rising 6.96% from the 2014. Leading in that growth was Signature Bank-based in Fayetteville reporting net income profit growth of 41.16% year-over-year. The bank earned net income of $3.258 million, compared to $2.308 million in the prior year.

Signature continued to grow its assets to $496.78 million by the end of 2015, while also reducing credit losses by more than $3.4 million throughout last year. The bank managed to grow loans to nearly $397 million last year, while also reducing provisions to loan loss reserves by $1.5 million. Looking ahead the bank has noncurrent loans down to $416,000 from a whopping $12.5 million at the end of 2014.

“We had a decent year in 2015 doing a bit better than we had budgeted and we are bullish on 2016 with more net income from loan growth, reducing our Other Real Estate Owned, and continued growth in our mortgage business and our wealth management business,” said Gary Head, CEO of Signature Bank.

Springdale-based Legacy National Bank also reported double-digit net income growth in 2015. The bank’s profits totaled $2.44 million, rising 16.59% from the $2.087 million earned in 2014, according filings made the FDIC.

Legacy also managed to grow its average earning assets to $334.357 million, up 12.9% from the prior year despite the competitive lending climate. Total loans grew by $30 million to $251.98 million last year, while net credit losses remained low at $60,000 for the year. The bank still had more than $3.9 million in noncurrent loans at the end of 2015, roughly the same as the prior year. CEO Don Gibson said Legacy’s 2015 earnings were on target and the bank expects continued earnings growth in 2016.

“Community banks, like Legacy, are a reflection of the communities we serve and NWA is experiencing healthy growth in all areas. Business construction and investment is improving as well as residential construction,” Gibson said.

He also cautioned that earnings will continue to be under pressure due to competitive factors, but said the local market is also poised to benefit from economic engines of retailing, transportation and poultry.

STEADY GROWTH
Searcy-based First Security Bank has had a large presence in Northwest Arkansas for decades and about 25% of its overall assets are located in Benton and Washington counties. The bank grew net income to $106.606 million last year, up 6.13% from the $100.444 million in 2014. With a return on assets of 2.28% First Security is one of the more profitable banks in the state.

One impressive statistic First Security pulled off in 2015 was a 42% reduction in other real estate owned. The bank held $9.325 million in repossessed real estate on its books at the end of 2015, down from $16.097 million in 2014 and $22.82 million in 2013, according to the bank’s FDIC filings.

First National Bank of NWA also saw steady growth throughout 2015. The Fort Smith-based bank had total assets of $1.216 billion, compared to $1.182 billion in the prior year. Net income rose 5.95% to $16.595 million last year, according to the bank’s FDIC filings.

The bank benefited from $1.231 million in reversed credit losses during 2015 and the movement of more than $4.6 million of repossessed real estate off its books. The bank’s total loan growth was flat at $761 million, roughly the same number reported at the end of 2014. Rob Husong, regional market president for Benton and Washington counties, said roughly 20%-25% of the bank’s loans are tied the local market.

“We have seen loan growth in all the counties we serve with Benton and Washington being a little higher than the others,” Husong said. “Lending in this market is very competitive and I suspect will continue to be so for some time. … We continue to see our personal and business customers striving to grow their savings and cash reserves. Many say that even though they may be making some purchases that they are still very cautious about it and still uneasy during this election cycle.”

“Even if it wasn’t an election year people would still be cautious with their cash given the Great Recession. I had a good customer just today say, ‘I remember what it was like just a few years ago to be cash poor and I never want to be in that position again,’” he added.

First National NWA recently broke ground on a new branch in downtown Bentonville after several years of planning. Husong said the bank already has an active customer base in Bentonville and a new full service branch there was one way to fill a gap connecting the bank’s coverage of Benton County.

Despite the crowded banking landscape in the region, Husong said First National is not trying to acquire the world, but merely allow itself to grow within the community it already serves.

“We want to grow but in a way that promotes healthy community growth as well,” he added.

REGULATORY ANGST
“Compliance burdens have not made lending any easier,” Husong said.

Other bankers agree. But rather than just complain about the constant regulatory hurdles imposed, Husong said his team decided take a proactive approach to what that could not change.

“As a community bank we need to be the experts and help our customers and community by understanding the compliance and helping navigate it to find solutions,” he said.

While taking a proactive approach is admirable, the reality is that regulation is bound to offset some earnings again in 2016, according to a national survey of community banks conducted in late 2015 in conjunction with Federal Reserve Bank of St. Louis and the 21st Century Community Banking report.

The report found the cost of regulatory compliance for U.S. community banks is estimated at $4.5 billion annually, or 22% of their net income. Respondents to the 2015 survey reported that regulatory compliance accounted for 11% of personnel expenses, 16% for data processing expenses, 20% for legal expenses, 38% for accounting and auditing expenses, and 48% of consulting expenses.

The smaller banks are likely those feeling the brunt of the pain related to higher regulatory costs. This has been, and may continue to be a catalyst for more bank mergers this year on the heels of two deals for Northwest Arkansas banks during 2015.