Increased competition squeezes bank margins in Northwest Arkansas

The health of the state’s banking economy is sound but competition in the Northwest Arkansas market is taking a toll on net interest income while at the same time regulatory costs are escalating.

Dr. Tim Yeager, Arkansas Bankers Chair at the University of Arkansas, said the trend shows bank earnings in the region are steady, but not strong. An analysis of 11 banks conducting considerable business in the region during the second quarter shows the net interest income ratio fell to 2.98%, down from 3.04% at the end of 2015, and well below the 3.55% of all U.S. banks in the second quarter.

The banks in Yeager’s analysis are: Signature Bank, First National Bank of Fort Smith, Chambers Bank, First Security Bank, Bank of Gravett, Arvest Bank, Pinnacle Bank, First Western Bank, United Bank, Priority Bank and Legacy National Bank.

Yeager said the falling interest income is a direct result of lower interest rates among banks eager to try and take market share, which intensifies competition among banks in the region. He said this can be a dangerous game to play in a climate where interest rates are expected to rise from the lows that have persisted for several years.

The State Quarterly Report released Friday (Sept. 9) indicates there are 38 banks in the Northwest Arkansas metro area, five more than in the large Little Rock metro and almost double the number of banks in the smaller Fort Smith and Jonesboro metro areas.

The 38 banks in the local region held more than $9.053 billion in deposits compared to the $16.36 billion deposit level in the Little Rock metro. Yeager said the banks in Northwest Arkansas that lack local deposits and rely heavily on brokered certificate of deposits or other borrowed money to fund their loans could be taking considerable risks lending at very low rates. He said the banks in Northwest Arkansas with the largest core deposits will likely be the best position when rates do climb higher.

Yeager’s report indicates that borrowings from the Federal Home Loan Bank of Dallas which are normally used to fund loans to have risen to $696.752 million in June among the 11 banks in the report. Borrowings have increased from $556.520 million to start the year.

The 11 banks hold loans totaling $13.877 billion through June 30, an increase of $500 million since the year started. The number of non-accrual or severely delinquent outstanding loans held by the 11 banks grew to $128.854 million as of June 30, up compared to $124.653 million at the start of 2016. The 11 banks earned more than $100.73 million in income from the delinquent loans they were not yet able to collect as of June 30.

Another trend Yeager noted is Northwest Arkansas banks have largely gotten their negative loan loss provisions balanced and are once again taking small, but positive expenses which has reduced the Return on Assets by about 0.10% in the last couple of quarters. He said banks are overall safe and sound, but interest rate conditions, regulatory costs and high capital levels are depressing shareholder return. Yeager said banks in general would likely benefit from a 0.25% to a 0.50% uptick in interest rates.

The Federal Reserve was expected to raise rates before the year ends, but recent comments from Federal Reserve board member Lael Brainard indicate that she’s in no hurry to raise interest rates. Brainard said Monday (Sept. 12) the risk that higher rates will damage a fragile economy exceeds the risk that higher rates will ignite inflation. Economic weakness “counsels prudence,” she said during a speech in Chicago.

Yeager has been vocal about the risks to the overall economy by keeping rates low. He said the Fed is likely pulling forward growth ahead and creating instability.

“We know rates will eventually go up, and it will be interesting to see how the Fed gets out of the box it’s in. Will it be a smooth unwinding or will rates really spike? We just don’t know at this point. The longer the Fed waits the harder it gets,” Yeager said.