Third quarter banking profits rise 12.9% nationally and 21% higher statewide

National and state banking sectors posted an almost 13% net income gain in the third quarter despite ongoing challenges, particularly for smaller banks. Arkansas banks posted a higher 21.3% combined net income gain.

Commercial banks and savings institutions across the United States reported a combined net income of $45.6 billion, up 12.9% from a year ago, according to the FDIC’s Quarterly Banking Profile released Tuesday (Nov. 29).

Earnings overall were most impacted by a $10 billion increase in net interest income, while fee income rose by $2.9 billion over a year ago. More than 60% of the 5,980 banks reporting had positive year-over-year earnings in the third quarter. The proportion of banks that were unprofitable in the third quarter fell to 4.6% from 5.2% a year earlier – the lowest percentage since the third quarter of 1997.

“Revenue and net income rose from a year ago, loan balances increased, asset quality improved, and the number of unprofitable banks and ‘problem banks’ continued to fall,” FDIC Chairman Martin Gruenberg said in a statement. “Community banks also reported solid results for the quarter with strong income, revenue, and loan growth. Nevertheless, the banking industry continues to operate in a challenging environment.”

Continuing, he noted: “Low interest rates for an extended period have led some institutions to reach for yield, which has increased their exposure to interest-rate risk, liquidity risk, and credit risk. Current oil and gas prices continue to affect borrowers that depend on the energy sector and have had an adverse effect on asset quality. These challenges will only intensify as interest rates normalize. Banks must manage risks prudently to ensure that growth is on a long-run, sustainable path.”

STATE SENTIMENT
Bankers around the Natural State echoed that sentiment especially in the highly competitive Northwest Arkansas market.

“Lending in NWA is always very competitive. With many banks having high liquidity, there is a strong desire and need to better utilize those deposits into higher interest paying assets, like loans. This makes it tough,” said Craig Rivaldo, president of Arvest Benton County.

Bill Holmes, Arkansas Bankers Association president & CEO, said banks are doing well even in the face of more regulations.

“Despite regulatory obstacles and a slow rebound in our economy, Arkansas banks are proving they can thrive. Our banks are in the best shape they have been in for almost a decade because our bankers looked at these difficulties and created opportunities to expand and gain more business, all while helping their local economies grow,” Holmes told Talk Business & Politics.

Arkansas Bankers Chair at the University of Arkansas Tim Yeager said Arkansas banks overall are safe and sound, but interest rate conditions, regulatory costs and high capital requirements are depressing shareholder return for some banks still. Yeager said banks in general would likely benefit from a 0.25% to a 0.50% uptick in interest rates, which is expected to happen in December.

STATE PROFILE
The FDIC State Performance Report showed 103 Arkansas banks earning a combined $797 million in the third quarter, up 21.3% from the $657 million reported a year ago. Assets also increased to $87.708 billion, up 19.2% from a year ago. The banks grew total loans to $58.578 billion in the quarter, a gain of $10.73 billion or 22.4% from a year ago.

Equally impressive, Arkansas banks grew deposits to $70.625 billion, up 19% from a year ago. Meanwhile other real estate holdings from foreclosed properties declined year-over-year. The banks held $260 million of foreclosed property on their books at the end of the third quarter, having moved $75 million of property off the books over the past year.

While the overall sector showed positive results, the gains were not equally distributed as small banks continue to struggle. There are 24 banking institutions in Arkansas with less than $100 million in assets. These small banks had total third quarter net earnings of $10 million, down from $12 million a year ago and $15 million earned in the same period of 2014. The rate of unprofitable institutions in this small bank cohort was 16.6%. The primary reasons for that was a declining interest margin, shrinking loans and core deposits amid higher regulatory costs.

Arkansas banks with more than $100 million in assets fared better. These 79 institutions grew net income earnings to $787 million in the third quarter. The larger banks were able to grow net interest rate margin slightly to 3.98%. Total loans in this group grew to $57.707 billion, compared to $46.789 billion a year ago. Deposits also increased to $69.344 billion, a gain of 20% year-over-year. The banks also saw the total real estate holdings on their books shrink to $243 million as they sold off $57 million of foreclosed property over the past year. This larger bank group had a combined 1.32% return on assets, above the benchmark 1%.

While profits have been harder for smaller banks to muster, the group was able to hold on to high capital ratios and a decent return on assets of 0.85%. They have done so, largely by shrinking assets and loans, which industry watchers say could make it harder for them to compete in certain markets and perhaps make them a takeover target in the future as the banking sector continues to consolidate.

Two years ago there were 111 institutions in the Arkansas Quarterly Banking Summary, that number declined to 108 in 2015, and falling to 103 this year. The majority of those banks consolidated were the smaller ones. There are five less small banks in the state than in 2014, while there are three fewer larger banks.