Northwest Arkansas banks report consistent profits led by consumer and commercial loans

Last year was good for Arkansas banks, who posted a combined net income gain of more than 21% in 2016, with a core group of banks in Northwest Arkansas posting a 16% gain.

The state’s 101 financial institutions reported net income of $1.086 billion in 2016, rising 21.47% from the previous year, according the state banking report from the Federal Deposit Insurance Corp. The report shows the 78 banks larger than $100 million in assets earned a cumulative $1.074 billion last year, up 23.16% from 2015. The smallest of the state’s financial institutions didn’t fare as well. These 23 federally insured financial institutions earned a combined $12 million, flat compared to the prior year and down 33% over the past two years.

The large banking cohort saw a 20.5% increase in total loans in 2016 and were sitting on $58.724 million in loans at year end, compared to $48.718 million the year before and $39.858 million to end 2014. The cumulative return on assets rose to 1.33% to end 2016, better than the industry benchmark of 1%. One of the metrics that can hinder profitability are non-performing loans, which were down in 2016 to 0.93% of assets among the larger bank cohort. In prior years, the ratio of nonperforming assets to total assets was 1.11%. The smallest banks had a nonperforming loan ratio of 2.13%, down from 3.02% in the previous year. Net charge-offs were flat against the prior year among both cohorts.

Deposit growth continues to rise among larger banks with total deposits of $71.759 billion at the end of 2016, up more than $10.5 billion in the year. Deposits decreased 15.88% in the past year among the smaller bank cohort.

NORTHWEST MARKET
Construction and consumer loan growth in Benton and Washington counties helped area banks add to profits in 2016. Eleven banks in the region — either based in the two-county area or having significant market share — were reviewed by Arkansas Bankers Chair Dr. Tim Yeager at the University of Arkansas.

Yeager told Talk Business & Politics this core group of banks — Arvest, Signature Bank of Arkansas, First National Bank of NWA, Chambers Bank, First Security, First Western, United Bank, Legacy National, Bank of Gravett and Priority — posted return on assets (ROA) of 0.95%, with combined profits of $240 million, a 16% gain from the previous year.

“Overall, their results represent strong performance and I have no concerns at all, which reflects the soundness and strong growth in this region of the state,” Yeager said in a telephone interview.

He said the income growth resulted from an 8% gain in net interest income, primarily from loans. He said fee income rose 13%, offset by a 3% increase in overhead expenditures by the group. Loans grew 8% year-over-year. One of the biggest areas of increased lending was in commercial construction and land development. About a quarter of that growth is in residential housing. He said agriculture loan growth was flat last year, but farmland loans increased by 10%.

One eye-popping statistic was the 25% increase in consumer loans last year. Yeager said the consumer loans were spread among several categories but the majority of the growth was in auto loans, with the core banks growing that particular portfolio by more than $108 million from the prior year.

“Money is cheap and consumers are obviously borrowing to spend,” Yeager said. “These 11 banks increased their overall lending in 2016 by $256 million over the prior year.”

In another sampling of five banks in the area using the same criteria as Yeager, Talk Business & Politics found similar results in terms of solid earnings overall. Arvest, First Security, Farmers & Merchants, Legacy National and Signature Bank reported combined net profits totaling more than $318.72 million last year, a gain of 12.7% year-over-year. Four of the five banks surveyed in the local market saw higher profits in 2016 over 2015. First Security was the exception. The Searcy-based lender had net income of $98.92 million last year, sliding 7.8% from the prior year. The bank continues to have an exceptional ROA at 1.99%, which was higher than the other four banks in the local survey.

First Security grew its loans by 10% last year and also reported a rise in non-current loans from 2015. Non-current loans remain low for the bank in comparison to overall assets of $4.934 billion. The reason for the reduced earnings is believed to be related to the bank’s securities positions, as the loan portfolio appears to be performing on par with a year ago.

Legacy National reported net income of $44.762 million, compared to $41.932 million in the prior year. The bank had loan growth of 15.68% last year. Don Gibson, the bank’s CEO, said the loan growth was primarily in commercial real estate and agriculture. Assessing the economy today, Gibson said he would grade it a B+ and improving.

Arvest Bank, by far the largest in the group, also posted increased income in 2016. The $16.6 billion bank earned $102.678 million in net income, up a whopping 54.7% from a weaker 2015. The bank grew loans to $9.404 billion, up 6.68% from the previous year.

Stuttgart-based Farmer’s & Merchants Bank, parent of The Bank of Fayetteville, grew its income to $9.365 million in 2016. The gain of 21% is partially related to the purchase of BOF, a deal completed in the summer of 2016. The bank’s total loans rose 19.3% to $650 million last year.

Signature Bank reported net income of $63.63 million last year, a gain of 6% from the prior year. Loans increased 4.25% to $414 million. CEO Gary Head told Talk Business & Politics evidence continues to show the local economy is sound. He said average home prices rising and average days on market being under four months is an indication of strength in real estate construction where the bank makes a majority of its loans.

Head grades the local economy an A+ from where he sits, citing low unemployment, strong job gains and a robust housing market as the primary reasons.

RISING RATES
Bankers said rising interest rates are likely to modestly benefit bank profits this year. They should also help consumers who rely on fixed income securities. He said the market expects three rate hikes and if that occurs, he anticipates no shocks on the financial markets. However, if interest rates rise faster than expected ,he said banks with the highest amounts of local deposits to loan will be the best suited for growth. He expects that won’t likely happen until to 2019.

“Banks are set up to have another good year in 2017,” Yeager said.

Agreeing with that sentiment, Head added, “We anticipate some higher rates which benefit the savers and cost the borrowers. We’re just making a living in the middle of it.”