EDITOR’S NOTE: The story has been updated with corrected information regarding second quarter income for Arkansas banks.
Cheap money and decent loan demand is helping Arkansas banks earn bigger profits, according the recent State Banking Performance Report compiled by the Federal Deposit Insurance Corp. (FDIC).
Through June, 98 Arkansas banks cumulatively earned $610 million in net profits, up 22.7% over the $497 million pocketed in the year-ago period. Bankers polled by Talk Business & Politics said the overall Arkansas economy is good and there are pockets of continued growth in the Northwestern and Northeastern regions of the state.
The report shows there are six fewer banks in the Natural State this year but overall assets have grown 15.2% from a year ago to $92.423 billion. At the same time deposit growth has improved nearly $9.7 billion from a year ago. The 98 banks showed cumulative deposits of $74.446 billion, compared to $64.747 billion last year.
The banks saw their cumulative yield on assets rise to 4.43%, up from 4.31% a year ago and net interest margins widened to 4%, from 3.94% in the same timeframe. Dr. John Dominick, banking consultant and finance professor at the University of Arkansas, told Talk Business & Politics the lower credit-loss provisions coupled with better net margins are the main reason for better bank earnings.
Banks charged off 0.18% of the their total loan portfolios, which was level to last year’s results. Credit loss provisions were lower as the number of non-performing loans was reduced to 0.88% of total loans on the books. A year ago the non-performing loans comprised 1.06% of the cumulative loans on bank balance sheets. Dominick said when a bank has fewer non-performing loans that reduces the reserves it must set aside against defaults and that’s money that can flow to the bottom line.
Better performing loan portfolios helped 62.25% of the 98 banks to report profitable gains. The report found 4% of the banks were unprofitable and the rest had earnings on par with a year ago. The standard metric to measure a bank’s profitability is its return on assets, where the benchmark score is 1%. For the entire group of Arkansas banks the ROA for the period was 1.35%, up from 1.27% a year ago.
The FDIC report segregates small banks (less than $100 million in assets) into one group and those with more than $100 million in assets into a larger group. In the small cohort there are five fewer banks this year as consolidation continues in the financial sector. The 21 small banks reported cumulative net income of $6 million through June, which was double the $3 million reported a year-ago by 26 banks. The ROA in the small bank cohort was 0.93%. While that’s below the 1% benchmark it was an improvement over the 0.32% reported a year ago.
The larger bank cohort of 77 banks posted cumulative net income of $604 million, up 22% from a year ago. This group’s ROA rose to 1.36%, compared to 1.29% a year ago. Arkansas banks on the whole outperformed the national results which produced ROA of 1.09% through June. Banks across the nation also saw total net income rise to $92.143 billion, up 11.6% from a year ago. The growth was roughly half of that seen by Arkansas banks.
Bankers polled in the vibrant Northwest Arkansas market report strong commercial loan demand, noting it’s comparable to a year ago, according to Don Gibson, CEO of Legacy National Bank. Gibson gives the local economy an A- for its economic health, saying the biggest threat on the local economy is not getting ahead of itself. One other possible threat to continued growth would be national or global factors that could ripple down to the local markets, he said.
Craig Rivaldo, president of Arvest Benton County, also sees 2017 being a good year for banks and the community at large.
“Commercial demand has been strong. Last year we exceeded growth estimates and the last couple of months have been the strongest thus far in 2017. The reason has been the continued strong regional economy and the growth we have seen,” Rivaldo said.
Neither Gibson nor Rivaldo had anything to add on the consumer lending front. But each banker did say bank earnings were helped because of slightly better interest rate spreads. Gibson said he anticipates maintaining spreads for the rest of this year with the Federal Reserve slowing down on interest rate adjustments based on recent comments. Rivaldo said with rates inching up earlier this year Arvest stayed short-term in its investment portfolio and worked to keep high liquidity levels overall.
“With rates on the way up, this has and will work to our advantage. The improvement to net interest margin has had a positive impact to Arvest earnings for 2017,” he added.
While profits are up, bankers tell Talk Business & Politics they continue to invest in Dodd Frank compliance issues and technology advances. Gibson said Legacy is converting to new a loan system to better conform to the required compliance. Rivaldo said Arvest’s compliance spending was about the same as last year, but the bank has spent more on technology enhancements.
“In our opinion, there is a strong push towards technology to enhance the customer experience. Customers today demand the convenience of applying for a home loan or consumer loan, in the evening while at home. If a bank is not going to spend the money on technology and stay current with the industry changes, it is not long before that bank will become irrelevant. Arvest has made the commitment to spend the money for the future,” Rivaldo said.
Arvest on Tuesday announced a $391 million acquisition of Bear State Financial that has been aggressive in technology investments, according to Banks Street Partners analyst Will Brackett. The deal with Bear State includes 3 technology centers along with the 42 branches.
STRONG SECOND QUARTER
U.S. banking profits were strong in the second quarter ending June 30, according to FDIC Chairman Martin Gruenberg.
“This was another positive quarter for the banking industry. Revenue and net income growth were both strong, profitability reached a post-crisis high, and net interest margins improved. While the quarterly results were largely positive, the operating environment for banks remains challenging,” he noted in a press release.
Quarterly net earnings rose 10.7% over a year ago, and community banks (which includes all the Arkansas banks) saw profits jump 8.5% from a year ago. Total bank profits rose to $48.3 billion in the second quarter, thanks to higher net interest income and well as rising fees.
The FDIC said delinquent loans more than 90 day past due declined by $8.4 billion or 6.7% in the second quarter. But charge-offs increased $1.1 billion as more credit card portfolios were in serious arrears compared a year ago. The agency said other consumer loans had lower charge-off rates year over year.
There were 105 banks on the FDIC “Problem Bank” list in the second quarter which was down from 112 in the prior period. The FDIC said this is the smallest number of problem banks on its list since March 2008.
In the second quarter, Arkansas banks earned a total of $315 million, up 27% from the $248 million earned in the second quarter of last year, according to the FDIC report.