Tax cuts, tailored regulations position state banks for growth in 2018

Bill Holmes says 2018 will look a lot like 2017 for the state’s banking industry.

“And 2017 was a good, healthy year for banks in our state,” Holmes said.

Holmes, president and CEO of the Arkansas Bankers’ Association for the past six years, pointed to a strong year of asset growth and deposit growth in 2017. According to the most recent data available from the Federal Deposit Insurance Corp. (FDIC), the number of banks in Arkansas shrank from 103 to 98 in the 12 months from Sept. 30, 2016, to Sept. 30, 2017. But assets grew from $87.7 billion to $97.4 billion. In the 12 months that ended June 30, total deposits statewide reached a record $56.5 billion.

Arkansas banks also saw an increase in profitability in 2017. The state’s most recent return on average assets (ROA) ratio, a main measure of health and profitability, was 1.33%, the top performer among the seven states that make up the U.S. Federal Reserve Bank’s Eighth District. It’s also ahead of the Eighth District average (1.17%) and the national average (1.08%).

Holmes said the industry could be poised for more growth in 2018 if federal regulations can, as has been promised, become more sensibly tailored to the size of the lender. There’s been some concern regulators may be doing too much to scale back rules (i.e. Dodd-Frank) that were put in place after the Great Recession and financial crisis. Holmes does not share that opinion.

“I think we are finally at the end of a long, 10-year cycle of new regulations and new rules and [new] laws, systems and oversights,” he said. “There is a new head of virtually every [bank] regulator. I hope that they hold to what they have stated so far. Certainly we are not going to undo Dodd-Frank or [make] a complete reversal. But to go back now and see what was right, what was wrong and fix some of the overregulation. All have committed to that. I think that would be great for our hometown bankers.”

Holmes and University of Arkansas finance professor Tim Yeager both agree the Tax Cut And Jobs Act, signed into law Dec. 22 by President Donald Trump, should be a positive for the banking industry, especially in terms of profitability.

“Because their tax burden is going to be reduced, banks are going to have higher profitability,” Yeager said. “And that will add to the momentum in the state economy, especially the banking sector.”

Holmes said the new tax plan might even spur changes among Arkansas banks ahead of the March 15 federal tax deadline for Subchapter S corporations. A lot of smaller banks have converted from a traditional corporation to an S corporation through the years in order to trim their tax bills. Enjoying that tax advantage is no longer the case.

“It’s now more favorable to be a [Subchapter] C corporation than an S, and about a third of our banks [there are 40] are S corporations,” Holmes said. “I have not talked to anybody that is [converting] or seen the process started, but you have to wonder if we might see some banks swing that way.”

Candace Franks, who became the state’s 21st bank commissioner in June 2007, agreed the tax bill and reduced federal regulations could be the two biggest benefits for Arkansas banks in 2018. She said an interest rate increase by the Fed could also be a vehicle for banks to balance their liquidity position.

Franks said banks are also still tepid in their enthusiasm of getting involved in the medical marijuana industry in Arkansas, which was approved by voters in November 2016 but is still working toward implementation. She said Attorney General Jeff Sessions’ announcement to give federal prosecutors the green light to enforce federal marijuana laws in states where cannabis has been legalized in some form didn’t help.

“I don’t know how that will affect an already-skeptical industry, but I think that threw a damper on banks who thought they might test the water,” she said. “I expect they’ll see how things unfold.”

In terms of technology, Holmes said banks need to push ahead in 2018 with further digitalization and adoption of more fintech products, while at the same time remaining good stewards of customers’ private information.

“We’ve always had great customer service, but it’s time for us to have great customer experiences,” he explained. “And that’s customers of every age. How many grandparents did we laugh about [being] on Facebook, and now how do they communicate with their grandkids every day? Innovation is going to take on a huge new role, and we’ve got to figure out how to use data in different ways.”