Arkansas financial institutions see flat net income growth in 1Q

Commercial financial and savings institutions insured in Arkansas saw flat net income growth in the first quarter compared to the rest of the nation as the state’s largest banks rest from a period of strong post-recessionary growth and acquisitions in 2018.

For the period ended March 31, the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $60.7 billion in the first quarter of 2019, up $4.9 billion or 8.7% from a year ago, according to the FDIC’s quarterly banking industry report card posted Wednesday (May 29). Of the 5,362 insured institutions that posted financial results, nearly one of every three or 62.3% reported year-over-year growth in quarterly earnings and only four percent of banks were unprofitable, the report shows.

“The banking industry reported another positive quarter,” said FDIC Chairman Jelena McWilliams. “Net interest margins improved, asset quality indicators remained stable, and the number of ‘problem banks’ continued to decline. Community banks also reported a strong quarter, with annual loan growth and a net interest margin surpassing the overall industry.”

The first quarter FDIC report is free and clear of adjusted quarterly earnings throughout 2018 that reflected the average effective tax rate prior to the $1.8 trillion Tax Cut and Jobs Act approved by Congress in December 2017, which boosted net income by $50.3 billion or 18.5% in the fourth quarter compared to a year ago.

In 2018, the U.S. banking industry reported full-year 2018 net income of $236.7 billion, up $72.4 billion or 44.1% from 2017. Adjusted for tax reform effects, full-year 2018 would have been $207.9 billion, an increase of 13.6% from 2017. Going into 2019 with a historically low interest-rate environment and strong competition to attract lending, McWilliams warned that some institutions have “reached for yield,” which limited net interest margin expansion.

“With the recent stabilization of interest rate hikes, some institutions may face new challenges in lending and funding,” said the FDIC chief. “Therefore, banks must maintain prudent risk management in order to support lending through this economic cycle.”

ARKANSAS FDIC-INSURED BANKS DOWN TO 93
In Arkansas, consolidation in the financial sector continues to reduce the number of active bank filings amid ongoing charter consolidations through mergers and acquisitions. At a total of 93 FDIC-insurance banks, there were three fewer Arkansas banks in the first quarter than a year ago and seven fewer than two years ago.

Overall, those 93 FDIC-insurance banks and financial institutions together posted net income of $399 million for the three-month period ended March 31, slightly down from $400 million from a year ago. The dip in profits corresponds with a decline in year-over-year first-quarter earnings at all three of Arkansas’ publicly traded banking groups – Simmons First of Pine Bluff, Little Rock-based Bank OZK, and Home Bancshares of Conway.

Still, the state’s four largest regional banking groups continue to grow through key acquisitions, together holding more than half of the state’s banking assets, FDIC data shows. For example, Simmons posted first-quarter profits of nearly $48 million only weeks after completing a strategic acquisition that expanded the Arkansas regional banking group’s footprint into the St. Louis metropolitan area.

Entering 2019, following two major acquisitions in 2018, the Pine Bluff bank’s total asset value jumped to an all-time high of $17.1 billion with more than 200 branch locations in Arkansas, Colorado, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.

The state’s largest bank by assets, Bank OZK, reported first-quarter net income of $110.7 million, down 2.2% from $113.2 million a year earlier. Home Bancshares, the parent company of fast-growing Centennial Bank, saw a slight first-quarter decline in net income of $71.35 million, down 2.3%.

Privately held Arvest Bank of Fayetteville, the state’s second-largest bank behind Bank OZK in terms of assets, continues to refocus its operations following the notable $391 million all-cash acquisition of Bear State Financial Inc. a year ago. In December, Arvest announced several key executive promotions to improve the bank’s relations with its customers and employees.

Altogether, Arkansas banks and savings institutions have total assets of $108.9 billion, a meager 1.3% gain from $107.5 billion a year ago. The 74 Arkansas banks with assets of more than $100 million saw the largest share of those first-quarter profits at $395 billion compared to only $4 million for the 19 smaller community banks below the $100 million asset threshold. Overall, there were $108.9 billion in assets spread among the 93 banks, up 6% from the $102.4 billion in assets reported a year ago.

In other key metrics, deposits at Arkansas banks eclipsed the total amount of loans and leases. Loans held at the end of the first quarter totaled $76.7 billion, up 8.8% from a year ago. Deposits rose 6.1% to $87 billion in the first quarter amid higher consumer savings rates and businesses sitting on cash.

In a recent interview with Talk Business & Politics, Arkansas Bank Commissioner Candace Franks said she expects to continue to see a new era of mergers, consolidations and acquisitions at smaller banking institutions as the economy improves and investors seek out higher growth areas.

“In the smaller banks, I can tell you that generally what is the impetus for this is a generational change. We’re seeing a lot of that as far as the effects of those institutions wanting to look for new ownership or new partners,” said Franks. “In a lot of those smaller institutions, we have closely-held ownership and sometimes the family doesn’t want to come home or doesn’t want to come home and run the bank, so it’s time for the institution to look for new management.”

Meanwhile, FDIC data further shows that Arkansas banks are continuing to add new workers to payrolls with 22,526 full-time employees at the end of the first quarter, up 899 from the previous year. Most of those new hires, some 22,191 Arkansans, work at regional and local community banks with over $100 million in assets.

OTHER FDIC BANKING BENCHMARKS
Other key highlights from the FDIC’s quarterly review of the nation’s banking sector was that the FDIC’s “Problem Bank List” declined from 60 to 19 nationwide during the first quarter, the lowest number of problem banks since the first quarter 2007. Total assets of problem banks declined from $48.5 billion to only $46.7 billion. In the first three months of 2019, merger transactions absorbed 43 banks, one new charter, and no failures occurred.

Other key first quarter benchmarks for the nation’s banking industry showed that net income for community banks rose 10.1% from a year ago. The 4,939 insured institutions identified as community banks reported net income of $6.5 billion in the first quarter, up $596 billion from a year ago.

Total loan and lease balances increased 4.1% over the past 12 months, a slight decline from 4.4% annual growth rate reported in the fourth quarter. Commercial and industrial loans grew by $37.7 billion, or 1.7%, from the fourth quarter, but was offset by credit card balances that fell by $43.5 billion, or 4.8%. Total loan and lease balances fell by $4.8 billion from fourth quarter 2018, with commercial and industrial loans registering the largest dollar increase from a year ago, up $155.6 billion, or 7.6%.

The Deposit Insurance Fund (DIF) balance rose by $2.3 billion from the end of the fourth quarter to $104.9 billion. The increase was mainly driven by assessment income, interest income, and unrealized gains on securities held by the DIF. The DIF reserve ratio remained unchanged from the fourth quarter at 1.36% as insured deposits also rose.