Arkansas banks see dip in second quarter profits as interest rate pressures grow

Second-quarter profits at Arkansas’ 92 federally insured banks were well below year-ago levels and fell further behind the rest of the nation, according to the Federal Deposit Insurance Corp.’s (FDIC) quarterly banking profile.

For the period ended June 30, the FDIC reported net income of $62.6 billion in second-quarter 2019, an increase of $2.5 billion or 4.1% from the same period of 2018. Of the 5,303 insured institutions that posted financial results, 60% of all institutions reported a year-over-year increase in net income and less than 4% of institutions were unprofitable.

Federal banking regulators attributed the slight improvement in net income to a $4.9 billion, or 3.7% increase in net interest income, which is the money a bank can earning on assets they own. Nationally, the FDIC said the average return on assets remained stable at 1.38%, which is an improvement from 1.35% in the first quarter and 1.37% a year earlier.

“The banking industry reported another positive quarter,” said FDIC Chairman Jelena McWilliams. “Quarterly net income expanded due to higher net interest income, loan growth increased, asset quality indicators showed modest improvement, and the number of ‘problem banks’ continued to decline. Community banks also reported another positive quarter. Net income at community banks benefited from higher net operating revenue, and the annual rate of loan growth at community banks was stronger than the overall industry.”

However, McWilliams warned that the recent lowering of short-term interest rates by the Federal Reserve’s Open Market Committee (FOMC) and the “inversion of the yield curve” in the second quarter presents new challenges for banks in lending and funding. The chief disciple of the negative yield curve theory over the past few years has been St. Louis Fed President James Bullard, one of 12 regional central banks who oversees the expansive Eighth District that includes all of Arkansas and six other states.

Just last week, Wall Street brokerage firm Raymond James downgraded Bank of America shares after warning investors that the Charlotte, N.C.-based banking giant is especially sensitive to interest rate changes shaped like a yield curve due to its large lending business and deposit base.

“With the recent lowering of short-term interest rates and inversion of the yield curve in the second quarter, new challenges for banks in lending and funding may emerge,” said McWilliams. “Therefore, banks need to maintain rigorous underwriting standards and prudent risk management in order to support lending through the economic cycle.”

ARKANSAS BANK INCOME
In Arkansas, consolidation in the community and regional banking space continues to reduce the number of active bank filings amid ongoing charter consolidations through mergers and acquisitions. At a total of 92 FDIC-insurance banks, there were three fewer Arkansas banks in the second quarter than a year ago and six fewer than two years ago.

Overall, Arkansas-based community and regional banks and savings institutions together posted net income of $807 million for the three-month period ended June 30, down 3.6% from $837 million a year ago. The dip in profits corresponds with a slight decline in year-over-year second-quarter earnings at two of the three Arkansas’ publicly traded banking groups, which include Little Rock-based Bank OZK, Home Bancshares of Conway, and Simmons First National Corp. of Pine Bluff.

In fact, in management comments released after its second-quarter earnings report in July, Bank OZK noted that its lower-than-expected second-quarter earnings were impacted by flat net interest income growth, which is the bank’s largest category of revenue.

“We strive to increase net interest income through a combination of growth in earning assets and good yields on those assets,” Bank OZK said in a company news release. The company ended the second quarter with 1.95% return on assets of $22.22 billion. “Our growth in net interest income has been inhibited in recent quarters by the large volume of loan repayments in non-purchased loans, the pay-downs in our purchased loan portfolio, the impact on our net interest margin from the competitive environment for loans and deposits, and recent decreases in LIBOR (interest) rates.”

Still, the state’s four largest regional banking groups, which also includes privately held Arvest Bank of Bentonville, continue to grow through key acquisitions, together holding more than half of the state’s banking assets, FDIC data shows. For example, after reporting improved second-quarter profits of nearly $56 million, Simmons First announced the acquisition of a Columbia, Mo.-based Landmark Bank a week later in an all-stock deal valued at nearly $435 million.

During the second quarter, Simmons First also completed its acquisition of St. Louis-based Reliance Bancshares Inc. in a $214 million cash-and-stock deal first announced in November. Together with Landmark Bank, Simmons is now expected to have dozens of new branch locations sprinkled across key rural and urban markets in Missouri.

Following the expected close of the Landmark deal in late 2019 or early 2020, Simmons will have assets nearing $21 billion, along with total loans and deposits surpassing $15 billion and $17 billion, respectively. Simmons will also close the gap between it and Arkansas’ two largest banks by assets in Bentonville-based Arvest Bank and Bank OZK of Little Rock respectively at $18 billion and $23 billion.

Altogether, Arkansas banks and savings institutions have total assets of nearly $111.5 billion, a 4.5% gain from $106.5 billion a year ago. The 75 Arkansas larger community banks with assets of more than $100 million saw the largest share of those first-quarter profits at $802 billion compared to only $5 million for the 17 smaller local banks below the $100 million asset threshold.

In other key metrics, deposits at Arkansas banks eclipsed the total amount of loans and leases. Loans held at the end of the second quarter totaled $79.06 billion, up 5.6% from a year ago. Deposits rose 4.5% to $88.8 billion in the second quarter amid higher consumer savings rates and businesses sitting on cash.

Second-quarter FDIC data also shows that Arkansas banks are continuing to add new workers to payrolls even as Arkansas’ unemployment rate neared in all-time low of 3.4% going into the second half of 2019. Altogether, there were 22,983 full-time employees at Arkansas banks at the end of the second quarter, up 945 from the previous year.

PROBLEM BANK LIST
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 59 to 56 nationwide during the second quarter, the lowest number of problem banks since the first quarter 2007. Total assets of problem banks increased from $46.7 billion to $48.5 billion. In the first six months of 2019, five new banks opened, 60 institutions were absorbed through merger transactions, and one institution failed.

Other key first-quarter benchmarks for the nation’s banking industry showed that net income for community banks rose 8.1% from a year ago. The 4,873 insured institutions identified as community banks reported net income of $6.9 billion in the second quarter, up $522.7 million from a year ago.

Total loan and lease balances in the second quarter increased by $15.2 billion or 1.5% over the previous quarter. Growth among major loan categories was led by consumer loans and credit card balances that grew by $42.2 billion, or 2.5%, and resident mortgages that rose slightly by 1.8% or $38.3 billion. Total loan and lease balances rose by 4.1% from the first quarter, with commercial and industrial loans registering the largest increase from a year ago at 5.9% or a robust $142.7 billion.

The Deposit Insurance Fund (DIF) balance rose by $2.6 billion from the end of the first quarter to $107.4 billion. The increase was mainly driven by assessment income, interest income, but unrealized gains on securities held by the fund and a reduction in losses from past failures made considerable contributions. The reserve ratio increased by 4 basis points from the previous quarter to 1.4%.