Banking profits improve, despite tepid loan demand

It looks like Arkansas banks are off to their best start in three years, despite lackluster loan demand and looming regulatory costs.

With the downturn in the economy in late 2008, most banks spent the next three years recognizing, downgrading (proper “risk grading”), and “reserving” (for loan loss), their loan portfolios, said Craig

He added that bankers continue to be watched by regulators who seek aggressive loan portfolio management which has ultimately led to higher earnings after three long years.

Four of the six banks with the largest marketshare in the Fort Smith metro area posted an increase in first quarter profits to start 2012, compared with a year earlier.

These six banks — Arvest, BancorpSouth, Citizens Bank & Trust, Farmers Bank, First National Bank and Regions — together posted net profits of $328.014 million, up 173% from the year-ago period. This unique banking survey segment includes large regional institutions all the way down to small community banks such as Greenwood-based Farmers Bank.

First National Bank was one of two in the group that saw slimmer first quarter profits. The bank posted net income of $2.920 million, down 26.96% from 2011.

Farmers Bank, the smallest in the group, also reported a gap of 25% from a year ago with net profits of $239,000, compared to $321,000.

“We continue to make provisions into our loan loss reserves for potential future losses in this uncertain economic environment. This is why earnings are down in the first quarter,” said First National CEO Sam T. Sicard. “We are fortunate to have a loyal client base that allows us to remain profitable in these challenging times.”

Bankers say they are happy to see a slowly improving economy, but that hasn’t really materialized into more loan demand.

Sicard says the pulse of his business customers remain mixed which has meant loan demand has been unpredictable in a relatively weak economy.

Only two of the six banks surveyed posted an increase in assets from a year ago, which is indicative of tepid loan demand and the cautious posture seen across the country.

Citizen Bank & Trust earned $1.251 million in the first quarter, slightly better than $1.239 million a year ago. This bank also grew assets to $366.317 million, up 5.69% from the prior-year period.

Arvest Bank reported $25.028 million in net income, up from $22.652 million a year ago. This includes all of the markets that Arvest serves. Arvest also grew assets company wide to $12.527 billion, up 9.57% from a year earlier. This increase includes the bank’s branch acquisitions in the past year.

Rivaldo attributed a bulk of the asset growth to the continued volatility with the stock market as customers seek safe and stable alternatives.

“There is some seasonality to asset growth. We typically experience significant growth in the first four months of the year as a result of our many customers depositing their tax return money,” he said.

BancorpSouth saw a large turnaround in its year-over-year profits. The regional bank posted net income of $25.369 million, up from $1.912 million a year ago. Total assets shrunk slighty to roughly $13 million.

“From the perspective of the Fort Smith market, our asset quality always has been good and the loan demand has been soft,” said Saundra Lockhart, spokeswoman with BancorpSouth.

Looking toward the remainder of 2012, bankers say they see headwinds from increased regulations and tepid loan demand from their customer bases.

Tim Yeager, Arkansas Bankers Chair at the University of Arkansas, said the state banks have made marked improvements in their balance sheets which are showing up in higher profits, but that only addresses part of the overall problem.

“Demand for new loans remains weak and the economy is still expected to grow at a slow pace into 2013 — that’s if we don’t slip into recession — which I think is unlikely, but possible,” Yeager said.

Rivaldo said business customers say they are holding more cash, not spending as much and not borrowing as much because of their concerns and burden from added governmental influence. He cites those uncertainties as pertaining to health care costs and tax rates.

“Increased regulations are also placing a great burden on banks, requiring them to hire more staff to further document and comply with added requirements. The new Consumer Financial Protection Bureau is a regulatory agency and banks are still trying to figure out the complete impact it will create,” Rivaldo said.

Yeager said he expects bank profits across the state to improve slightly through the balance of this year.

He said the average 3.93% net interest rate margin in the first quarter did compress slightly from the end of 2011, but it’s still workable given the cost of money is dirt cheap.