FDIC: Banking sector improvements continue

Banks across Northwest Arkansas and their improving balance sheets are another indication of local economic recovery. A report released by the Federal Deposit Insurance Corp. on Monday (March 25) shows the state banking sector is mending well.

The state’s banking sector grew total assets by 4.75% in the fourth quarter of 2012 from the prior-year period, amid a tepid lending climate as consumers who can borrow remain on the sidelines in many cases.

The report found total average assets in Arkansas for the quarter to be $61.282 billion held by 126 federally insured banking institutions. This is up from $58.499 billion in the prior-year period.

Asset quality also improved in the year-over-year period with problem loans shrinking to 2.93% of total loans in the fourth quarter. Distressed loans totaled 3.19% of total loans a year earlier, according to the FDIC report.

The community banking sector across Northwest Arkansas held on to 14.5% more profits in 2012 than in the prior year. The group surveyed by The City Wire includes 17 banks either locally-based or those having a large presence in Benton and Washington counties.

The banking group posted cumulative net income of $328.274 million last year, a $41.78 million improvement over 2011, according to the call reports filed with the Federal Deposit Insurance Corp at year-end.

Local bankers said profits continued to improve as 2012 went and several of the local banks posted their best fourth quarter in several years.

As a group the NWA bank earnings improved as loan losses subsided among the vast majority of the banks reporting. Just two banks out the 17 surveyed posted net losses for the year as a result of provisions set aside to offset rising loan delinquencies.

“Banks turned the corner a few quarters ago for the most part and are starting to see higher profits on the bottom line. As real estate losses shrink, banks are seeing higher quality credit on their balance sheets which means there are fewer loan loss provisions needed and that’s having a positive impact on the net income,” said Tim Yeager, Arkansas Bankers Chair at the University of Arkansas.

Yeager said local banks are also benefiting from modest loan growth as the economy shows glimpses of strength.

He expects growth in 2013 to remain slow but said bankers can still make money in this climate if they aren’t having to write down real estate values.

As the local real estate market has improved, Yeager said bankers have been able to sell some off properties at higher prices and help the quality of the balance sheets. Real estate loans still comprise a lion’s share of the credit market for banks across the state though total lending actually decreased in the forth quarter from a year ago.

The FDIC reports commercial real estate loans were by far the most active lending sector in the fourth quarter. Those total loans declined slightly from the prior year. Residential loan activity was the only area showing gains in the fourth quarter, while agricultural and industrial lending held steady with the prior-year levels.

One overhang presenting a slight drag on bank earnings is the growing level of real estate owned (REO) sitting on bank balance sheets.

Several Northwest Arkansas bankers said 2012 was better for total earnings, but no one was ready to gloat saying there is still ample work to be done in moving non-performing real estate off bank books.

Toward the end of 2012 state-chartered banks had $548 million in real estate holdings on their books. Since 2006 real estate owned by state banks rose from $46 million, according to the Arkansas State Bankers Association newsletter.

Adding to the concern was $805 million in non-accrual real estate loans likely to feed the REO pipeline through 2013.

Northwest Arkansas banks large and small held a total of more than $300 million in REO on their balance sheets at the end of 2012, but most say they are making some progress of reducing the once toxic levels.

Bob Taylor, president of Parkway Bank in Rogers, said while his bank was able to cut its REO almost in half from 2011, the $3 million still on the balance sheet is a drain on earnings.

“We continue to work hard to move these non-performing assets off the books, because that is $3 million that can’t be loaned out or put to work generating future profits,” Taylor said. “We are seeing higher real estate appraisals and that is definitely helping curb write-downs.”

The Bank of Gravett also reduced its REO properties during 2012. The bank reported real estate owned of $546,000, down from $1.829 million a year earlier.

David Bordovsky, president of Pinnacle Bank, said he is focused on reducing REO holdings this year as there are more interested buyers in the local marketplace than in recent years. According to FDIC reports, Pinnacle Bank had assets of $87.45 million at the end of 2012, the bank also held roughly $20.9 million in other real estate owned.

Don Gibson, CEO of Legacy Bank, said the bank was able to move a little of its real estate holdings off the books in 2012, incurring about $900,000 in additional write downs to get the property sold.

“For the longest time the REO bucket was filling up faster than banks could find buyers. But some of the property is starting to move now and flow into the bucket has slowed to a trickle,” Gibson said.

In the past year Legacy reduced its REO from $9.195 million to $7.686 million but it will take more time sell off two developments and some raw land still on the bank’s books.

The FDIC reported margin compression in the year-over-year period with the median yield on average assets of 4.6% for the fourth quarter of 2012. This slid from 4.86% in the third quarter and declined from 5.02% in the year-ago period.

Local bankers report more competition for loans which is driving down overall yields.

Northwest Arkansas is the largest of the state’s four regional banking centers in terms of number of institutions at 38. The Little Rock metro area has 36 institutions and the Fort Smith market has 23 institutions. Jonesboro is the smallest with 19.

Little Rock reports the most deposits at $14.034 billion, and Northwest Arkansas banks hold $8.869 billion for depositors. The regions of Fort Smith and Jonesboro reported deposits of $4.327 billion and $2.731 billion, respectively.