Arkansas Banking Sector Better In 2014, Healthy Outlook Ahead In 2015

The state’s banking sector has climbed out of the doldrums in the past few years and through three quarters of 2014 the financial sector is healthier than a year ago, according to the Federal Deposit Insurance Corp. state quarterly profile.

“There has been significant improvement in the banking sector since the financial crisis. We should continue to see improvement in banks both in Arkansas and throughout the nation during the year 2015. The number of banks on the FDIC’s problem list has declined to 354 which is a 63% decrease from the high of 888 during the financial crisis,” said Garland Binns, bank attorney for Little Rock-based Dover, Dixon and Horne.

The FDIC reports the segment grew its employment across the state to 18,930 full-time workers in the third quarter, despite more bank consolidation to 111 financial institutions as of Sept. 30, down from 120 reported at the end of 2013.

Bob Taylor, president of Parkway Bank in Rogers, gives the local banking sector a solid grade of “B” this year. He said home construction and commercial building continue to show signs of strength in Benton and Washington counties.

“We are one of the smallest banks in this region and somewhat constrained by capital but there is growing demand as we see it. We are making sure we’re shepherding our capital the best we can to take advantage of growth opportunities,” Taylor said.

He expects Parkway to experience a 4% to 5% loan growth in 2015, despite the ongoing cost increases of unfolding regulation.

Sam Sicard, president and CEO of First National Bank of Fort Smith, also is optimistic about the sector but said competition and regulation may dampen results.

“The profitability and financial health of the banking industry is closely correlated with the condition of the economy. This past year the national economy has strengthened, which has led to increased loan demand and lower loan losses. I expect the national and local economies to continue to steadily improve next year due to improved consumer confidence, increased employment levels, and the significant decline in energy costs,” Sicard said in a statement. “However, improvement in profitability will be somewhat limited by aggressive competition between numerous financial providers and the financial burdens of dedicating more of our staff to complying with increased government regulations.”

REGULATION POLITICS
“We have yet to feel the complete impact of the Dodd-Frank regulations. About 50% of the regs are still being written. We are outsourcing some of our added regulatory work given our small size, but that’s still an added cost to the bottom line,” Taylor said.

He and other bankers remain hopeful that the new Congress will take a hard look at this legislation and its impact on community banks who had little to no responsibility in the overall financial meltdown of 2008.

Dr. John Dominick, banking analyst and professor at the University of Arkansas, said perhaps the Republican Congress will keep the regulations in place, but not add any others. He hopes they will reevaluate the mortgage lending requirements under Dodd-Frank, which he said are too stringent in some cases.

“Just because something looks good in theory, does not mean it makes sense when it’s applied to a diverse group of borrowers,” Dominick said.

He said the capital requirements and stress tests on larger banks will likely remain problematic as the law attempts to over-manage bank capital.

The FDIC reports Arkansas banks had combined capital equity of $7.867 billion, a gain of $596 million so far this year. Dominick said profitable banks add to their capital holdings each quarter. He said as profits continue to increase amid lower loan loss requirements capital levels should continue to rise.

ASSET, BOTTOM LINE GROWTH
Total assets in Arkansas-based banks grew to $64.941 billion as of Sept. 30, a gain of $2.891 billion or 4.6% this year. Assets rose 5.95% since 2012 and 11% since 2011. Dominick said a decline in the money banks must set aside to account for possible bad loans (loan loss provisions) have and will continue to help bottom lines.

“I expect bank profits around the state to continue to grow. We may have some interest spread margin reduction in the future, but the ongoing reduction in loan loss provisions will be the biggest catalyst for higher bank profits in 2015,” Dominick said.

Net loans among Arkansas banks grew to $39.849 billion through the third quarter, a gain of $2.7 billion from the end of 2013. Loan quality also improved requiring less money be set aside in loan loss provisions. The loan loss allowance in the third quarter was $634.137 million, down from $674.612 million a year ago.

Bank balance sheets are leaner this year as real estate owned by the financial institutions from loans foreclosed continue to shrink. The combined 111 banks held $469.226 million in real estate assets on their books as of Sept. 30, well below the $572.563 million at the end of 2013.

While real estate owned is shrinking, Dominick said it remains a problem for some banks in Northwest Arkansas and those who invested in the region. He said it is the biggest problem going forward for smaller banks who have millions tied up in property. He said a $15 million other-real-estate-owned (OREO) position means a bank doesn’t have that money to loan to consumers. It’s a stagnant asset that many times costs the bank in added fees for maintenance and upkeep.

“It’s going to take a few more years to burn off the overhang of real estate on some bank books. Demand for new loans is pretty good but there is a plethora of banks bidding on each loan. Banks constrained by capital or high OREO holdings can have a harder time competing,” Dominick said.

There are still a few banks across the state working through credit quality issues. A benchmark measurement to gauge credit problems at a particular bank is known as a Texas Ratio. It takes the amount of a bank’s non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the bank’s tangible capital equity plus its loan loss reserve. A ratio of more than 100 (or 1:1) is considered a warning sign.

Arkansas banks registering the highest Texas Ratio metrics as of Sept. 30 include Pinnacle Bank, (Rogers) 191.78%, and Allied Bank (Mulberry) 123.93%.