U.S., state banking sector sees modest profit growth, despite low interest rates

Low interest rates, stable loan demand and hyper competition characterized the banking climate in the state and nation, with net income for all U.S. banks up 1.46% in the second quarter of 2016.

The Federal Deposit Insurance Corporation (FDIC) reported Tuesday (Aug. 30) aggregate net income of $43.6 billion in the second quarter of 2016, up $584 million or 1.46% from the same period last year. Roughly 60% of the nation’s 6,058 banks reported year-over-year net income growth in the second quarter ending June 30.

The FDIC also noted 44.2% of banks were forced to add money to their loan loss reserves totaling $3.6 billion in the second quarter, with much of that from energy related loan losses by commercial and industrial borrowers. Still the unprofitable banks fell to 4.5% in the second quarter, the lowest level since 1998.

Despite the growth in the sector, FDIC Chairman Martin Gruenberg said challenges continue for community banks.

“Revenue growth remains sluggish as a prolonged period of low interest rates has put downward pressure on net interest margins. This has led some institutions to reach for yield, increasing their exposure to interest-rate risk. More recently, persistent stress in the energy sector has resulted in asset quality deterioration at banks that lend to oil and gas producers. We likely have not yet seen the full impact of low energy prices on the banking industry, particularly for consumer and commercial and industrial loans in energy-producing regions of the country,” he said.

ARKANSAS, NATIONAL ROUND UP
Community banks posted strong growth in lending and revenues. The 5,603 community banks reported a $41 billion increase in total loans and leases made in the second quarter. During the past year loans made community banks rose 9.1% or $122.8 billion from the previous year.

The amount of non-current loans fell $4.8 billion or 3.4% during the second quarter. But loans made to the energy sector resulted in a $2.1 billion increase in loan delinquencies in the quarter. Net charge-offs of energy-related loans rose 100.3% from a year ago, while total charge-offs all all loans were up 13.1% from a year ago.

The FDIC’s problem bank list shrunk to 147 institutions in the second quarter, down from 165 a year ago and significantly lower than the peak of 888 reached in the first quarter of 2011. There were two bank failures in the second quarter.

Bill Holmes, Arkansas Bankers Association president & CEO, said banks are doing well even with regulatory “obstacles.”

“Despite regulatory obstacles and a slow rebound in our economy, Arkansas banks are proving they can thrive. Our banks are in the best shape they have been in for almost a decade because our bankers looked at these difficulties and created opportunities to expand and gain more business, all while helping their local economies grow,” Holmes told Talk Business & Politics. “Banks are the lifeblood for small businesses. They provide consulting to aid in the development and implementation of financial strategies in addition to lending and dynamic banking services. This continued trend of growth in community banks demonstrates the strength and stability of our banking industry.”

Holmes noted that community banks reported $300.7 billion in small loans to businesses for the quarter, up $3.9 billion, or 1.3%, from the first quarter. He also noted that 74% of community banks boosted their loans from the previous quarter, and the quarterly growth rate at community banks outperformed that of noncommunity banks by 1.9%.

NORTHWEST ARKANSAS SNAPSHOT
The Northwest Arkansas banking sector is making decent money through first half 2016. Five banks in Talk Business & Politics’ second quarter sampling showed Arvest Bank, Signature Bank and Legacy National Bank each reported double-digit net income growth through June when compared to the year-ago period. First Security Bank’s earnings slid 3.1% through the first half of 2015 and First National Bank NWA and its parent company First National Bank Fort Smith’s earnings were nearly flat, up 0.44% from a year ago.

Springdale-based Legacy National Bank led the growth with net income of $1.624 million through June, up 49% from the year-ago period. The bank also grew its assets to $365 million in the second quarter and loans increased to $281.3 million, up 16% from a year ago. CEO Don Gibson said the competitiveness in the local market is a challenge but there is good demand from borrowers. Real estate comprise 88% of the bank’s loans, but Gibson said underwriting standards are more stringent given the rising real estate prices and recent memory of the real estate bubble that burst around 2007.

The largest local bank in the region is Arvest with assets over $16.23 billion as of June 30. Arvest earned $38.967 million in the first two quarters of 2016, up 18.4% from the $32.895 million profited a year ago. Arvest grew loans to $9.18 billion through June, up 5.5% from last year. The bank also lowered its delinquent loans and sold off $29 million of foreclosures real estate off its books in the first half of this year.

“Lending in NWA is always very competitive.With many banks having high liquidity, there is a strong desire/need to better utilize those deposits into higher interest paying assets, like loans. This makes it tough,” said Craig Rivaldo, president of Arvest Benton County.

Gibson and Rivaldo believe there will be a Federal Reserve interest rate hike in December and if so that would be a positive for their bank’s revenue and perhaps bottom line.

Tim Yeager, Arkansas Bankers Chair at the University of Arkansas, said a 0.25% to 0.5% uptick in rates would benefit banks. He said banks that have strong core deposits are the ones most likely to benefit from rising interest rates because the cost on borrowed deposits used to fund lending will also rise and further squeeze loan margins. He said the loan competition in Northwest Arkansas is not likely to abate, and there could be a day of reckoning for banks that get too long on loans made at low interest rates with borrowed money.

Yeager said if and when the Fed decides to emerge from the box they have backed themselves into by keeping rates low so long there could be repercussions for lenders taking risks with interest rates. He said the Fed is also likely pulling forward future growth and creating instability for the banking sector in terms of interest rate risk.

Signature Bank of Fayetteville’s net income rose to $1.995 million in June, up 13.65% from a year ago. The bank’s assets rose to $498 million, a gain of $5 million from June 2015. The bank’s loans grew to $404 million, up from $391 million a year ago. Problem loans were down slightly year-over-year but the bank still held $13.7 million in foreclosed real estate on its books as of June 30.

FORT SMITH METRO SNAPSHOT
Four banks surveyed by Talk Business & Politics in the Fort Smith metro area reported mixed earnings results in the first half of 2016. The largest of the banks Arvest, which conducts business in 10 markets around Fort Smith reported strong earnings growth as previously stated.

Rodney Shepard, president of the Fort Smith-River Valley market, said that market’s growth is trending slightly above projections and well ahead of a year ago. He said the consumer lending market has been resilient with modest demand growth in mortgages as well as commercial lending.

While property values in the Fort Smith area have not risen as quickly as in neighboring Washington and Benton counties, Shepard said land prices are seeing slight, but steady appreciation. Shepard said deposits are up and that’s related to new customers, more consumer savings and commercial deposit growth through the first two quarters of 2016.

In the back half of the year, Shepard sees more of the same for the markets he supervises. Shepard would also favor a rate increase from the Fed because it would likely increase the bank’s top line revenue and it could push consumers on the fence into making the large purchase they have been debating.

Sam T. Sicard, president of First National Bank of Fort Smith, said his bank’s profits are up slightly year-over-year with net income of $9.01 million, compared to $8.97 million earned a year ago. He attributes the solid earnings to less charge-offs on troubled loans compared to a year ago. First National Bank’s financial data includes First National BankNWA, which is run by Rob Husong. Sicard said Fort Smith market growth is somewhat muted compared to Northwest Arkansas, but Fort Smith is seeing a few good deals, noting there is plenty of bank competition in two very different markets.

First National grew loans to $788.54 million, by $32 million from a year ago. At the same time the bank’s foreclosed real estate holdings decreased year-over-year. Sicard said the bank transferred some of the real estate to its holding company but also was able to sell some residential real estate lots it owned in Northwest Arkansas, given the demand for more housing. Sicard also would like to see the Fed raise interest rates slightly this year because he too believes it would help banks add more profits to the revenue from bond investments and it would provide a little better rate margin in the competitive loans.

Citizens Bank & Trust in Van Buren reported earnings of $2.849 million through June, down 13% from a year ago. The bank grew its loans to $222.9 million, from the $218 million last year. The bank’s troubled loans were flat against a year ago totaling $3.55 million as of June 30.

Farmer’s Bank of Greenwood reported a 2.3% gain in net income year-over-year. The bank earned $752,000 through the first half of this year, compared to $735,000 a year ago. Loans totaled $88 million, up $10 million from June of last year. Roughly 81% of the bank’s loans are backed by real estate.

BIG ARKANSAS BANK ROUNDUP
During the recently completed second quarter earnings period, all of Arkansas’ publicly traded banks reported strong earnings for the three-month period ended June 30. Bank of the Ozarks, which reported second quarter profits of $54.5 million, completed two acquisitions in the second quarter that moved the fast-growing Little Rock regional bank just ahead of Arvest as the state’s largest banking holding company by total assets.

On July 20, Bank of the Ozarks said Wednesday completed its $800 million acquisition of Atlanta-based Community & Southern Holdings Inc. (C&S), the Little Rock bank’s largest takeover to date. At the end of the second quarter, C&S had approximately $3.9 billion of total assets, $3.1 billion of loans and $3.3 billion of deposits.

A day later followed the closed of the Community & Southern deal, Bank of the Ozarks completed its merger of St. Petersburg, Fla.-based C1 Financial Inc. the fifteenth acquisition since March of 2010. At June 30, C1 had approximately $1.7 billion of total assets, $1.4 billion of loans and $1.3 billion of deposits.

At the end of the second quarter, Bank of the Ozarks had total assets of $12.3 billion. That asset total is expected to climb above $18 billion in the third quarter as the Little Rock regional bank digests the Community & Southern and C1 Financial acquisitions.

Not to be overshadowed, Conway-based Home Bancshares, Pine Pluff-based Simmons First National Bank and Little Rock’s fast-growing community bank, Bear State Financial, also reported strong second quarter growth.

For the period ended June 30, Home BancShares earnings jumped to $43.5 million, up 28.3% from $33.9 million in the same quarter in 2015. According to Home BancShares officials, the record second quarter earnings continues the fast-growing bank’s consecutive win streak of 21 straight profitable quarters. At the end of the second quarter, the parent company of Centennial Bank had total assets of $9.5 billion, just below the important regulatory baseline between super-community banks and larger regional banking groups.

Simmons First also continued its strong growth in the second quarter as profits jumped 14.5% in the second quarter as the Pine Bluff bank’s loan portfolio grew to $5 billion and total assets rose to $7.5 billion for the three-month period. Bear State’s profits rose a whopping 80% as the Little Rock community bank said it benefitted from strong mortgage loan growth and operational and organizational efficiencies from its autumn acquisition of Springfield, Mo.-based Metropolitan National Bank.

Wesley Brown contributed to this report.