NORTHWEST ARKANSAS — The local banking sector made headway in 2010, collecting $180 million in profit, despite swallowing hefty charge-offs and large provisions taken to offset the ongoing saga of real estate loans gone bad.
The combined net income among 18 community banks doing business in Benton and Washington counties rose 182 percent from $64 million earned in 2009, according to the Federal Deposit Insurance Corp.
Part of the earnings increase relates to aggressiveout-of-state branch expansions by Simmons First National and Bank of the Ozarks in the second half of 2010. When setting aside the results of these two banks, the remaining 16 institutions together earned $90.2 million in 2010.
“It looks as if our local banks have turned the corner for the most part. They made steady progress working through troubled loan portfolios, dealing with several large bankruptcies and a sluggish economic recovery last year,” said John Dominick, banking professor at the University of Arkansas.
Higher provisions for loan loss reserves siphoned $269.2 million from local bank profit in 2010.
That is money that didn’t flow through to earnings.
“That’s a lot of money put in the cookie jar by local banks because they are still somewhat nervous about how long the recovery will take,” Dominick said. “Just think how fast earnings will rise once these large provisions are no longer necessary.”
He said the biggest drain on bank earnings in 2011 is the $497 million of real estate the 18 financial institutions recovered last year.
“Real estate
Half of the 18 community banks earned more money than a year ago: First Security Bank, Bank of Fayetteville, Parkway, Simmons First National, Bank of the Ozarks, First State Bank of Northwest Arkansas, the Bank of Gravett, Liberty Bank and First Western.
Three banks earned a smaller profit in 2010: Arvest, Bank of Arkansas and Decatur State Bank.
Six banks lost money last year. Metropolitan National, Pinnacle and Legacy National each trimmed losses from 2009. Chambers, Signature and First State Bank of Lonokeeach posted wider losses linked to nonpaying real estate loans.
While the segment is improving overall, analysts say bankers remain cautious, and with good reason.
appraisals are much lower than when the loans were written. That means banks must write off the difference and either hold the foreclosed property and pay for upkeep, or resell it at a lower price and swallow the loss,” Dominick said.
Charge-offs declined about 15 percent in the year-over-year period but remained high at $221.6 million at the end of 2010.
Better banking profit is contingent upon how efficiently the lenders can work through their real estate holdings, said Tim Yeager, Arkansas Bankers Chair at the university.
The tell-tale signs of a prolonged recovery are seen in the banks’ rising delinquent loan portfolios.
The combined non-accrual loans jumped 23 percent last year to $688 million for the 18 banks.
Those are loans more than 90 days late and facing charge-off. The banks also reported $252 million in loans past due 30 to 89 days.
Yeager said Northwest Arkansas banks had a higher concentration of real estate loans than the state average and continue to suffer losses related to declining land and home prices.
The group held total loans of $16.25 billion at the end of 2010. About 5.86 percent of those were delinquent.
Yeager said this is at least four times greater thana bank’s normal comfort zone and indicates bankers still have more work to do before earnings normalize.
Fatter Bottomline
Analysts say the larger banks have had an easier time moving through the recovery cycle, but that wasn’t necessarily the case with the local banks reviewed.
The highest marks for bank performance ranged from First Security with $3.2 billion in assets to the region’s smallest, First State of Northwest Arkansas.
Yeager said the results posted by these two banks would be great in any economic climate.
First Security earned $66.9 million in net income. This was a 64.6 percent improvement over last year with a stellar 2.05 percent return on assets, the metric used to measure a bank’s profitability relative to its capital base.
According to the Boston Consulting Group, the industry benchmark is a return on assets of 1 percent.
First Security ranked higher than 96 percent of its 173 peers across the nation, according to the FDIC.
“This bank continues to set the bar high, managing to escape many of the commercial real estate lending woes other local banks have endured in recent years,” Yeager said.
Jim Taylor, regional president for First Security, said conservative lending practices in good and bad economic cycles have served the bank well.
“We are not immune from real estate exposure and also experienced a slightly higher than normal amount of delinquencies last year. We are seeing some real estate lot values stabilize which is encouraging,” he said.
First Security is flush with $337 million in equity capital and Taylor said the bank has money to lend and continues to shop for possible branch acquisitions within the state.
First State of Northwest Arkansas outperformed 97 percent of 146 banks of similar size across the nation last year. Huntsvillebased First State earned $1.42 million, up 30.6 percent from the prior year. The bank also improvedits return on assets to 1.84 percent, up from 1.47 percent in 2009.
Simmons First National, Bank of the Ozarks and Liberty Bank, each based outside Northwest Arkansas, also ranked at the head of the class, according to their year-over-year financial results.
Four other banks reversed their fortunes in 2010, hitting pay dirt after sustaining losses in 2009.
Parkway Bank of Rogers climbed out of a $4.6 million hole to earn $326,000 in 2010.
“It has taken time, patience and due diligence to turn the losses around and, while we know there is still lots of room for improvement, we’re happy with the progress made last year,” said Bob Taylor, president of Parkway.
He said the bank has focused on identifying and collecting its past due accounts but still faces $8.2 million in real estate on its books.
“The real estate holdings are the biggest challenge for us this year. But we are just now beginning to see some serious interest in a few of the properties, after months of fielding calls from bottom-feeding bargain hunters,” he said.
The Bank of Gravett reversed a $5.8 million loss in 2009 to earn $460,000 last year. The profit is linked to a $5 million reduction in charge-offs in the year-overyear period.
The Bank of Fayetteville wiped away a $2 million loss and posted a profit of $157,000 in 2010.
Holding Steady
Three banks made money, albeit less than in 2009.
Arvest set aside $129 million to loan loss reserves in 2010. This reduced the banks net income to $49.5 million, down 6.2 percent from the prior year, according to the FDIC.
Arvest deposits rose about 3 percent in the past year, but total loans shrunk by $624 million or 7.9 percent.
“Consumers saved money in 2010 and seem to be stepping out to spend a little more in recent months. We are encouraged that loan demand will improve this year as consumers feel more confident about holding on to their jobs,” said David Short, president of Arvest Bank’s Benton County market.
While Arvest continues to expand outside the area, deposits held in Benton and Washington counties total $3.1 billion, or roughly one third of the bank’s total.
The Bank of Arkansas and Decatur State Bank each reported smaller profit margins in 2010, while also writing fewer loans and adding more deposits.
The Bank of Arkansas reduced its non-performing loans by 44 percent in 2010, without adding to its real estate portfolio or any substantial increase in charge-offs.
Decatur State Bank continues to face $25 million in non-performing loans, up 123 percent from a year earlier.
Analysts expect Decatur State Bank’s earnings will contract further in 2011 as it will need to set aside additional provisions to offset the risk associated with its deteriorating loan portfolio.
At the end of 2010, the bank had loss reserves of $4.14 million, not nearly enough given the banks recent increase in delinquencies.
Hefty Losses
Six banks in the group lost a combined $49.97 million last year, linked to local real estate woes and a few multimillion-dollar customer bankruptcies. The largest declines were felt by Chambers Bank and Signature Bank.
Chambers Bank lost$17.9 million last year, as it set aside $28.6 million to cover its rising delinquent loan portfolio.
Signature Bank’s net income plummeted from $1.06 million earned in 2009 to a $15.6 million loss in 2010.The earnings deficit included a $10 million goodwill impairment charge related to Signature’s branch in Brinkley.
Gary Head, president of Signature, said the goodwill charge was required by the bank’s auditing firm given the decline in bank stock valuations since the Brinkley branch was purchased in 2006.
The bank also set aside $18.8 million to offset its delinquent loan risk and charged off $17.8 million that could not be collected.
Head downsized the bank by selling two branches in Benton County last year to First Bank of Camden in an effort to shrink the institution and its capital requirements.
He attributed much of the rough year’s performance to free-falling appraisal values on loan collateral and lackluster local economy.
Head said between September 2009 and December 2010 an appraisal for one piece of commercial real estate held as collateral declined from $16 million to $10.5 million.
“We are off to a better start in 2011 and continue to run a lean operation,” Head said. “I am glad 2010 is history.”
News, Pages 7 on 03/09/2011