story by Kim Souza
ksouza@thecitywire.com
A slowly improving Fort Smith area economy has helped the local banking sector tally respectable profits through the first half of 2015 despite depressed margins and higher operating costs related to federal Dodd Frank legislation.
A sampling of five Fort Smith area banks ranging from large, median-size and small community banks with a significant presence in the region were analyzed for this report. Those banks include: Arvest: $15 billion in assets; First National Bank Fort Smith: $1.209 billion in assets; Armstrong Bank: $763.46 million; Citizens Bank & Trust: $372.353 million; and Farmers Bank $198.290 million.
The cumulative profits for these five banks through the first half of 2015 totaled $53.875 million, down 24.7% from the same period last year. The steep decline in profits relates to Arvest Bank, by far the largest in the group. Arvest experienced a 44.7% drop in its year-over-year net income reported as of June 30, according to call reports filed with the Federal Deposit Insurance Corp.
Excluding the Arvest numbers the other four banks in this cohort had total half-year profits of $20.98 million, up 12.8% from the $18.616 million they earned in the period last year.
MIXED RESULTS
Fort Smith-based First National Bank led this group in year-over-year income growth. The bank’s net income through the first two quarters of 2015 was $8.97 million, a gain of 29.4% over the $6.931 million it pocketed a year ago.
CEO and President Sam T. Sicard said the primary reason the bank’s earnings rallied in the second quarter relates to funds moved out of its loan loss reserves when the bank was able to recover losses it had previously made provisions for some quarters back.
“When money is moved out of reserves it flows directly into net income. We have had very little charged off and continue to see moderate growth in the Fort Smith market, but competition for the commercial projects is heated,” Sicard said.
He said the competitiveness for loans and the low interest rate environment has compressed margins as tight as he has ever seen. On a positive note, SIcard said the bank has seen steady deposit growth, from existing consumers saving more and new customers joining the bank.
First National’s average loans total $756.186 million through June 30, compared to $762.287 million a year ago. The bank’s other real estate owned was paired down $791,000 from $8.901 million a year ago.
Arvest, the largest bank in this cohort, reported steep declines the company’s overall net income. Profits totaled $32.895 million through the first two quarters of 2015, this compared to $59.592 million a year ago. Credit losses rose to $9.139 million, versus $2.068 million in the year-over-year period. Arvest did grow loans to $8.7 billion, up from $8.37 billion a year ago, according to the FDIC filings.
Non-current loans for Arvest through June were $110.642 million, versus $172.332 million a year ago. The bank also reduced its real estate owned to $47.8 million, down from $59.77 million a year ago. Foreclosures were $4.873 million. down from $7.419 million year-over year.
On the local level, Arvest Bank reports profits on par with a year ago, according to Rodney Shepard, president for the Fort Smith market which stretches from Sallisaw, Okla., to Mena and from Van Buren to Russellville.
“Commercial loan activity is good, but competition for these loans is intense, particularly on the higher profile development out at Fort Chaffee and the re-development on Garrison Avenue,” Shepard said.
He also reports an uptick in mortgage lending in the region. He said the bank has made more new loans and refinances which have pushed the bank’s total mortgage activity ahead of last year’s pace. On the consumer front, Shepard said lending is flat. He said the competition for car loans has never been greater and banks are often priced out of the market.
“We are seeing our deposits grow in this market, some of it’s related to more saving but also we are growing the customer base,” he added.
The third largest bank in this cohort, Armstrong Bank-based in Muskogee, Okla., reported softer profits in the year-over-year period. The bank that acquired Benefit Bank earlier this year showed net profits of $7.977 million, sliding 4.4% from $8.345 million a year ago.
This bank grew its average loans to $559.64 million, compared to $441.91 million which includes the Benefit Bank numbers. Armstrong Bank is historically a very profitable institution posting return on assets of 2.09%, against an industry benchmark of 1%.
Prior to the merger of Benefit Bank into Armstrong Bank, the Fort Smith bank saw a five fold increase in its non-accrual residential construction and development loans. Delinquent single family and multi-family mortgage loans were more than two and a half times the bank’s peer group at the end of the first quarter of this year. Prior to its merger with Armstrong, Benefit Bank had set aside $3.384 million in reserves for future loans losses as of March 31. At the same time the bank reported seriously delinquent loans of $8.389 million, more than twice the reserves on hand.
PROFITS ABOUND
The final two banks in this cohort reported strong year-over-year profits. Citizens Bank & Trust of Van Buren – a subsidiary of Fort Smith-based First Bank Corp. – grew its profits by 22% in the first half of this year compared to the same period in 2014.
Like First National Bank, this mid-size institution was able to collect on bad debt and reverse credit losses to the tune of $437,000 this year. The bank’s net income rose to $3.298 million, compared to $2.701 million a year ago. Average loans for this bank totaled $218 million as of June 30, up $5 million from a year ago. The bank shrunk its non-current loans to $1.053 million as of June 30, this compared to $1.356 million a year ago.
An impressive turnaround was the bank’s reduction of its other real estate owned. OREO totaled just $74,000 as of June 30. A year ago the bank held $721,000 worth of foreclosed real estate on its books.
The smallest bank in this group also produced big profits in the first half of this year. Greenwood-based Farmers Bank reported net income of $735,000, up 15% from the same six-month period of 2014.
The local bank had credit losses of $277,000, rising from $181,000 a year ago. Farmers Bank reported loans of $78.144 million, growing from $77.920 million in June 2014. The bank’s exposure to non-current loans was even with last year with $658,000 tagged as seriously delinquent. The bank’s foreclosed property tagged as other real estate owned equaled $2.057 million, versus $2.395 million a year ago.
PLANNED GROWTH
Two of the banks in this report — Armstrong and First National Bank — have already spread their wings into neighboring Northwest Arkansas.
Armstong’s Gary Andrews said Armstrong Bank also will “investigate” new opportunities in the “highly, highly competitive” Northwest Arkansas banking sector. Prior to the acquisition, Benefit Bank obtained state approval to convert its Springdale loan production office into a full-service branch bank. Armstrong was able to retain that approval.
“We’re going to go up there (Northwest Arkansas) and try to carve out a niche and compete and do the best we can,” Andrews said.
Sicard said First National’s growth strategy was to expand its Northwest Arkansas footprint with a new branch planned for downtown Bentonville in 2016. He said the bank recently closed on property on South A Street, located in the city’s Arts District directly across from the ERC multifamily development known as Thrive.
“We expect to break ground in early 2016. We are excited about working with designers on this new facility that will be fitting for the Arts District. We opened our Joyce Street location earlier this year in Fayetteville and we have three other branches in Benton County that were acquired a years ago,” Sicard said.
He admitted that the Northwest Arkansas market is extremely competitive, but said the bank has been pleased with the growth it’s seen there thus far.
REGULATORY ISSUES
Officials at banks of all sizes have plenty to say the added costs they face relating to implementation of the Dodd Frank legislation. Garland Binns, attorney with Dover, Dixon, Horne in Little Rock, said the Dodd Frank Act has and continues to cause smaller banking institutions to have greater overhead costs in complying with the requirements placed on banks.
“This causes community banks to either consider acquisition of another community bank in order to become larger in order to reduce overhead compliance costs, or alternatively to consider selling to another bank,” Binns said. “The compliance costs for a $100 million community bank are basically the same as those of a $400 million community bank. Both in Arkansas and throughout the United States, consolidation will continue in the banking sector at a moderate pace.”
Craig Rivaldo of Arvest Bank in Bentonville and former president of the Fort Smith market, said the banks have experienced added expenses associated with staffing related directly to Dodd Frank compliance.
“The regulations expect banks of all sizes to have the same expertise regardless of resources. This makes it very tough on the smaller banks to provide the necessary level of expertise,” he said.
Sicard agreed that there are burdens associated with Dodd Frank legislation. The said the federal bill causes banks of all sizes to spend significantly more on their operations and requires additional staffing. Sicard said the bill is more intrusive on the smaller banks because they do not have revenue streams broad enough to spread out the costs.