State banks holding own, Fed VP says

Profits, low-interest rates main issues facing bankers

Arkansas banks are performing relatively well compared with other banks around the nation, but they face two critical issues, said a senior vice president with the Federal Reserve Bank in St. Louis.

Arkansas bankers are concerned about remaining profitable in a competitive, low-interest rate environment and pending federal regulations, said Julie Stackhouse, senior vice president with the St. Louis bank regulator.

Low interest rates are causing a significant decline in net interest income - the difference in income earned on interest-bearing assets and interest paid to customers, Stackhouse said. The Fed has kept its federal funds rate - the overnight rate banks charge other banks for funds held at the Fed - near 0.25 percent for more than four years.

Because of such low interest rates, banks cannot continue to reprice the interest they pay customers on deposits, she said. Once deposit rates are as low as possible in a community, the income a bank generates is driven by volume and the income it earns on loans and investments, Stackhouse said.

Banks are aggressively competing for existing loans, Stackhouse said.

Borrowers who qualify are able to negotiate very favorable terms for their loans, even if that requires changing banks to do so, Stackhouse said.

“When we do our examinations, if there is aggressive competition going on, we’re going to look at underwriting standards,” Stackhouse said. “Banks should take risks, but if you change underwriting standards, you introduce new risks. Generally, in this environment, that is interest rate risks.”

Bankers worry, too, about new federal consumer compliance regulations, Stackhouse said.

The first set of regulations concerns mortgages and takes effect next year, she said. There are still details to be sorted through, she said, but they could significantly affect community banks.

One of the few advantages banks in small communities have is that they can customize products for their customers. And additional regulations tend to work against customizing products, Stackhouse said.

An example concerns how small banks are allowed to customize mortgage loans. Because interest rates are so low, smaller banks might offer a five-year balloon mortgage instead of a 30-year fixed rate mortgage, she said.

“Community banks can’t take the interest rate risk of a 30-year mortgage,” she said. “So they offer a five-year balloon, which is what the customer needs. Well, some of these regulations don’t favor that.”

Ultimately, new regulations may favor products that are safer for consumers but don’t match the products offered in more rural areas, Stackhouse said.

Susannah Marshall, deputy bank commissioner, acknowledged that coming regulations are on the radar screen of the state’s bankers.

“Our banks are apprehensive and continue to closely monitor new federal regulations,” Marshall said.

Arkansas’ 126 banks earned about $192 million in the first quarter, up 31 percent from about $147 million in profits in the first quarter last year.

“Arkansas banks are still earning pretty well,” Stackhouse said. “If we put them up against the national average for similar banks, they look pretty good.”

Nationally, bank profits rose 16 percent in the first quarter.

The profits in Arkansas are a little deceiving, however.

The four largest banks in the state - Arvest Bank of Fayetteville, First Security Bank of Searcy, Centennial Bank of Conway and Bank of the Ozarks of Little Rock - accounted for more than $110 million in net income, almost 60 percent of the profits earned by the state’s banks through March 31.

Arvest, the largest bank based in Arkansas with $14.3 billion in assets, had the highest net income in the first quarter, $45.3 million or almost $1 of every $4 earned by the 126 banks based in the state.

Bank of the Ozarks has the record for the highest quarterly net income of any bank in the state with $50 million in the second quarter of 2011.

“Our institutions continue to struggle with earnings,” Marshall said.

The banks are having problems with a lack of loan demand, Marshall said.

“That has been diminished over the last few years, which has further strained earnings,” Marshall said.

Arvest did so well in the first quarter because of profits from its mortgage business, Stackhouse said. Arvest reached $1 billion in mortgage originations this year in the quickest period in its history - just over five months. It had $624 million in mortgage originations in the first quarter, the bank said in a news release.

Arvest reached $1 billion in mortgages so quickly because low-interest rates encouraged homeowners to refinance their loans, Steven Plaisance, president of Arvest Mortgage Co., said in a statement.

Unlike most banks in the state, Arvest also services the mortgages it originates. It services more than $7 billion in mortgages, Arvest said.

There are 13 state-chartered banks facing sanctions from the state Bank Department, Marshall said. That’s downfrom 14 in December.

After federal regulators said earlier this month that they had terminated a sanction against Fidelity National Bank in West Memphis, there are 14 banks under federal sanctions, down from 17 in December.

Home BancShares, holdingcompany for Centennial Bank, said in June that it has agreed to acquire Liberty Bancshares in Jonesboro for $280 million in stock and cash. When the deal closes later this year, it will make Centennial Bank the second-largest bank in the state with about $7.1 billion in assets.

Business, Pages 63 on 07/07/2013

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