Northwest Arkansas Banks Mend After Recession

Area Banks Healthier, But Weak Spots Remain, Experts say...

FILE PHOTO — A Federal Insurance Deposit Corp., employee enters the Arkansas National Bank building in Rogers on May 2008 after the bank failed. ANB Financial of Bentonville reopened the next week under a new owner.
FILE PHOTO — A Federal Insurance Deposit Corp., employee enters the Arkansas National Bank building in Rogers on May 2008 after the bank failed. ANB Financial of Bentonville reopened the next week under a new owner.

Banks in Northwest Arkansas continue to climb out of the financial pit they fell into during the 2008-2009 recession, but the industry's profits remain below prerecession levels and the area still has too many banks, experts said.

"Things are a lot better now than they were from 2008 to 2012 -- much, much better in banking and in general -- but things are still not rosy," said John Dominick, professor at the finance department in the Sam M. Walton College of Business at the University of Arkansas at Fayetteville.

National Trend

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corp., reported a combined net income of $40.3 billion in the fourth quarter of 2013, a $5.8 billion increase in earnings for the same time a year ago. Source: FDIC Fourth Quarter 2013 News Release

By the Numbers

While overall loans were up among Northwest Arkansas banks, not all categories saw improvement in 2013.

w Consumer loans were down 0.7 percent the fourth quarter of 2013 over 2012.

w Loans for multifamily construction was down 7.8 percent for the fourth quarter last year compared to 2012.

w Loans considered not traditional, for example, those to other financial institutions, fell by 9.3 percent.

w Commercial real estate loans were also down 4.5 percent.

Source: Northwest Arkansas Loan Categories by Tim Yeager, associate professor, Department of Finance at the Sam M. Walton College of Business at the University of Arkansas at Fayetteville

Fast Fact

Despite the large, longterm decline in the number of banks since the mid-1980s, the total number of U.S. banking offices increased from 84,202 in 1987 to 98,180 in 2011.

Source: FDIC Community Banking Study, December 2012

Banks nationwide took a beating about seven years ago when overbuilding in real estate caused prices to plummet, builders to go bankrupt and developers to default on loans. Homeowners found themselves in homes with less value than their mortgages, and as some loan programs increased mortgage payments, homeowners were unable to pay. Foreclosures skyrocketed.

Area banks lost millions on bad loans.

"We made some very, very bad decisions," Dominick said.

Dominick sits on the board for Signature Bank of Arkansas in Fayetteville. The bank lost about $12 million in bad loans during the recession, he said. Signature wasn't the only bank to struggle. Two local banks -- ANB Financial of Bentonville and Sinclair National Bank of Gravette -- are listed as failed banks on the FDIC website.

Other banks needed federal or state oversight.

The surviving banks started to see a turnaround about 2012, Dominick said. Both the banking industry and the economy remain weak, but banks are healthier, he said.

Last year, area banks saw loan growth in business, residential real estate, farming and construction, said Tim Yeager, associate professor at UA's Sam M. Walton College of Business and Arkansas Bankers Association chair in banking. Banks are starting to see more profitability, Yeager said.

The number of bad loans banks handled in 2013 shrank statewide and locally. The number of foreclosures and loan defaults mostly decreased in Northwest Arkansas last year. Banks didn't need to set as much money aside to cover failed loans, Yeager said.

For example, Arvest Bank, the state's largest, cut its loan loss allowance from $188.45 million to $173.78 million between Dec. 31, 2012 and Dec. 31, 2013, according to year-to-date income data provided by the Federal Deposit Insurance Corp. A decline in loan-loss provisions mean banks are more profitable year over year.

More local banks are also loaning more money, Yeager said. Commercial loans are up $84 million, or 4.6 percent from the year before, he said.

Net loans and leases at Centennial Bank, for example, rose to $4.4 billion last year, up from $2.7 billion the year before, FDIC records show. Those numbers likely include recent acquisitions. Centennial is among several banks expanding locally.

Bank net incomes are also up statewide -- going from $695 million in 2012 to $708 million last year, according to the FDIC website. Yeager said net income at among 14 banks he reviewed that had significant activity in Northwest Arkansas rose to about $259.5 million in 2013 from $221.3 million in 2012.

This past year also saw banks grow assets. At Arvest Bank, total assets increased from about $13.2 billion to about $14.1 billion from Dec. 31, 2012 to Dec. 31, 2013, FDIC year-to-date records show. Other banks, including Simmons First National Bank, showed increased assets of $1 billion or more year over year.

The sting from the recession isn't completely gone, said Susannah Marshall, deputy commissioner at Arkansas State Bank Department, which oversees about 90 state chartered banks.

Banks statewide are interested in loan growth and diversification, Marshall said. Bank officials want to strengthen earnings, which have been low for the past few years, she said. Banks, including those in Northwest Arkansas, are rebounding from the recession but are not back to prerecession profits, Marshall said.

"We see strength in the Northwest Arkansas banking market," she said. "I think all our banks are beginning to see progress."

Despite improvements in the Arkansas banking industry, last year the number of state and national financial institutions in Arkansas shrank from 126 to 118 as of February this year, according to the FDIC website. No new bank charters were issued last year, Dominick said.

Banks are buying out their competitors. Many banks will merge to increase assets and offset costly federal regulations, Dominick said.

The bank mergers are double edged, experts said. Having more banks gives residents more choices and makes it easier for businesses to get loans, Yeager said. Lots of bank branches also makes banking convenient, but it can also foster an atmosphere where banks are once again making risky loans, Dominick and Yeager said.

"It also fosters conditions where banks need to take bigger risks to attract the borrowers," Yeager said in email. "That competition certainly contributed to the glut of real estate development during the housing boom."

Recovery among banks in Northwest Arkansas can't come fast enough for bankers and competition remains fierce as the local market remains crowded, Yeager and Dominick said.

"We have far, far, far too many branch buildings -- maybe twice as many as we need," Dominick said.

The FDIC shows 96 bank offices, or branches, in Benton County and 97 in Washington County. At least 25 regional, national and state financial institutions have branches in the two-county area, according to the FDIC and other websites.

The number of total financial institutions in the market, which includes part of Oklahoma and Missouri, is nearly the same as central Arkansas, even though central Arkansas's metropolitan population is nearly 50 percent higher than that of Northwest Arkansas, according to the Federal Reserve Bank of St. Louis' bank structure analysis website.

The bank market in Northwest Arkansas includes Benton, Madison, Washington counties in Arkansas, McDonald County, Missouri, and Delaware County, Oklahoma. The banking market for Little Rock includes Conway, Faulkner, Grant, Lonoke, Perry, Prairie, Pulaski, Saline, Van Buren and White counties, according to the analysis website.

"We are over banked," Yeager said.

Building and operating branches increases overhead costs for banks and decreases bank earnings, Dominick said. Banks with a lot of branches can see reduced profitability, yet banks seem reluctant to shutter branches, he said.

Putting in bank branches, especially during shaky economic times, can damage banks, Dominick said. For example, the now defunct Metropolitan National Bank put branches in Northwest Arkansas right before commercial real estate tanked. The bank had also made a lot of commercial real estate loans that went sour, Dominick said. The combination hurt the bank, which merged with Simmons First last year.

The number of branches going up this year has slowed as banks try to find ways to cut costs, Yeager said. Even so, several branches opened last year and more are under construction.

First Bank started a Washington County branch this past October, according to the FDIC. Integrity First Bank established a Rogers branch this past July. Legacy National Bank opened a branch this past August in Fayetteville.

Some branches closed last year or are set to close. First Security Bank and Bank of America closed branches in Bella Vista and Springdale, respectively. First Federal Bank closed a Rogers branch in August. Simmons First National Bank plans to close some Metropolitan National Bank branches March 21, according to a news release.

Other banks aren't building at all but are focused on technology that allows access to banking services through computers or smartphones. Signature Bank of Arkansas, for example, is competing by adding services without building more brick-and-mortar stores, said Gary Head, chairman, CEO and president of Signature.

"We have been blessed and very fortunate to have lots of Northwest Arkansas clients who are OK that we don't have a branch on every corner," Head said.

"Northwest Arkansas is getting back to normal," said Jett Cato, president and CEO of Bank of Arkansas, which is under BOK Financial Corp. out of Tulsa, Okla.

Several bankers said banks are getting help from an influx of new residents and increasing job growth.

During the fourth quarter of 2013, commercial loan growth was up 4.6 percent over the same time a year ago and total loans are up 0.4 percent, according to documents provided by Yeager. Home equity is up 9.2 percent locally in the fourth quarter over the same time in 2012.

Several bank presidents said they are optimistic about the banking industry's health in Northwest Arkansas. Banks seem to be getting back on their feet, Marshall said.

Dominick said Signature Bank had compliance issues in 2010, but this past year, the bank saw a profit of about $1 million. Harrell Bancshares of Hampton, Ark., the holding company for First Bank, took over the liability for Signature's Siloam Springs and Rogers branches in 2010 and brought First Bank to the Northwest Arkansas area.

Other banks are also getting out from under federal orders. United Bank of Springdale and Legacy are clear after the Office of the Comptroller of the Currency terminated its cease-and-desist orders last year. The banks agreed to the orders in 2012 and 2008, respectively, but last year, they were both found in compliance.

Bankers said banks' health will continue to improve with the economy. The population in Northwest Arkansas is expected to reach 500,000 this August, the area ranks fourth for non-farm job growth nationally, income is increasing, deposits are up at banks and real estate and construction is recovering, bankers said.

"I think Northwest Arkansas particularly will see a faster recovery than the rest of the country, but I don't think we will recover as fast as we would like it," Cato said.

NW News on 03/23/2014

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