story by Ryan Saylor
rsaylor@thecitywire.com
The number of bad loans banks are writing off may have dropped in the last year or more, but it does not mean profits are necessarily increasing at Fort Smith area banks.
According to figures provided by the FDIC, Arvest Bank, Benefit Bank, Citizens Bank & Trust of Van Buren, Farmers Bank of Greenwood and First National Bank of Fort Smith reported net income of $67.676 million for the first half of 2014. The total represents a decline of 5.77% from the first half of 2013, when net income for the five banks totaled $71.823 million.
Keith Hefner, president and CEO of Citizens Bank & Trust, said extra costs associated with the federal Dodd-Frank Act have put an undue burden on many banks. As a result of tightening regulations caused by the federal legislation, which was passed in the fallout from the 2008 financial crisis, many banks are having to add staff, outsource compliance operations or both in order to abide by the law, Hefner said.
Named after legislative authors U.S. Sen. Chris Dodd and U.S. Rep. Barney Frank, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law on July 21, 2010. Dodd and Frank have since retired from Congress. It was passed in response to the near collapse of several large U.S.-based banking operations in 2007-2008. Democratic leaders in Congress blamed the financial problems on a lack of federal oversight. Advocates of the law say it will prevent banks and other financial institutions from essentially creating a financial house of cards.
"In the past two years, we have added four positions in our bank that we created as a result of compliance with some facet of meeting the requirements of Dodd-Frank," he said. "In addition to that, we have either outsourced or increased our level of reliance on outsourced compliance support as a result of what has been implemented and what we see coming in the next year to two years that we will have to be in compliance with. It's a financial commitment either with people or utilization of support outside your organization.”
It is a story heard across the state, with CEO Don Gibson of Springdale's Legacy Bank noting that the bank has added a full-time compliance professional to try and create a safe haven in the midst of burdensome regulation.
“I recently attended training in Memphis. The very first slide of the training showed the number of pages in the Dodd Frank legislation against all other banking acts. Content wise, Dodd Frank has volumes of requirements that will end up costing consumers more in the long run,” Gibson recently told The City Wire.
At Arvest Bank, which has operations in Arkansas, Kansas, Missouri and Oklahoma, profits have fallen from $69.646 million during the first half of 2013 to $56.644 million during the first half of this year. At First National Bank of Fort Smith, profits have fallen from $8.881 million during the first half of last year to $6.931 million during the same period this year.
Farmers Bank of Greenwood held steady, with $639,000 in profit for the first half of the year versus $635,000 during the first half of last year. Citizens Bank & Trust was an outlier, with profits increasing from $2.125 million during the first half of last year to $2.701 million during the first half of 2014. The other outlier, though on a smaller scale, was Benefit Bank which saw a profit of $761,000 for the first half of 2014, versus $536,000 for the first half of 2013.
As for the drops in profits seen at many area banks, Hefner said adding staff means more than just adding salaries.
"There's greater expenses involved when you add staff with benefits and so there's increased expense on the income side of the bank. That puts a greater burden on the profitability. We are fortunate that we have a $360 million asset size, so we're confident we can absorb the extra cost going forward, particularly as we see the economy improving.”
He said the banks that will be impacted more are those that have far smaller asset portfolios and run razor thin margins.
"There's a real challenge for banks not maybe located in our geographic area that are smaller that I think will struggle mightily with absorbing this. It's a shame because any community needs a good local community bank. I don't think our congressional representatives fully understood the repercussions of what Dodd-Frank would do to the state of Arkansas and the community banks. It was an overreaction to a problem that community banks in Arkansas didn't create, yet we're bearing the burden of.”
And while profits may be down at banks in the region, Hefner pointed to optimism in the local economy, saying that banks like Citizens were starting to see the improvements on their balance sheets.
And that is the case with provisions for loan and lease losses, or the money required to be set aside to cover expected losses.
Arvest's provisions dropped to $1.214 million for the first half of this year versus $2.651 million it had set aside during the same period last year, while Benefit Bank has no money set aside this year and had $60,000 set aside last year.
Citizens set aside $298,000 in provisions during the first half of this year, a significant drop from its 2013 first half of the year provisions of $.155 million.
Farmers Bank is the only bank to increase its provisions, going from no provisions during the first half of last year to $10,000 during the first six months of 2014.
First National Bank has decreased its level of losses significantly since 2011, when it had $11.53 million set aside for losses during the first half of the year compared to only $1.056 million during the first half of 2013 and only $300,000 for the first half of 2014.
In spite of the improved balance sheets, Hefner said a concern that remains going into next year is what happens with Rural Development Loans. He said even though Citizens does not directly service RDLs, the trickle down of a possible loss of the loan option in Van Buren could result in less work for local contractors and vendors who work in new home construction. And that could directly impact bank profitability in the region.
"So the direct impact on our bank is minimal, but it impacts our customers. … It impacts (us) indirectly.”
BANK PROFITS (January-June 2014)
Arvest Bank
2014: $56.644 million
2013: $59.646 million
Return on Assets: 0.78%
Benefit Bank
2014: $761,000
2013: $536,000
Return on Assets: 0.81%
Citizens Bank & Trust
2014: $2.701 million
2013: $2.125 million
Return on Assets: 1.49%
Farmers Bank
2014: $639,000
2013: $635,000
Return on Assets: 0.68%
First National Bank of Fort Smith
2014: $6.931 million
2013: $8.881 million
Return on Assets: 1.18%