Midsize Banks Weather Loan Losses in 2007
Last updated Thursday, February 21, 2008 8:04 PM CST in Business
By Kim Souza
THE MORNING NEWS
Editor's note: This is the third of four reports on the Northwest Arkansas banking industry. Saturday's edition will review financial performance of the larger area banks in 2007.
Troubled loan portfolios in 2007 drained bank earnings across Northwest Arkansas, regardless of bank size.
Banks in the middle, with assets ranging from $300 million to $800 million, weathered financial turbulence that John Hampton, CEO and board chairman of First Western Bank, said is nothing more than a market correction.
Seven midsize community banks in Northwest Arkansas reported a cumulative net income of $18.79 million in 2007, down 36 percent from the $29.64 million earned in 2006.
This group's cumulative numbers were helped by the Bank of Fayetteville, which reported strong earnings, despite its exposure to troubled loans.
The Bank of Fayetteville set the bar high for the group with net income growth of 19.9 percent from 2006; while First Western Bank brought up the rear, reporting a net income deficit of 93 percent in the year-over-year period.
Mary Beth Brooks, CEO of the Bank of Fayetteville, predicts 2008 will be a tough year, but said the bank has planned for the troubled loans on its books. However, there is still a large unknown factor looming in the marketplace.
"We don't hardly know what is around the next corner, because we are seeing small business suppliers and other real estate-related businesses with (liquidity) problems that we didn't expect," Brooks said.
The difference between the banks who made money and those sustaining losses is their exposure to bad loans, said John Dominick, Arkansas Bankers Chair and professor at the University of Arkansas.
At year end, the group faced $69.9 million in loans that had stopped accruing interest -- a 111 percent increase from the previous year that cost the banks about $5.6 million in interest income.
More importantly, the rising number of bad loans prompted the banks to put $7.9 million into loan loss reserves, an almost $8 million hit to their bottom lines in 2007. In 2006, the same banks set aside $5.9 million for loan loss reserves.
Fortunately for the banks in this group, capital ratios remain strong, analysts said.
Capital reserves are a buffer against future losses, should banks report negative earnings.
Though earnings will be harder to come by in 2008, these banks appear to have enough capital to sustain them as they work the bad loans off of the books, Dominick said.
Booneville-based First Western Bank will have a tough 2008 with 5.5 percent of its loans being noncurrent, up from 0.5 percent reported in 2006. First Western's nonaccrual loans escalated to $11.9 million, up 753 percent from the prior year period.
John Hampton, CEO of First Western, said 2007 was not as bad as the numbers show. He admitted the bank's troubled loans were growing as a result of the market correction underway in the region's single family housing market.
He said the correction was brought on by growth in the national real estate market, too much housing product in certain price ranges in local markets, too many new banks that were allowed to come into the region in recent years and the timing of the economic business cycle winding down from a 10-year run.
Hampton said the bank is prepared to ride out the storm with strong capital ratios. While profits may be lighter than in recent years, he said the bank will make money.
By The Numbers
Bank 2007 Net Income 2006 Net Income Return on Assets
Bank of Fayetteville $5.73 million $4.8 million 1.34%
Community First Bank $4.62 million $4.61 million 1.03%
First State Bank of NWA $2.75 million $3.4 million 0.87%
Chambers Bank $2.81 million $4.58 0.90%
First Federal Bank $2.6 million $7.4 million 0.32%
Signature Bank $136,000 $-1.93 million 0.03%
First Western Bank $122,000 $1.77 million 0.04%
Source: Federal Deposit Insurance Corporation
Notables
"We are looking for bank profits to normalize some time in 2009."
Mary Beth Brooks, CEO Bank of Fayetteville
"We are glad to see lower interest rates because they will help our customers in 2008; which is important to banks as they are merely a reflection of the customers they serve."
Gary Head, CEO of Signature Bank
"The one area that banks can't compromise without worry, is loan underwriting."
John Dominick, Arkansas Bankers Chair at the University of Arkansas.
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