November 27, 2013

Kansas banks see less profit than year-ago period

The first nine months of 2013 were profitable for the biggest Kansas banks operating in Wichita.

The first nine months of 2013 were profitable for the biggest Kansas banks operating in Wichita.

But for roughly two-thirds of them, the first three quarters weren’t as profitable as the year before.

According to data from the Federal Deposit Insurance Corp. released Tuesday, seven of the 10 largest banks based in Kansas and operating in the Wichita area saw slimmer profits in the nine-month period ended Sept. 30.

Those seven banks – Emprise, Capitol Federal, Southwest National, Legacy, Rose Hill, First Bank Newton and Midland National – saw profits decline between 3 percent and 42 percent between the first nine months of 2012 and 2013, according to the FDIC.

They wrestled with continued tight net interest margins. Some were also dealing with declines in non-interest income or from interest earned on their investment portfolios. And others were setting aside more money for potentially bad loans.

Nationally, the FDIC said on Tuesday that half of the 6,891 banks and thrifts it insures reported year-over-year growth in earnings, while half reported declines.

At the same time, three area banks – Intrust, Fidelity and Equity – saw an increase in profits over the period, though the reasons for those gains were as varied as it was for their less profitable peers.

Intrust, the largest bank based in Wichita, increased its net income 7.3 percent over the period to $29.7 million, according to the FDIC data. Lyndon Wells, Intrust’s division director of public affairs, attributed the increase largely to the bank setting aside less money for what could turn out to be problem loans.

“We are a reflection of the success of our customers,” Wells said. “In this case, we’ve returned to a more stable environment than we had last year.”

At Fidelity Bank, the gain in net income from last year was meteoric. But that’s because in the first nine months of 2012 it recorded a $1.1 million loss.

“That’s all related to the fact that in the first quarter of 2012, we elected to sell $70 million of under-performing securities, and we took a loss associated with that,” said Fidelity president John Laisle. “Our earnings (this year) have been running pretty strong.”

Laisle said Fidelity’s $11.4 million in net income in the first nine months of 2013 reflect a combination of the absence of those under-performing securities as well as year-over-year gains in commercial and consumer loans and mortgage originations.

“Not only has our loan base expanded, but our loan loss provision has been mitigated (in 2013).” he said. Laisle said Fidelity expects to end the year with $14 to $15 million in earnings.

Brad Elliott, chairman and CEO of Equity Bank, said his $1.02 billion bank’s 128 percent increase in 2013 earnings were helped by its acquisition last summer of Lee’s Summit, Mo.-based First Community Bank.

Since last year, the bank also has improved its efficiency and expenses, and increased loan volume, he said.

“As the economy has gotten better so has the operations of the bank,” Elliott said.

Tom Page agrees that the economy has improved. But it hasn’t improved enough to convince the Fed to end its bond-buying stimulus and allow the Fed Funds Rate, which is at nearly zero, move higher. Nor has an improved economy convinced enough borrowers to take out loans at a pace seen in past recoveries, he said.

“It’s better, certainly than it was,” Page, CEO of Emprise Bank, said of the economy and loan demand. But demand for new loans is not at a level that “lets everyone significantly expand the level of their loan portfolio.”

Higher loan demand, a higher Fed Funds Rate and the end of bond-buying would take away a lot of that pressure on banks’ net interest margin.

“Net interest margins continue to shrink, and people have lowered their costs down as far as you can go,” Page said.

Those tight margins and an increase in loan loss provisions pushed Emprise’s profitability down nearly 7 percent between 2012 and 2013.

The FDIC said the national average net interest margin – the difference between the average yield banks earn on loans and other investments and the average cost of funding those investments – was 3.26 percent as of Sept. 30, down from 3.42 percent in the same period a year ago.

Roger Kepley, president of Rose Hill Bank, doesn’t see any quick relief.

“Margin has become more compressed and will probably stay that way until there’s a higher interest rate environment, which is probably a year, two years away,” Kepley said.

Rose Hill Bank, which has $249.4 million in assets, saw its net income decline nearly 14 percent between the first nine months of 2012 and the first nine months of 2013, according to the FDIC. It had net income of $1.6 million as of Sept. 30.

“We don’t anticipate that earnings will substantially improve until we return to a more normalized interest rate (environment),” Kepley said.

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