The good news in the first quarter of 2013 is that the 10 biggest Kansas-based banks doing business in the Wichita area made a profit in the three-month period that ended March 31.
That’s according to an Eagle analysis of data released Wednesday by the Federal Deposit Insurance Corp., which showed that Wichita-based Fidelity Bank and Wellington-based Impact Bank reversed their year-ago losses.
The eight other largest banks all reported profits in the quarter, though all but one posted lower profits than in the first quarter of 2012.
The 10 banks reviewed have headquarters in Kansas and operate in the four-county metropolitan statistical area – Butler, Harvey, Sedgwick and Sumner counties – and had the most deposits in the area as of June 30.
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The Eagle looked at the banks’ pre-tax return on assets and profits in the first quarter of 2013 and the first quarter of 2012.
Besides the changing fortunes at Fidelity and Impact banks, the analysis showed that seven banks posted lower year-over-year ROA and net income: Intrust, Emprise, Capitol Federal Southwestern National, Rose Hill, Legacy and First Bank Newton. Only one other, Equity, saw a year-over-year increase in net income, or profit, from $1.04 million to $2.63 million.
Brad Elliott, Equity’s chairman and CEO, said the increase came from the bank increasing its earnings internally as well as through its acquisition last year of First Community Bank in Lee’s Summit, Mo.
Declining profits in the first quarter could signal the beginning of a period in which sustaining growth will become tougher for even most well-run banks, bank executives including Elliott said.
“Net interest margins are compressing, so the ability for banks to make money on a return-on-asset basis are getting more and more difficult,” Elliott said. “We, too, are struggling to keep net interest margin where it’s at.”
The FDIC data released on Wednesday were in conjunction with the FDIC’s quarterly report on 7,000 banks and thrifts it insures across the country.
That report said those institutions collectively increased their profits nearly 16 percent from the first quarter of 2012. And in that same period, the average return on assets – a key measure of profitability showing how much money a bank earns for each $100 it has in assets – increased from 1 to 1.12 percent in first-quarter 2013.
“Today’s report shows further progress in the recovery that has been underway in the banking industry for more than three years,” Martin Gruenberg, FDIC chairman, said in a news release. “We saw improvement in asset quality indicators over the quarter, a continued increase in the number of profitable institutions and further declines in the number of problem banks and bank failures.”
Locally, Fidelity Bank, which at more than $1 billion in local deposits is the area’s second-largest Kansas-based institution, reversed the $6.65 million loss it recorded in the first quarter of 2012. In first-quarter 2013, it posted a $4.26 million profit. Fidelity CEO Clark Bastian attributed last year’s loss to the bank’s sale of mortgage-backed securities, calling the loss “a one-time balance sheet cleanup.”
“I think at the time I said we were going to be putting more resources into direct lending, and we were pretty successful in doing that,” he said, noting that the calendar first quarter is the fourth quarter of Fidelity’s fiscal year.
“Nine years ago, we had the opportunity to expand into Oklahoma City in the Edmond area, and we’re about ready to open our sixth branch there, so we’ve have great success down there. We moved into the Carnegie Library with the commercial banking group. That has, I think, increased our visibility to the business community. We have less reliance on CDs (certificates of deposit). We’ve changed our deposit mix, and our loan mix has changed as well. We’re doing more C&I (commercial and industrial) lending and commercial real estate and multifamily (lending).”
He said that between the first quarter of 2012 and the first quarter of 2013, Fidelity has increased its loan portfolio 18 percent, or about $170 million.
To be sure, there may be more than one reason that more than half of the 10 area banks posted lower profits. In Emprise Bank’s case, said CEO Tom Page, lower first-quarter 2013 profit reflected the absence of $1 million in gains from the sale of bonds that it recorded in the first quarter of 2012.
“I think every bank’s story is going to be a little bit different except the one common thread,” Page said, which “is that their net interest margins are shrinking.”
Net interest margin is where banks make money on their loans. If that margin shrinks, which it has because of the persistently low federal funds rate set by the Federal Reserve, then banks have to compensate by paying less for deposits such as on certificates of deposits, raising fee income, cutting expenses or increasing loan volume.
The problem is, Page said, many banks are trying to increase loan volume at the same time demand for loans isn’t keeping the same pace.
“You work on fee income and you work on reducing your overhead and you be very, very careful about loan losses,” he said. “That’s kind of the recipe.”
Page said Emprise is doing all three of those, including plans to reduce its branch network from 42 to 40 by closing one of its three Augusta branches and one in Toronto.
Trish Minard, president of Southwest National Bank, which in the first quarter of 2013 held the distinction of having the highest return on assets among the area’s 10 biggest banks, said she expects that figure to decline because of a narrowing net interest margin.
“We’ve got people out there doing car loans for 1.29 percent (interest rate),” she said. “I can’t keep the lights on” by offering that low of an interest rate.
So for the near future, the mantra at Southwest National – which saw its profit decline by about $36,000 between the first quarters of 2012 and 2013 – is “managing the margin and … making sure you don’t have unexpected losses,” Minard said.
Lyndon Wells, division director at Intrust Bank, said even for bankers who have been in the business for several decades, such as himself, the long-lasting low-interest rate environment is a new experience.
“Most of us, regardless of how long been we’ve doing this, have not seen this,” he said. “We’re having to manage under a different set of circumstances.”
There is expectation that at some point, the net interest margin will improve once the Fed begins to adjust the rate higher; it has been at near zero since Dec. 15, 2008.
“Everybody’s profits would improve dramatically,” Equity’s Elliott said of an uptick in the rate. “I don’t believe personally that will happen in the next 18 to 24 months.”