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with 0.65 percent at the end of 2010. ROA for Arkansas com-
mercial banks has not been this high since the third quarter of 2007, when it also was 1.10 percent. Improvement in earnings is due, in part, to a declin- ing level of loan losses. The ratio of net charge-
offs to loans for Arkansas commercial banks as of June 30, 2011, was 0.59 percent, up slightly from 0.49 percent on March 31 but down sharply from 1.17 percent at year-end 2010. This ratio has not been this low since March 31, 2009, when it was 0.47 percent.
Sizable challenges for
our banks remain despite the improvement in profit- ability.
Even with the high level of charge-offs in recent years, the ratio of noncur- rent loans to loans as of June 30, 2011, was 4.01 percent. This is the highest this ratio has been for Ar- kansas commercial banks for at least 10 years, ac- cording to a review of quarterly data since year- end 2001. Beginning with this year’s March 31 call report, however, banks that have acquired failed insured de- pository institutions are required to report the por- tion of covered past-due and nonaccrual loans that is protected by loss-sharing agreement with the Federal Deposit Insurance Corpo-
ration. When these loans are
factored out of the noncur- rent percentage for Arkan- sas commercial banks, the ratio drops from 4.01 per- cent to 3.11 percent. This level still is well above the threshold of regulatory concern. The volume of Other
Real Estate Owned on the books of Arkansas com- mercial banks also remains elevated. The aggregate balance of OREO on these banks’ general ledgers ex- ceeds $771 million. In fact, the balance has increased every quarter since the fourth quarter of 2006. Of the $771 million in OREO on the books of Arkansas commercial banks, $108 million – or 14 percent – is protected by FDIC loss-sharing agree- ments. Clearly, the volume of
noncurrent loans and OREO on the books of Arkansas commercial banks must be reduced considerably for profitabil- ity to be sustained at or above the historical 1.00 percent benchmark. Looking forward, so much depends on the di- rection of economic condi- tions. The housing market continues to flounder, with declining prices creating deflationary expectations and, consequently, falling demand. According to one econo-
mist at the Federal Reserve Bank of St. Louis, the fun- damental problem in most local housing markets re- mains excess supply at cur-
rent prices and demand levels, with the most likely resolution being further price declines through this year and into 2012. In addition, new loan demand continues to be flat. The loan-to-deposit ratio for Arkansas commer- cial banks fell to 73.99 per- cent on March 31, 2011, the lowest this ratio has been during a period of quarterly data recorded since year-end 2001. The ratio increased on June 30, but by only 5 basis points. The offsetting benefit of weak loan demand is the ample liquidity on banks’ balance sheets. During the 12 months ending June 30, 2011, Arkansas commercial banks increased their aggre- gate cash balance by 15.27 percent and their balance of investment securities by 19.84 percent, and de- creased their balance of other borrowings by 13.87 percent.
An improved liquidity
position and lower leverage will be favorable factors when economic conditions and loan demand strengthen. Still, we’re not out of the woods yet, but there are at least indications banks are closer to the end of this severe downturn than the beginning.
Abundant uncertainty for
the industry does continue, but there is no question that Arkansas bankers have skillfully responded to the difficult challenges of the past four years with leader- ship, resilience, hard work and courage.
September 30, 2011
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often are referred to as a wholesale banking opera- tion. The deposit customer base for these banks is somewhat limited so there is a large reliance on non- core funds such as borrow- ings from the Federal Home Loan Bank, Internet or brokered deposits, and large retail deposits. Strong funds manage-
ment practices should be in place for these institutions, with realistic limits on non- core funding sources. These are often expressed as a percentage of assets or capital for each source, with an aggregate limit de- fined.
Institutions with signifi-
cant noncore funding con- centrations have a higher risk profile and may be prone to higher levels of liquidity risk if asset quality becomes an issue. A well- defined liquidity contin- gency funding plan should be in place and higher lev- els of capital often are maintained. Regardless of concentra-
tion type – either asset or funding related – institu- tions most likely will un- dergo more thorough ex- amination procedures if concentrations are apparent or emerging. Institutions reflecting a high degree of concentration risk or emerging trend may be expected to have stronger risk management practices in place regardless of size, complexity or current risk profile.
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