Banks still growing despite added regulation above $10 billion

A handful of Arkansas banks have shopped their way to become super-regional institutions with assets near or more than $10 billion in recent years. Prior to the passage of Dodd Frank legislation in 2010, Fayetteville-chartered Arvest Bank was the only Arkansas-based bank above the $10 billion threshold. Since 2010, Little Rock-based Bank of the Ozarks (BOZ) has joined the club with 15 acquisitions to grow its assets to a whopping $18.43 billion as of Sept. 30.

Between 2010 and 2012 BOZ spent more than $2.2 billion on six deals it made with the Federal Deposit Insurance Corp. Since that time, the bank has completed nine other deals with open banks, the last in July was the acquisition of C1 Financial, adding another $1.7 billion to its asset base.

Home BancShares Inc. of Conway, holding company of Centennial Bank, is knocking on the $10 billion threshold with assets of $9.8 billion as of Sept. 30. Centennial spent roughly $2 billion on nine FDIC acquisitions through April 2015, and one non-FDIC deal made in October 2015 for the $100 million acquisition of Florida Business BancGroup.

Bank executives at BOZ and Centennial have said their growth strategy is about diversifying assets in multiple states as well as streamlining regulatory costs which have ballooned since the passage of Dodd Frank.

Pine Bluff-based Simmons First National Corp., holding company of Simmons Bank, has also been growing via acquisition toward the $10 billion mark. As of Dec. 14, Simmons had assets of $8.2 billion, investing more than $805.2 million in three FDIC acquisitions through 2012. Since that time Simmons acquired Little Rock-based Metropolitan National Bank out of bankruptcy and added additional banks in Oklahoma, Missouri and Tennessee.

Heightened Scrutiny
Banking analysts say there are plenty of reasons for banks like Simmons and Centennial to grow, but continue to stay just below the $10 billion threshold as there is heightened scrutiny by regulators on banks with assets of more than $10 billion.

“Continuous supervision approach when banks cross the $10 billion mark, they are no longer considered community banks, but rather midsized institutions – a designation that introduces an enhanced supervisory approach from regulators,” notes analysts from Grant Thornton. “Banks can expect a larger and more frequent examination presence from regulators, featuring full-scope, point-in-time examinations combined with regular, targeted reviews that include a variety of off-site monitoring activities [i.e., monthly conference calls, frequent on-site reviews, etc.].”

The consultancy also said banks approaching $10 billion in assets must assess their compliance functions to determine if the appropriate infrastructure is in place to manage new requirements and added regulatory scrutiny from the Consumer Finance Protection Bureau, which becomes heightened for the larger banks.

There are also the interchange rules as part of the Durbin Amendment, which limits the amounts larger banks can charge merchants when their debit cards are used as payment. Lastly, there is a third level of stress testing which must be completed by the larger banks to determine risk exposure as part of the Dodd Frank legislation.

With the new Republican administration, House and Senate banking insiders are hopeful some of the regulations with Dodd Frank will be re-examined with community banks in mind.

Randy Dennis, president of DD&F Consulting Group in Little Rock, said it’s entirely possible that the $10 billion threshold will be lifted higher to perhaps $50 billion or so, because there is a significant difference between a $10 billion bank and the mega-banks responsible for much of the banking crisis.

Going Bigger
Dennis said Arkansas bankers like George Gleason, chairman and chief executive officer of BOZ, are not likely threatened by the $10 billion threshold, as the bank leaped well above that mark. Dennis said BOZ, Simmons and Centennial each have their own growth strategies and have executed them well.

“I said several years ago that Arkansas could become the next Birmingham (Ala.) – a hotbed of regional banking growth that produced the likes of Regions Bank and others,” Dennis said. “Arkansas bankers saw a target-rich environment. These banks were inquisitive and smart-minded in their expansion plans, cherry picking the banks they wanted, regardless of the $10 billion threshold.”

While BOZ chose to leap over the $10 billion threshold and has not looked back, Centennial has sought to fill in its markets with additional acquisitions and Simmons has done a nice job expanding into Missouri and Tennessee, Dennis said.

Dennis expects these banks will continue to seek out growth opportunities this year and beyond. He said the FDIC auctions of failed banks were rich pools to draw from, but that has all but dried up since 2012. The next wave of growth opportunity for these aggressive banks will be to find $1-to $2- billion institutions that have hit a wall in terms of growth and want to hitch themselves to a bigger wagon.

Dennis said BOZ and Simmons have had recent successes acquiring $1 billion banks outside the Natural State, which is a very competitive market. He agreed the best growth strategies for the larger banks is to focus on growing markets they have been able to develop in other states such as Texas, Georgia, Florida, Tennessee, Oklahoma and Missouri.

Northwest Arkansas Market
“Arvest does a really good job controlling the Northwest Arkansas growth for other banks,” Dennis said.

Northwest Arkansas is one of the fastest growing regions in the country and nearly all of the Arkansas-based banks want to have access to loan demand in the region. That said, with Arvest having a lion’s share of deposits it’s been harder for BOZ, Centennial and Simmons to gain any real traction in the Northwest Arkansas market.

The Northwest Arkansas financial sector was a hotbed of small bank startups from 2003 to 2006. The market has seen some consolidation among those ranks and even a flagship bank such as The Bank of Fayetteville was acquired by Farmers & Merchants of Stuttgart in 2015. Parkway Bank, another startup was acquired by Citizens Bank of Batesville in 2015.

While several Arkansas banks have become larger regional players while keeping their presence in Northwest Arkansas, smaller competitors such as Signature Bank of Arkansas, founded in 2005, have managed to grow market share amid a slew of competitors.

When asked how the Fayetteville-based lender continues to grow amid much larger competitors, CEO Gary Head said the bank is locally owned by a diverse group of shareholders.

“It’s been really important for us to have these local cheerleaders, our shareholders, referring new business our way over the years,” Head said. “When you look at some of the main banks I compete with, they are over $10 billion in size and some of the largest of them – Regions and IberiaBank – have closed branches and are now moving the other way.”

At $510 million in assets, Head said the bank is growing, and he would like to see it continue over the next few years as the region itself continues to flourish.

Signature Bank defines itself as a true community bank, lending to businesses inside Benton and Washington counties. Head said when the region is doing well the bank also grows, and when the economy is tough the bank’s profits will also be harder to come by.

Head expects to see more banks across Northwest Arkansas acquired by outside interests similar to the Parkway and The Bank of Fayetteville deals. Though he hasn’t fielded any recent calls from potential suitors, he said there is always outside interest for smaller banks that have solid income and customer bases.

Legacy National Bank of Springdale was also founded in 2005 and has grown its assets to about $400 million. CEO Don Gibson said the growth the founders anticipated in 2005 was somewhat derailed between 2008 and 2011 as the real estate market correction took place. He said the growth of other competitors like BOZ and Centennial has not really affected the Legacy business, which is concentrated in Benton and Washington counties.

“For the last three years we have been growing at the pace we first anticipated back in 2005,” Gibson said. “We see lots of competition from larger banks, and we continue to be aggressive in going after the business and not waiting for it to come to us,” Gibson said.

The local bankers agree they likely have it easier than several $100 million banks that are also trying to manage high regulatory costs and intense competition from bigger fish.

“There aren’t nearly as many of those small family-owned banks in Arkansas as there were just a few years ago,” Head said.