First Security Plans Splash

$10 million investment may pay off in a $10 billion market

First Security Bank quietly opened the doors of its new 14,000-SF Fayetteville branch during the last days of June, but don’t expect this to be a stealth operation for long.

The Searcy-based bank, with assets of $492 million, is hoping to grab a significant portion of the multi-billion-dollar Northwest Arkansas banking market and, to do so, it’s investing millions in what’s already a highly competitive market.

The Fayetteville building alone cost upwards of $2.5 million to $3 million – the building permit was for $2 million and the bank paid $500,000 for the Joyce Street property – and dirt work has already begun on a site in Rogers where a duplicate building will be constructed.

Additionally, bank Vice President Jim Taylor, who oversees First Security’s Northwest Arkansas operations, says he’s scouting for a place for a third branch of the same design as well as numerous ATM locations.

All in all, that could easily add up to an investment of $10 million in a market that already has more than two dozen banks and more than a hundred bank offices.

But Taylor says it could be money well spent. Based on June 1998 deposit figures, the latest currently available, he says the two-county region is a $3 billion market. By applying the growth rate in deposits from the past 20 years, he figures Washington and Benton counties should reach $10 billion by 2010, and that makes it worthwhile to invest heavily to gain a share of the market.

Past growth took place, he notes, before the regional airport or the new Interstate 540 opened. Taylor expects both to be catalysts to the local economy.

Figures on file with the Federal Reserve Bank back up some of Taylor’s enthusiasm. Deposits for the two-county region totaled more than $3.6 billion as of June 30, 1998. That’s an increase of more than 36 percent from 1994, when deposits for the region totaled nearly $2.7 billion.

At the same time, the number of bank offices in the area grew even faster, from 83 to 117, an increase of 34 offices, or 41 percent.

All this doesn’t surprise John Dominick, a finance professor at the University of Arkansas, who’s familiar with First Security Bank and knows its chairman, Reynie Rutledge.

“Reynie is a very, very smart individual,” Dominick says. “I think it’s rather obvious this is the fastest growing area of the state. With growth, you pick up deposits and you pick up loans. I think he signaled by the type of building he is building that he plans on being very competitive in this market and expects to grow rapidly.”

That echoes Taylor’s remarks, who notes that his new Fayetteville office building bears little resemblance to what most people expect of a branch bank. It’s got a spacious 7,000-SF footprint, all of which will be used for bank offices and teller windows. Upstairs, there’s another 5,000 SF of space, which he expects to fill quickly with additional bank offices.

“We want everyone to know that we’re 100 percent committed to this area. We’re not going to make a splash and leave,” Taylor says. “I wouldn’t want to do business with someone who wasn’t 100 percent committed” to the area.

“We want to be a significant player in this market,” Taylor says.

There’s formidable competition, however, and Taylor gives the nod to Arvest Bank Group’s dominant position in the market.

“Arvest is always going to be the No. 1 provider in this market,” Taylor says. “But there’s always room for a No. 2 provider.” Especially, he adds, when the market is as segmented as that of Northwest Arkansas.

First Security is taking advantage of a change in Arkansas banking laws that now allows statewide branching. Prior to Jan. 1 of this year, banks were prohibited from branching throughout the state. There were exceptions – banks subject to federal instead of state law and cases in which some banks were allowed and encouraged to take over failed institutions in different counties – but, for the most part, banks were generally prohibited from building across the state.

No banks for sale

Dominick, the university professor, says the quickest way to get market share is to buy an existing institution.

“Then you get loans, you get customers and you try to keep them.” By branching into a new area, banks hope customers will change banks, he says.

“Typically, a customer has to be very, very unhappy to switch banks,” Dominick says. He suggests First Security may hope to draw its consumer business from the growing population.

Also, “You’ve got commercial customers who like to do business with several banks, so [First Security] could pick up some of that business.

In this market, experts say, it’s difficult to find an institution to buy.

“The opportunity for acquisitions the last five years has been limited – because we’ve looked,” Rutledge says.

That’s a point Dominick makes, too. “[Bank of Fayetteville] shareholders decided they did not want to sell [to another prospective buyer],” he says. “McIlroy [Bank & Trust] is owned by Arvest. We’ve got the Bank of Arkansas, owned by a bank over in Oklahoma, and the other bank downtown [is] owned by NationsBank.

“None of them are available for sale,” Dominick says, adding that most are already owned by large bank holding companies.

The same is true in Springdale, he notes. “You’ve got Springdale Bank & Trust that’s owned by Arvest. You have the old First National Bank of Springdale … owned by First Tennessee. The old State Bank there is owned by NationsBank.”

Rutledge says a reporter’s estimate of First Security’s investment – around $10 million – is “probably not too much” offbase. And he knows some people are questioning the size of his investment in the region.

But, he says, it’s an investment for the long term, and he hopes in 10 years bank shareholders will look back and wonder why anyone questioned the move.

“We feel we can prosper with Northwest Arkansas.”

Rutledge says he has no interest in selling First Security and he’s committed to doing banking in Arkansas.

A University of Arkansas graduate – with an undergraduate engineering degree and an MBA – Rutledge says he’s maintained strong ties with the area. He currently is chairman of the selection committee for the Arkansas Business Hall of Fame for the Sam M. Walton College of Business Administration.

Also, Rutledge has maintained business interests in the area. He holds an interest in numerous projects, including apartments and golf courses, with his brother-in-law, Jim Lindsey, a prominent real estate developer.

That familial connection “certainly doesn’t hurt,” Rutledge acknowledges.

Still, he knows there’s risk in a sizable investment.

“Just because we’re doing it up there doesn’t mean it the right thing to do,” Rutledge says. Such an investment is “a little risky” but then, he notes, the bank principals are all young and expect to be around in 10 years to see their investment pay off.

One person who’s seen the banking competition firsthand is Shell Spivey.

Spivey previously worked for what was then First National Bank of Fayetteville and, in 1995, he helped found Community Bank. Spivey left the bank after merger negotiations began with Chambers Bancshares of Danville and he recently joined Merrill Lynch in Fayetteville.

Like First Security, Community Bank aimed to deliver high quality service to attract customers. The banks also share a strategy that includes both consumer and commercial customers.

“We never tried to isolate the smaller customer and say, ‘We don’t have time for you,'” Spivey says. “We figured if we treated everybody right … we’d get some extremely profitable business and some less profitable business. We tried to treat everybody with the same degree of respect.

“I don’t think a person with a $100,000 account was treated any better than someone with a $100 account,” he adds.

But he believes customer service is key. “If you do an excellent job of taking care of customers, customers will come. I don’t think banking’s any different than the retail sector. People are really starved for good service. If they get it, they’re going to go shop there.”

And Spivey notes that “First Security has a very good track record.”

He, too, expects phenomenal growth in the next few years.

“Over the next 10 years, the area will absolutely explode. As far as number of dollars, I don’t know, but we’re going to have an absolute explosion.”

“Unless there’s a significant downturn in the national economy and things really cool off, this area’s going to continue to explode,” Spivey says.