Deposits in Arkansas Grow 2.7 Percent

A bank’s deposit trend line can say as much about the management’s philosophy as about its prowess, a fact on display in the summary of deposits released last month by the Federal Deposit Insurance Corp.

The summary of deposits is a snapshot taken at midyear by the government agency that insures bank deposits. It is not a report card on the health of a bank or of the banking industry, but it is the only official report that provides Arkansas-specific trend data for multistate banks.

Bank deposits in Arkansas grew 2.7 percent in the 12 months that ended June 30, much slower than the national pace (8.5 percent) for the second straight year. But that’s just an average, and some Arkansas banks were grabbing deposits with both hands while others were taking a pass.

For a market share breakdown of the six-county area in Northwest Arkansas, click here.

In the upside-down world of bank accounting, deposits — the money a bank has — are liabilities because interest must be paid to depositors, while loans — the money a bank has given out — are assets because they generate interest income. What’s more, all deposits are not created equal, not by a long shot.

The core deposits from regular retail customers can be very cheap, while a bank will have to pay top dollar for “brokered” deposits or other “hot money” that is merely seeking the highest rate of return while enjoying the safety of FDIC insurance.

The different attitudes toward deposits are on display at two of Arkansas’ largest banks: Arvest Bank of Fayetteville, which gained $867.3 million, or 15.5 percent, in deposits in the year that ended June 30, and Bank of the Ozarks of Little Rock, where deposits actually declined by $28.4 million despite an excellent earnings year.

“We lead with deposits,” said John Womack, CEO of Arvest in central Arkansas. “We think that’s the most important thing to get.”

A new deposit customer can then be converted into a profitable borrower in the form of mortgage loans (which Arvest routinely sells on the secondary market but then profits from serving in-house), consumer loans and credit cards. They may also be good prospects for uninsured investment products through Arvest Asset Management, Womack said.

Arvest, owned by Wal-Mart founders the Walton family, is very much a retail-oriented bank, and the same low-margin, high-volume philosophy is on display in both Walton companies. Arvest Bank’s return on average assets was 0.72 percent at the end of 2011. The national average for the second quarter was 0.99 percent.

“Our margins are getting squeezed because we are very liquid right now,” Womack conceded. “But there may be a time in two years when we won’t be so liquid and loan demand starts coming back. … It’s a nine-inning ballgame and we’re not in the ninth inning.”

Arvest’s emphasis on customer service — its branches are open from 7 a.m. to 7 p.m., for instance — is also reminiscent of that other Walton business.

“If you think about Wal-Mart, if something isn’t working, you take it in and they either give you another one or give you your money back,” Womack said. “We want to be very profitable — don’t get me wrong, we think that’s good. But we’re in it for the long term. And if we take care of the customers, that will take care of the bank profits.”

Arvest Bank earned $42 million last year, and is on pace for $50 million in net income this year.

Meanwhile, at BOZ

Bank of the Ozarks, which is publicly traded, has a much more bottom-line view of deposits — and it shows on the bottom line.

With $3.75 billion in assets, barely a quarter the size of Arvest, BOZ earned almost $66 million last year, and had net income of $38.7 million in the first half of the year.

“We could easily have twice as many deposits as we have today,” Greg McKinney, Bank of the Ozarks’ chief financial officer, said in a recent interview. “But the key is, you have to have a place to invest those deposits, either in the bond market or loans. It doesn’t make you any money to pay 40 or 50 basis points to have deposits and not have any place to put it.”

Bank of the Ozarks acquired, with FDIC assistance, two banks in Georgia just weeks before the deposit snapshot in 2011, and typical post-acquisition deposit runoff since then was evident in its out-of-state deposits: down more than $330 million. That was fully expected, McKinney said.

“In some [acquisitions], we predict as much as 50-75 percent runoff. We reprice [deposit accounts] down and expect it to leave the bank, and if it doesn’t, that’s fine too.”

Unlike Arvest, Bank of the Ozarks isn’t concerned about not having enough deposits.

“That’s where you have to look strategically,” McKinney said. “If we had an opportunity tomorrow to fund $1 billion in loans or to go into the bond market and buy very good quality bonds, we could do that quickly.”

BOZ’s return on assets last year: 3.74 percent, buoyed by those FDIC acquisitions. At June 30, it was a hair over 2 percent.