BOZ Brings It To the Table

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George Gleason is not just meticulous, he’s laser focused.

The Chairman and CEO of publicly traded Bank of the Ozarks Inc. is committed to growing the Little Rock holding company’s bank business from 51 in-state branches to 83 by the end of 2008.

At least part of the plan includes building a minimum of 12, and as many as 14, Bank of the Ozarks offices in Benton and Washington counties in a calculated bid to capture some of the coveted Northwest Arkansas market share.

The bank, which had $1.72 billion in assets and $1.4 billion in deposits as of Dec. 31, has already purchased six properties (see map, pg.17) for permanent site development in the two county-area. Three more sites are under contract. Gleason expects to close on those by the end of June.

Bank of the Ozarks, traded under the ticker symbol “OZRK,” is in negotiations for a 10th site and has general locales eyeballed for the 11th and 12th sites, but no lots are picked as yet.

More importantly than simply achieving growth is doing it while maintaining solid returns for the company’s shareholders, Gleason said.

The philosophy is kin to the old saw: You gotta spend it to make it.

“We want to be a significant player in the market,” Gleason said. “We realize you can’t stick your toe in the water and do that. If you really are going to be a significant player, then you’ve got to make a significant commitment of physical facilities, human resources as well as emotional energy and commitment to the community.”

The bank has consistently backed up that philosophy with performance. It has delivered stockholders higher earnings per share for 16 straight quarters.

Susan Blair, an executive vice president at BOZ, said the Arkansas State Bank Department and the Federal Deposit Insurance Corp. have already given their blessings for BOZ branches in Bentonville, Bella Vista and Fayetteville.

With little fanfare, the bank opened a loan production office in Bentonville in December near its future permanent pad at Arkansas Highway 102 and S.W. “D” Street.

The office started taking deposits on March 31.

Doug Parker, a BOZ executive vice president and its Northwest Arkansas division head, said the office’s first depositor wrote the bank a check for $1 million that day.

A second office on Joyce Boulevard in Fayetteville is set to begin taking deposits by the end of April.

Parker said the bank is hiring local people with local market experience to operate the two facilities.

Parker himself worked in the Northwest Arkansas market for 11 years. He is now in the process of relocating to Rogers from Little Rock where he has been for the past few years.

Plans are for the bank to have three permanent facilities up and running by the end of 2005 — one each in Bentonville, Fayetteville and Rogers.

Then BOZ will add four more permanent offices in the two-county area in 2006, four more in 2007 and at least one more by the end of the first quarter in 2008, Gleason said.

Two more locations could follow, he said, depending on site location and market factors.

Blair said BOZ would not disclose how much it has invested in land in the two counties, citing ongoing negotiations for other properties, but according to tax stamps affixed to warranty deeds filed in both counties, three of the locations cost the bank a combined $1.52 million.

For branch size comparison, Rogers-based Simmons First Bank of Northwest Arkansas, a division of Pine Bluff-based Simmons First Corp., has 10 locations in the two-county area with two more offices in the works; ANB Financial N.A. of Bentonville has 11 total offices; and Searcy-based First Security Bank has 15 offices in its northwest division. The Bank of Fayetteville N.A. operates nine locations in Washington County.

Market Move

As of June 30, there were 19 unique banking institutions doing business in the two-county area. Since then, four others — including BOZ — have opened their doors to depositors, and two more have said they will join the gold rush this year.

The biggest question being asked even by professionals outside the industry: Can the market sustain this level of activity?

Gleason is no braggart, but he’s confident about the bank’s market move.

“We don’t in any way want to minimize the level of competition in this market,” he said.

But he points to BOZ’s history in Little Rock. He said the bank entered the capital city in 1998 and opened four branches there between February and October. The following year, the bank went from being 21st in market share to fifth, he said.

“And did that while making good profit out of the offices as well,” Gleason added.

The bank doesn’t necessarily pursue the No. 1 market share in all of its markets, Gleason said. Instead, the company believes in “optimal market share” which is a balance between income and expenses that ideally generates the best return.

Gleason said for most of this year the bank will concentrate on its commercial business in Northwest Arkansas, but starting in 2006, BOZ will develop more of its retail customer base.

Parker said no one will be able to accuse BOZ of “buying” deposits in the two-county area.

“We’re going to have to be competitive,” he said, but there aren’t any plans to price out of range to draw depositors.

Instead, BOZ will rely on its local connections, relationships and “getting the right accounts and being the right bank,” Parker said, a play on the bank’s tagline,”The right bank at the right time.”

He points to the fact that BOZ ranked as the third highest mortgage lender in Benton County in November, with $21.77 million in loans made before the bank opened its first office, according to the Northwest Arkansas Business Journal’s mortgage report.

The report is based on mortgages filed at local county assessors’ offices as compiled by Waco Title Co.

Parker admits November “fell right,” because in December BOZ dropped to No. 9 with $7.88 million in mortgages. In January, it ranked No. 19 with $3.98 million, and in February the bank fell off the list because it apparently didn’t meet the cutoff for inclusion — at least $2 million in mortgage business for a single county.

Jeff Dunn, chairman and CEO of the Bank of Arkansas N.A., has been in the Northwest Arkansas market for nearly a decade. He said his gut feeling is that the market is quickly reaching a saturation point for banking, if it hasn’t already, though he said he doesn’t know of any specific data to back up that notion (see article below).

“It’s very competitive right now,” he said.

More and more people keep moving to the area, Dunn said, and he’s sure the startups and new-to-the-market banks have done their research.

But real estate is the banker’s bread and butter in this market, and signs of slowing are beginning to show as interest rates start to ascend and some developers think the area is overbuilt.

On March 22, hotelier John Q. Hammons announced his group would postpone building a $30 million Marriott hotel in Rogers because the area is overbuilt.

“We measure success based on the acquisition of customers and return on investment for our shareholders,” Gleason said. He’s sure the bank can do both in Northwest Arkansas.

De Novo A-Go-Go

Recently, Gleason, Parker and Blair surveyed the site of the first Bentonville branch. The ground was muddy and the air steamy from the previous day’s rain. Gleason nodded at the constant stop-and-go traffic coursing in front of the site, the customers he believes he’ll capture.

As they walked back to their ride, Gleason told Parker how the ground needs to be prepped and raised to the level of the adjacent parking lot at the Ruby Tuesday restaurant.

He’s seen enough branches built lately to know the ins-and-outs and foresee potential pitfalls.

Since 1994, BOZ has opened 49 of its 54 nationwide offices. Ten of the offices were opened in 2004 alone, with three of those strategically positioned in Texas: Texarkana, Dallas and the booming northeast Dallas suburb of Frisco.

Ground was broken on March 29 in Texarkana for the first permanent stand-alone facility in the “Lone Star State.” BOZ also has a loan production office in Charolette, N.C., which opened in 2001.

Gleason said that although the de novo strategy looks like a major commitment of resources, it is really just part of the company’s comprehensive plan.

“De novo” is the Latin term meaning fresh or new. Bankers use it to differentiate their strategy of building new branches, rather than growth through acquisition.

The plan is for BOZ to open eight to 11 Arkansas offices a year for the next four years, then expand further into the Texas and North Carolina markets starting in 2009.

“This is the continuation of a branching strategy we’ve been pursuing for a little over 10 years,” Gleason said.

BOZ, which has been publicly traded on Nasdaq since 1997, doesn’t skimp when it comes time to invest in infrastructure. According to the company’s annual report, it expects to have between $20 million and $29 million in capital expenditures for 2005 “including progress payments on construction projects expected to be completed in 2005 and 2006.”

During calendar 2004, BOZ spent $65.1 million on “premises and equipment,” according to the report. About, $25.7 million was spent on land and $33 million on buildings and improvements, while the rest was balanced out in improvements, equipment and depreciation.

The company spent $50.2 million in calendar 2003 for the same line item.

Of the startup and new-to-the-market banks that made announcements last year about entering the two-county market, only Fayetteville-based Signature Bank of Arkansas has announced it will open three locations from Fayetteville to Bentonville in its first year of operation, and officials said it will follow those with branches in Rogers and Siloam Springs soon thereafter.

Legacy National Bank of Springdale said it will initially open two offices on either side of that town. And both Rogers-based Parkway Bank and Pinnacle Bank have said they will concentrate on their yet-to-be-built single offices for the foreseeable future.

Little Rock-based Metropolitan National Bank plans a location in Rogers and possibly one in Fayetteville. BancorpSouth Bank of Tupelo, Miss., has said it will move to the market and eventually build more than one location but has not indicated it will build an extensive infrastructure.

All of those are dwarfed in comparison to BOZ’s planned 12 branches.

Of course BOZ is publicly held, so it has a deeper pocket from which to pull a checkbook. But it may be interesting to see how the institution originally chartered in Ozark competes with home-grown and other area banks.

The typical BOZ branch will break even in about a year, Gleason said. Some have taken longer, but some have been in the black in as little as five months.

BOZ Performance

Sandler O’Neill & Partners is a bank and thrift investment firm that received compensation from BOZ for investment banking services and non-investment banking securities-related services.

Scott Alaniz is a chartered financial analyst and an Arkansas bank researcher at Sandler O’Neill & Partners’ Atlanta office. He said BOZ will be a force to contend with once they get rolling in the market.

“This company doesn’t do anything halfway,” Alaniz said. “I think they’ll be a strong competitor.”

He said many banks can generate return on equity by cutting costs and not grow their footprint, or a bank can grow while sacrificing performance. BOZ has managed to do both, he said, because of its meticulous planning and “full-bore” execution.

“It’s an effectively run organization,” Alaniz said.

According to the company’s 2004 annual report, BOZ’s net income was up 28 percent to $25.8 million at the end of 2004 from $20.2 million at 2003’s end. Its earnings per share were up 25.8 percent from $1.24 to $1.56 for that period.

The bank’s performance is even more dramatic since year-end 2000. Net income is up 329 percent from $6 million and earnings per share are up 290 percent from 40 cents for the four-year period.

“The only way we’ve been able to achieve those returns for our shareholders is by gaining large numbers of customers every month,” he said.

Gleason said about half of the company’s stock is owned institutionally, about one quarter is owned by executive officers and directors of the company, and the rest is on the open market.

“Our mindset is: ‘Yes we want to grow and we want to make a lot of loans and have a lot of deposits, but we want to do that in a way that builds a profitable franchise for our shareholders.'”

Gleason, a Dardanelle native, graduated from Hendrix College in only two years with a business and economics degree. He went to law school at the University of Arkansas in Fayetteville. He then worked at Rose Law Firm in Little Rock for about two years before he purchased a small bank in Ozark in 1979. He was 25.

Two years later, he bought a second bank, and a third the following year.

“It was in 1994 when the company was debt free, and my wife and I were personally debt free, that we embarked on this expansion program which has led us to where we are now,” he said.

Market Mistake?

Virtually everyone seems to be wondering if the market can absorb all the new and new-to-the-market banks in Northwest Arkansas. How many banks is enough?

Information from the U.S. Census Bureau and the Federal Deposit Insurance Corp. was compiled for the chart “Market Shares” below. The only comparable information from both agencies was from 2003.

Both the Tulsa and Little Rock-North Little Rock metropolitan statistical areas were included because of their geographic proximity to Northwest Arkansas. The Shreveport-Bossier City, La., MSA was included because the market is similar in size to Northwest Arkansas.

If the numbers in the chart remained true through 2004, then Northwest Arkansas is holding steady with the Little Rock MSA, and is more saturated than Tulsa or Shreveport.

But what is the magic number at which saturation occurs?

Scott Alaniz, chartered financial analyst and Arkansas bank researcher at Sandler O’Neill & Partners’ Atlanta office, said unfortunately, it’s impossible to tell until too many branches have been built.

At that point, some banks will start showing diminished returns and a trend will show, he said. So far, the banks in Northwest Arkansas are maintaining decent returns.