Modesty Key to FSB’s Marketplace Success

Advertisements and commercials for First State Bank are like silver dollars and wheat pennies: hard to find these days.

Bruce Loftin, president of Lonoke-based First State Bank, may control less than one percent of the Benton and Washington county deposit market share, but you won’t see him publicizing incentives for new deposits or retail customers.

Retail banking isn’t really FSB’s specialty. In fact, the bank’s two Northwest Arkansas locations don’t even have Saturday banking hours.

But the small town bank’s two Washington County locations do have more than $245 million in loans and relationships with some of the area’s biggest movers and shakers.

In a period when neon on banks is in vogue and CEOs announce multi-branch, multi-million dollar infrastructure plans upon entering the market, First State Bank has grown its assets 290 percent from Dec. 31, 1997, to Dec. 31, 2007, by playing by its own set of low-key rules.

First State Bank CEO David Estes, who spoke to the Northwest Arkansas Business Journal via video-conferencing from his office in Heber Springs, humbly admits FSB has thrived in Northwest Arkansas because of its ability to service the commercial real estate lending market and continue the down home, hometown service many banks homogenized years ago.

“We knew we had to carve out niche to grow here,” Estes said. “And so far we’ve been real successful with that. I do feel like our customers appreciate our emphasis on hometown service. I like to let our customers do the talking for us.”

The bank spent about $5 million on infrastructure in Northwest Arkansas and leases both of its Washington County locations.

First State Bank was started in the farming community of Lonoke (a central Arkansas hamlet of about 4,300) in 1935 and now operates through the Lonoke Bancshares Inc. holding company. In 1956 the Bennett family of Lonoke purchased the bank and has remained in charge since.

The bank’s growth is worthy of an MBA program case study. In 1997 FSB had $85.83 million in assets and $76.25 million in deposits.

Five years later the institution’s assets and deposits had increased more than 100 percent and at the conclusion of 2007, the bank had $335.5 million in assets and $267.7 million in deposits, a 290.9 percent increase in assets and a 251 percent increase in deposits.

The bank recorded more than $2.75 million in net income, issued more than $239.6 million in loans last year and had an 11.44 percent increase in assets from 2006 to 2007.

Finding a Niche

Estes never had dreams of conquering the Northwest Arkansas market. What he did have was excess deposits from his four other branches that he needed to put to work.

Estes knew Northwest Arkansas was a growing market and after a meeting with Loftin, he realized the pair had “like minded business philosophies and goals.” Estes saw potential for success in the area and began working on a plan.

In Sept. 1999, Loftin and John Duke, now the executive vice president of the bank’s Washington County operations, opened a loan production office across the street from the Springdale Country Club.

Loftin said he and Duke knew that the key to playing in the two-county banking market was finding and taking advantage of a niche segment.

So they set their sights on the commercial real estate market and within a year the duo had accomplished the bank’s three-year goal for the office.

Commercial lending may be the strong suit of the bank’s Northwest Arkansas operations but it’s not the emphasis of all its branches.

The major industries in each community have helped Estes and the bank’s leaders decide what business sectors to service at each location.

In Lonoke and Carlisle it’s agriculture and farming, in Gurdon (a town of about 2,200 south of Arkadelphia) the bank services the community’s growing timber market, and in Herber Springs the bank has set its sights on servicing the tourism industry and new business from the Fayetteville Shale Play.

“We realized that to be successful in each market we would have to carve out a niche,” Estes said. “So far we’ve been very successful. Each community is unique and we recognize that.”

The original Lonoke branch opened in March 1935. In June 1989 a second, limited-service Lonoke facility was opened. In Aug. 1997, First State moved into the Carlisle market and in July 2000, opened its Gurdon branch.

In Sept. 2001 the Fayetteville branch opened and in May 2007 the Springdale branch was added. The bank added its seventh branch in June of last year in Heber Springs.

FSB recorded more than $2.75 million in revenue in 2007 and saw more than 11.4 percent increase in assets from 2006 to 2007.

Estes, who recently moved his office to the bank’s Heber Springs location, said he makes the 212-mile trip from Lonoke to Fayetteville about four or five times a month and speaks with Loftin and Duke weekly using the bank’s video conferencing system.

“We’re a close knit group,” Estes said. “We have spent a lot of money on technology so that we can stay connected and in touch with one another.”

Hometown Service

Despite its commercial lending emphasis, the bank’s Washington County team is prudent in making sure everyone receives the bank’s signature hometown service.

Linda Smith, senior vice president and deposits manager for the bank’s Northwest Arkansas offices, manages the bank’s small group of retail clients.

Many customers come to FSB for their attractive CD rates and top-notch service.

“We can’t compete in branches so we have to provide extraordinary customer service,” Smith said. “A lot of people come to us for our good CD rates and once they’re here we try to keep them under our wing.”

Loftin said CDs make up about 90 percent of the bank’s $64 million in deposits.

The bank has also begun taking on more small business customers, as a spin-off from its commercial loan operations.

“I make it a point to know all of my customers and all I can about their portfolios,” Smith said. “If I know one of my customers is out of the area for the winter I’ll call him to remind him that one of his CDs is maturing. We know our customers and a lot of people really appreciate that.”

Smith said she likes the fact that most of the bank’s customers also bank at other institutions, “it’s good for us because they can give us feedback on what other people are doing.”

Lending Practices

Playing in the Northwest Arkansas commercial lending market has meant dealing with changing markets and challenging times.

Principals of the small town bank knew that if they wanted to make a name for FSB in Northwest Arkansas it had to become a major player in the commercial lending market.

In 2007 more than 88 percent of the bank’s $239.6 million in loans were commercial real estate loans.

The bank’s ROA slipped slightly from 2006 levels to 0.87 percent at the end of 2007.

Loftin used his contacts and experience to grow the bank’s commercial lending business and has kept the bank in good shape through hard work and common sense.

First State Bank has not been immune to the commercial market slowdown, but Estes said the bank has managed to stay ahead of the meltdown — knock on wood.

“We have done a good job in selecting who to loan money to,” Loftin said. “That has really helped us through the turbulent times. No one could have foreseen the slowdown but thus far I’ve been fortunate.”

Duke said he has and continues to use data and numbers to gauge the market, not gossip and headlines.

“I subscribed to the Reed Report before it became Streetsmart,” Duke said. “I’ve spent a lot of time keeping up on what is going on in this market.

Things are pretty complex right now but we need to keep up on the data to know the trends and keep out front of the changes. We always try to avoid the bubbles and things that just don’t make sense.”

Loftin said he remains an optimist and believes the real estate market will bounce back, it’s just a matter of when.