Small Banks in Arkansas Feel Consolidation Pressures

Lenders of all sizes continue enduring balance sheet pressures wrought by increased regulatory requirements that followed the 2008 financial meltdown.

Small community banks are especially hard hit by the added costs of doing business and more stringent lending requirements that ensued.

"Banks that have total assets of $150 million and below are really feeling the stress," said Bill Holmes, president of the Arkansas Bankers Association.

About 50 lenders, mostly in southern and eastern Arkansas, hover at or below that $150 million threshold. Two, Decatur State Bank and the Bank of Rison, already are in the process of selling in deals that exemplify signs of the times in different ways.

The sale of Decatur State Bank is a distressed transaction prompted by severe loan losses, while the Bank of Rison deal reflects a small-town bank with dim prospects.

More consolidation is expected in the days ahead as shareholders at small banks contend with compressed earnings and grapple with an uncertain future.

Tommy May, chairman and CEO of Pine Bluff's Simmons First National Corp., said the company had talked with representatives from about 10 different Arkansas community banks during the past three years regarding a possible merger.

He described those discussions as ranging from casual conversations to more serious overtures.

No deals have resulted. "We've had some bankers approach us expressing an interest in maybe becoming a part of our institution," May said. "The expectations of the seller are probably still a little bit higher than the reality of what the buyer is willing to pay.

"Things have just changed. The timing of this isn't good relative to their value. A whole lot of families invested money in banks over many years and were difference-makers in communities.

"Now what do they do with their investment?"

Stockholders in the Bank of Rison, the smallest bank in Arkansas, are willing to sell their $27.9 million-asset operation at a zero premium. The deal struck with Fordyce Bank & Trust is a one-for-one exchange of cash for the shareholders' equity in the 80-year-old bank.

What started as a $5.4 million sale has fallen to less than $4.2 million after Bank of Rison posted a loss of nearly $1.4 million in the second quarter. The loss is the result of the bank boosting its loan loss reserves by nearly $1.5 million.

The aftermath of the proposed transaction is expected to add another empty building to downtown Rison's aging inventory as operations are consolidated with Fordyce Bank & Trust's modern Rison Financial Center on Highway 35.

The sale will pare the local banking scene from three to two - not just in Rison but in all of Cleveland County. Centennial Bank operates an $8.6 million-deposit branch in Rison, the county seat of about 1,300 residents.

Shareholders in Decatur State Bank were positioned to sell the $136.8 million-asset operation to Mathias Bancshares Inc. of Springdale, also for zero consideration.

However, a $700,000 loss in the second quarter by DSB required its parent company, Peterson Holding Co., to inject $1.1 million to expand the bank's nearly depleted capital to $2.9 million.

The move amounts to the Peterson family paying Mathias $1.1 million to take over ownership. When the deal closes, Mathias will rebuild the bank's capital with a $13 million infusion.

Banding Together

While some community bankers are looking for a merger partner as an exit strategy, others are digging in to hold their ground.

Nine bankers in southeast Arkansas have formed a loose alliance to explore mutually beneficial deals.

The group comprises banks in Drew, Ashley, Bradley, Desha and Chicot counties: Union Bank & Trust and Commercial Bank & Trust of Monticello, First National Bank of Crossett, Warren Bank & Trust, McGehee Bank, First State Bank of Warren, Merchants & Farmers Bank of Dumas, First National Bank of McGehee and Eudora Bank.

"We think we have a lot of opportunities by banding together," said Dave Dickson, president of Monticello's Union Bank & Trust.  "Maybe one day banking will be an enjoyable career again. There's so much being put on us now. It's a challenge."

Dickson and his colleagues began holding monthly meetings about a year ago to discuss pooling their buying power to realize savings on insurance, office equipment and data processing. The group looked hard at trying to find a way to consolidate their health insurance plans, but the variables at nine different lenders and the unknown effects of national health care reform led them to table that item for now.

Dickson is confident the group will be able to find ways to collectively wring earnings from reduced expenditures by attracting better bids from vendors or sharing regulatory compliance costs.

"There are certainly dollars to be saved through economies of scale, but we've got to be willing to change," he said. "It's all about saving money because the income is not going to be the same. We've got to look at the expense side of it, and there will be a lot of opportunities there."

The first bottom-line fruit of the Southeast Arkansas Bankers Group is joining forces to fund a $9 million commercial loan. All of the banks were offered an equal share in the financing, and eight of the nine lenders opted to participate.

Dickson expects other profitable ventures to result from their forum.

"We have the mechanism in place to make it happen," he said. "There's nothing wrong with getting together with your peers to share ideas. Whether any dollar savings come out of it, we'll see. But I do believe savings will come."