If you find yourself on hold with Piggott State Bank in extreme northeast Arkansas, you’ll hear a recorded message about the benefits of banking with a locally owned institution rather than “an oversized corporate bank.”
Oversized is the last thing one could call Piggott State.
It is one of 20 banks in Arkansas that had assets of less than $100 million as of June 30.
And while that is a big number in almost any other context, it is tiny in the banking world. Bank OZK of Little Rock, the largest bank chartered in Arkansas with $22.2 billion-with-a-b in assets, is 250 times larger than Piggott State and yet is still firmly in the category that federal regulators consider “midsize.”
But Piggott State is consistently profitable and well capitalized, with a 5-star rating from the industry analysts at Bauer Financial of Coral Gables, Florida. And it is becoming ever more important to Clay County, President and CEO Cody Knight said last week.
After decades of serving Piggott, population 3,600, from a main office downtown, the bank opened its first branch last year some 14 miles to the southwest in Rector, which is about half the size of Piggott.
Rector had been left with only one bank, a branch of Centennial Bank of Conway, after Regions Bank, the 24th-largest bank in the country with $123 billion in assets, closed its office there in 2016.
“That’s what’s hurt these small communities more than anything,” Knight said, lamenting the arrival and eventual departure of big banks in small towns — even though the bank that he has led for the past five years has taken advantage of the void.
The Regions branch in Rector had about $10 million in deposits; Piggott State has been able to attract about $3 million to its year-old branch, according to the Federal Deposit Insurance Corp.’s “summary of deposits” as of June 30.
Two months ago, Regions closed its Piggott branch as well, home to less than $12 million in deposits.
That left dominant Piggott State, which reported net income of $930,000 in 2017 and $560,000 in the first half of this year, with only one in-town competitor, First National Bank of Paragould.
Preservation
Bank consolidation nationally is continuing on a similar pace to recent years, but it has been a slower year in Arkansas, especially for the smallest banks.
In 2017, four Arkansas charters were collapsed into other banks, the largest being Twin Lake Community Bank in Flippin with $125.5 million in assets. (It was collapsed into its sister institution, Anstaff Bank of Green Forest.)
So far in 2018, only three deals have been completed, and only one of those — the acquisition of publicly traded Bear State Bank of Little Rock by Arvest Bank of Fayetteville — was a market-rate purchase of a healthy financial institution. Heartland Bank of Little Rock, with $176 million in assets, was essentially repossessed by Simmons Bank of Pine Bluff when Heartland’s holding company defaulted on loans secured by bank stock.
And One Bank & Trust, with $255.6 million, had recorded 24 consecutive quarters of operating losses when it was acquired by First National of Paragould on Aug. 1.
To see the roster of small local banks remain stable is a good thing, said Bill Holmes, who retired last week as president and CEO of the Arkansas Bankers Association. (See Lorrie Trogden Named CEO of Arkansas Bankers Association.)
“We want to preserve them,” Holmes said. “A branch of a bigger bank is not the same.”
But bigger banks have economies of scale that can protect them from the slings and arrows of outrageous fortune — and federal regulations. An analysis by the Federal Reserve Bank of St. Louis found that, as of 2014, regulatory compliance cost an average of 2.9 percent of noninterest expenses for banks with assets of between $1 billion and $10 billion.
But for the smallest banks, those with assets of less than $100 million, compliance cost an average of 8.7 percent of noninterest expenses.
Knight, the CEO at Piggott State Bank, holds out little hope that the cost of regulatory compliance will ever improve, so he’s looking at the line items he can control.
“What it boils down to is knowing your customers and keeping losses to a minimum,” he said.
Talent Hunt
The cost of compliance isn’t the only problem that the creeping regulatory burden has brought to small banks.
Just as troublesome, Knight said, is the development of an industry of specialists who know the many rules and regulations for only one slice of the banking world.
That may work in a big bank, he said, but “in a small bank, you have to be able to take more responsibilities across the board.”
Finding the right employees in a tight job market is hard for almost any business, Knight said. And while, for now, he “couldn’t be happier with the team we have,” he knows that keeping homegrown workers from leaving is as much of a challenge as recruiting new residents.
“For us, the hardest part is talent leaving the area,” he said, citing the age-old attractions of bright lights and big cities. “How we’re combatting that is getting into the schools and showing them that they can make a career here.”
He can’t wait until his future employees have left for college. He’s trying to spot talent before they get their high school diplomas.
“I try to take on summer help so they can see what banking is about — bring them in and teach them what banking is about,” Knight said.
An underappreciated perk of small-town banking: no traffic to fight. Knight, who grew up in Jonesboro and ventured as far west as Salem (Fulton County), now lives a half-mile from the main branch in Piggott.
“I get to come up here at 11 o’clock at night when the alarm goes off.”
Little Red Ink Among Littlest Banks
Every bank of every size tries to keep losses to a minimum, but a lending relationship that sours can be especially painful for a bank with less cushion.
Only two of the 20 smallest banks in Arkansas reported a net loss for the first two quarters of 2018. One of those is $82.8 million Bodcaw Bank, a reliably profitable fixture in Stamps (Lafayette County) since 1903. It recorded a net loss of $54,000 as of June 30, which may reflect the cost of establishing its first branch, which has not yet opened in Magnolia. It maintained its 5-star rating with Bauer Financial as of June 30.
Much deeper red was reported by Bank of Prescott, which reported a midyear net loss of $1.35 million after charging off $3.7 million. The big hit came in the first quarter, and may be related to the collapse of Alliance Insurance Group of Arkadelphia and self-described fraud by its owner, Berry Bishop. (See Former Insurance Agent Berry Bishop Acknowledges Fraud.)
In a suit filed in April and amended in August, Bank of Prescott listed 21 loans to Alliance totaling more than $2 million.
Bank of Prescott had assets of $68.5 million as of June 30, down more than 16 percent since mid-2017, and its equity capital took a similar hit, down to $9.6 million as of June 30 from $11.4 million a year earlier. Bauer downgraded Bank of Prescott from 4 stars at the end of 2017 to 3.
President John Brannan Jr. did not return a call seeking comment last week.
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