At first glance, Arkansas may seem an unlikely place for a banking mecca.
The state is home to several growing regional banks as publicly traded Simmons First National, Home BancShares and Bank of the Ozarks have taken advantage of acquisitions — and a business-friendly government in their home state — since the financial crisis.
Arkansas wasn’t as hard hit as other Southern states during the last recession. Its economy, which tends to avoid boom-and-bust periods, provided a stable environment for home-grown banks. It is worth noting that Arkansas is also home to the $17.3 billion-asset Arvest Bank, which recently agreed to buy Bear State Financial in Little Rock.
“We’re proud of our financial sector growth in Arkansas,” Gov. Asa Hutchinson said in a recent interview. “You have to give credit to some incredible entrepreneurs. They know how to grow and serve customers and manage complex financial institutions in a conservative, but successful, manner. Each individual success story starts with the spirit of the leadership.”
Agriculture is Arkansas’ top industry, contributing about $16 billion annually to the state’s economy, according to the Arkansas Farm Bureau. Transportation and logistics, food manufacturing and health care also play a role. The state is also home to Walmart and Tyson Foods.
Its 3.4% unemployment in July was almost a full percentage point below the national average, according to the U.S. Bureau of Labor Statistics.
“We’ve been that sleepy Southern state, but we do have the wherewithal to be a leader in job growth,” said Mike Preston, executive director of the Arkansas Economic Development Commission, adding that the state’s requirement to have a balanced budget and its status as a right-to-work state have helped. “We have been actively recruiting” companies and jobs.
Home, Simmons and Bank of the Ozarks have also relied on relatively low funding costs in Arkansas to make loans in higher-growth markets, said Stephen Scouten, an analyst at Sandler O’Neill. That helps explain acquisition strategies that extend far beyond Arkansas.
“You can make a case that they have chosen different paths in terms of where they are and their M&A strategy," said Matt Olney, an analyst at Stephens, which is based in Little Rock. "The origins start with the last downturn. They all recognized they were in a unique position in the region to get more aggressive and capitalize on that.”
Here is a look at the growth strategies for each bank.
Before the last downturn, the $9.1 billion-asset Simmons “checked all the boxes with regard to what you’d like to see at the time of a crisis,” said George Makris Jr., the chairman and CEO. The company had been conservative, so its balance sheet was healthy. It was also able to boost capital.
Makris points to Simmons’ stock price, which has almost doubled since early 2008, as a measure of success. In contrast, the KBW bank stock index has increased by roughly 13% over that same period.
Simmons raised capital in 2009 to help it buy four failed banks. Overall, Simmons has bought 10 banks since May 2010 and has two more deals pending that will add another $4.5 billion in assets. It agreed last year to buy Southwest Bancorp in a deal will give it heft in states such as Oklahoma, Colorado and Texas.
“What’s unique to them is they’re a little bit more of a consumer franchise,” Olney said. “That being said, these pending deals are more commercially focused, so I think they will lean more commercially going forward.”
Makris described his approach to M&A as an “inside-out growth strategy,” where Simmons enters contiguous markets to efficiently offer products such as trust services to more customers. It is unlikely the company will start “jumping states,” he said.
Olney said he expected Simmons First to complete more fill-in deals in its footprint, which will extend from Colorado to Tennessee once its pending deals close.
“We’re still having great conversations with potential merger partners,” Makris said. “We will continue to do deals as long as that is in the marketplace.”
Johnny Allison, Home’s chairman, has never been afraid of challenges. The $10.9 billion-asset company is still looking to buy troubled banks, continuing a strategy it used following the financial crisis. Home bought seven failed banks in Florida between March 2010 and November 2012.
“If there’s a crisis or a problem, where there’s something bad, there’s also something good,” Allison said. “We’ve bought scratch-and-dent banks forever.”
The Conway company is also willing to pay up for successful franchises, Allison said. He pointed to Home’s pending $778 million deal to buy Stonegate Bank in Pompano Beach, Fla.
Stonegate should add more growth markets in Florida, Olney said.
“That deal gives them a significant presence in Florida,” Olney said. “With Stonegate, for the most part they feel like they have filled their holes in Florida. It will be interesting to see what their next move is.”
Home could expand in states such as Texas, Missouri, Tennessee or Georgia where it doesn’t have branches, Olney said.
Allison said he would like to focus on Texas because it’s a market he likes and is familiar with. While on the board of First Commercial, he led a team that handled assisted deals in Texas in the 1980s and 1990s after the energy bust.
Home, like the other Arkansas banks, has benefited from lower overhead, such as personnel and real estate expenses, industry experts said. Home’s efficiency ratio of roughly 37.3% at June 30 helped it generate record income of $50.1 million.
“Home has exemplified” cost control, Scouten said. “They have a lower efficiency in Conway because it is exponentially cheaper than if they were in Fort Lauderdale.”
Bank of the Ozarks
Management at Bank of the Ozarks in Little Rock is eyeing more de novo expansion; it plans to open 60 branches in top U.S. markets over the next five years, Scouten said. The plan features bigger flagship locations backed by smaller branches.
At the same, Bank of the Ozarks could look at M&A to fill in certain markets, Scouten said.
The company’s currency is under pressure right largely due to lingering concerns about its concentrations of commercial real estate loans. Last year an investor known for shorting stocks criticized Ozarks’ business model; the company’s stock is down 20% so far in 2017.
There are also concerns the company will be unable to pick up enough deposits to keep up with loan growth, Scouten said.
“There’s a fear of any sort of potential credit hiccup,” Scouten said. “They’re growing so fast [that] the ability to create deposit growth at a reasonable rate is a bit of a question.”
Bank of the Ozarks has been able to “capture market share, add new geographies and gain talented people through” its acquisitions, George Gleason, its chairman and CEO, said in written responses. He said the company’s primary area of expertise and growth will continue to be commercial real estate. Risk is mitigated by having low loan-to-cost and loan-to-value ratios.
“Through our Real Estate Specialties Group, we do business with a majority of the top developers in the country,” Gleason said. “Our loans in this portfolio are, on average, our best quality and lowest leverage loans, with our best sponsors and best properties, and are our best underwritten, documented and serviced loans.”
Since the bank does business with commercial real estate developers across the country, management may look more carefully at markets where it has a strong lending presence.
But financial metrics, rather than geography, will be determinative. The company’s 15 acquisitions since 2010 have been accretive to book value, tangible book value and earnings per share, Gleason said.
“We’re going to expect to achieve those three accretive metrics in our future transactions as we have with our most recent 15 acquisitions,” Gleason said.