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Branching out

Banks invade Little Rock, but a day of reckoning awaits them.

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GOLD DIGGERS: Banks find plenty to compete for in LR.
  • GOLD DIGGERS: Banks find plenty to compete for in LR.
It is almost impossible not to notice the fast-paced banking expansion in Little Rock. New bank branches are being constructed all over town, and billboards advertise more services, better rates and constant promotions. The growth has three main elements: Banks already established in Central Arkansas, like Metropolitan National Bank and Twin City Bank, are increasing their branch network; out-of-town banks, like Summit Bank of Arkadelphia and First Security Bank of Searcy, are moving into the market; and brand-new banks, like Centennial Bank, are being created to compete here. Only 10 years ago, the nationwide trend in the banking industry was toward consolidation, with big regional banks like Bank of America purchasing smaller banks and closing local branches in favor of a more efficient centralized business model. Little Rock’s population and economy are steadily growing, but not so much to justify such a dramatic expansion in banking. According to the Federal Deposit Insurance Corp., commercial bank deposits in Pulaski County increased from $4.84 billion in 2000 to $6.49 billion in 2004. The county’s percentage of overall state bank deposits has remained fairly steady during roughly the same time period, rising from 15.05 percent in 1999 to 15.95 percent in 2004. The fact that Little Rock’s economy is expanding — even at a relatively slow pace — is enough to justify the frantic desire for banks to get a piece of the action, even if that means there will be a serious reckoning in the not-too-distant future. “I’m not convinced there is enough growth for all of the banks to make it in the long run,” said John Hall, associate professor of finance at UALR. “But there are only a few attractive growing areas of the state to be in, and you don’t want to give up and not take a shot at it. Over time, the banks coming in here will get bought up or merge together; they can’t all be successful over time. But if some are going to make it and some are not, do you not want to have your bet on the table?” Ken Hammonds, the president and CEO of the Arkansas Bankers Association, says that banks do not want to sit on the sidelines while their competitors are making money here. “If they see a bank is doing $700 million in business, they think, ‘I know I can open a new one and get at least $150 million of that,’” Hammonds said. “If they do that, they’ve got a viable bank.” One key reason for the recent introduction of out-of-town banks is the 1999 reversal of a rule that only permitted branches in counties that were contiguous with the county where a bank was located. That is what allowed Ross Whipple, chairman and CEO of Summit Bank, to consider a move into the Little Rock market. “There may not be a lot of growth in Pulaski County, but there is more there than in the counties we are currently in,” Whipple said. “We don’t follow the herd. We just think there is a niche to play in Pulaski County.” Jeff Hildebrand, the president and CEO of First Security Bank’s new Central Arkansas operation, identified a particular niche that his bank is targeting. “We feel like there is a segment of the population, small- to medium-size businesses, that the so-called larger banks were not taking care of,” Hildebrand said. “Our growth has far exceeded our expectations, and we have several other locations coming. We have made a tremendous commitment to the market in terms of real estate, people, resources.” Because new branches require a considerable initial capital outlay for real estate, construction and employee salaries, there is significant risk involved with the strategy. However, most bank leaders feel confident about their investment, and they say the expense is necessary to provide the customer service that banks need to compete effectively. “There is no question about it,” responded Bob Birch, president and CEO of North Little Rock-based Twin City Bank, when asked if building new branches was worth the cost. “People in the Little Rock market expect service, convenience. They want to have a branch close to where they work, live, enjoy entertainment and recreation. To do that is about a 15- or 20-branch market.” Hall said that consumers are indeed benefiting from the increased competition, mainly in the form of more convenient branch locations and operating hours. He has not studied the effect on interest rates and other purely economic factors, but he has observed that free checking has become more prevalent, and more banks have eliminated minimum balance requirements. “You know you have more choices, and it is easier for you to do more of what you wanted to do than it was with your bank before, so consumers are benefiting in that sense,” Hall said. “Just look out for possible fees on the other side.” Susie Smith, the senior executive vice president of Metropolitan National Bank, says she is “real pleased” with the performance of each new branch. “We see in a year, year-and-a-half of operating, that branch operating in a profitable manner,” she said. Whipple has a similar projection for Summit’s introduction to Little Rock, for which he plans three new branches opening over the next three years. “We feel like we can break even in 18 months,” he said. Little Rock is nearing the saturation point for bank branches, especially as banks specifically enter neighborhoods where they observe their competitors doing well. “The banks all go to one area if one bank is already there and has been successful,” Hildebrand said. “It’s like what happens with Walgreen and USA Drug, when they have almost identical locations, sometimes right across the street from each other.” When that saturation point is reached, there will be yet another realignment in the local banking picture. “I do think in the next five to seven years there will be fallout in this industry,” Whipple said. “The strong survive and the weak fall by the wayside.” Birch agrees: “The customers will choose who is here in five years and who is not.”

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