Bank OZK, Arkansas regional banks weather COVID-19 bear market in the second quarter

September 7-13, 2020

By Daily Record Staff


Profits at Arkansas’ federally insured banks plummeted in the second quarter as many financial institutions across the state paused to support customers and businesses impacted by COVID-19, according to the Federal Deposit Insurance Corp.’s (FDIC) quarterly banking profile released on Aug. 26.


Nationally, the FDIC reported that U.S.-based commercial banks and savings institutions saw a steep decline of 70% from a year ago, although cash flow and capital levels remained very strong to meet loan demand and absorb any losses in the future across the country.


For the 5,066 commercial banks and savings institutions insured by the FDIC, including 86 Arkansas banks, aggregate net income totaled $18.8 billion in second quarter 2020, down $43.7 billion from a year ago. The decline in net income is a continuation of uncertain economic conditions, which drove an increase in provision expenses, the FDIC said.


“Although economic stress related to the COVID-19 pandemic continued to affect bank earnings, the industry has remained a source of strength for the economy,” said FDIC Chairman Jelena McWilliams. “Banks of all sizes supported their customers and communities, including by originating more than $480 billion in Small Business Administration-guaranteed Paycheck Protection Program (PPP) loans in the second quarter.”


However, McWilliams noted that lower levels of business activity and consumer spending – combined with uncertainty about the path of the economy and the low interest-rate environment – contributed to higher provisions for loan and lease losses, as well as a decrease in net interest margins. 


“Notwithstanding these disruptions, however, the banking industry maintained strong capital and liquidity levels at the end of the second quarter, which will protect against potential losses in the future,” said the FDIC chief. “As individuals and businesses sought safety during the uncertain economic environment, banks experienced their second consecutive quarter of over $1 trillion in new deposits, increases that far exceed any deposit growth the FDIC has seen in the past.”



Arkansas’ Big Four banks see 2Q profit decline


In Arkansas, continued consolidation in the community and regional banking space since the Great Recession continues to reduce the number of active bank filings amid ongoing charter consolidations through mergers and acquisitions. At a total of 86 FDIC-insurance banks, there are now six fewer Arkansas banks than a year ago and nine fewer than in the second quarter of 2018.


Overall, Arkansas-based community and regional banks and savings institutions together posted net income of $518 million for the three-month period ended June 30, down 36% from $807 million a year ago. The dip in profits corresponds with a broad decline in combined year-over-year second-quarter earnings at Arkansas banks with over $100 million in assets.


The state’s largest bank by assets, Bank OZK, reported a 71.9% decrease in profits from $221.2 million to $62.1 million for the first six months of 2020. Company Chairman and CEO George Gleason told Wall Street analysts in the conference call that the “sudden and severe economic downturn” due to COVID-19 led the bank to post nearly $375 million in total allowances for credit losses (ACL). That calculation for credit losses is an estimate of debt the fast-growing Arkansas regional bank is unlikely to recover down the road.


In management comments concerning the second quarter results, however, Gleason said he was pleased with the company’s three-month results. He noted the company’s balance sheet continues to be an industry leader among regional banks, highlighting the Arkansas financial holding company’s stable asset quality, total loan growth and record deposits of $1.9 billion.


“The COVID-19 pandemic was a significant factor throughout the quarter, but our results reflect solid fundamental performance and include a number of significant achievements,” said Gleason. “Our people demonstrated that they are among the best in the industry throughout the quarter and continued to assist our customers during these trying times.”


Still, during the quarter, Bank OZK announced agreements to sell four bank branches in Alabama and South Carolina, leaving just two branches apiece in those states. From its brand-new headquarters in west Little Rock, the former Bank of the Ozarks now has more than 250 branches across Arkansas and nine other states, including California and New York.


Gleason also stated that the Arkansas bank’s ACL losses were not unexpected. He said the Arkansas’s bank ACL increase over the first two quarters of 2020 was appropriate but warned that if economic conditions deteriorate further in the second half of the year then Bank OZK expenses to cover future losses may again be unusually large.


“If future economic conditions align with our projections, then our provision expense in future quarters should primarily reflect provision expense needed to cover loan growth,” said the Arkansas banking executive. “If economic conditions improve relative to our projections, then our provision expense in some future quarters could be zero or negative,” said the longtime Bank OZK chief executive.


Besides COVID-19, Gleason also said Bank of the Ozarks profits were also significantly impacted by the Federal Reserve’s decision in March to cut federal funds rate to near zero. In the banking sector, the federal funds rate is what commercial banks like Bank OZK charge each other for overnight lending, while the prime rate is the interest most lenders charge their most credit-worthy and preferred customers for mortgages and other short-term loans.


“It’s going to take us really through the end of the year and probably through the first quarter of next year to get substantially all of the deposit cost cuts in there,” Gleason said in Bank OZK’s quarterly conference call. “The Fed’s really fast action. They cut 225 basis points (bps) in three quarters and 150 bps of it in short order here in March. We could not adjust deposit cost nearly as fast as loan yields went down.”


Still, Bank OZK, along with Arkansas’ other Big Four regional banks, hold more than 65% or $85 billion of the state’s total banking assets. The other three banks with assets topping federal banking regulator’s $10 billion threshold between community and regional banks include privately held Arvest Bank of Bentonville, Pine Bluff-based Simmons First National, and Home Bancshares of Conway.


As of June 30, Bank OZK had total assets of $26.38 billion, up 14.9% from a year ago. Following the close of its key deal to purchase Columbia, Mo.-based Landmark Bank nearly a year ago for $444 million in stock, Pine Bluff-based Simmons First National now has assets nearing $21.9 billion and operates in Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.


However, Simmons announced the temporary closure of 52 branches in March due to COVID-19, pushing customers to its improved digital banking options. Although most of those branches have reopened, Simmons still announced in June it closed 11 branch locations for annual cost savings of $2.4 million. 


Simmons also said it expects to close an additional 23 branch locations and one loan production office during the fourth quarter of 2020, with an expected net savings of approximately $6.8 million. The Arkansas bank has offered early retirement to some employees to cut expenses related to COVID-19 and the Landmark deal.


Conway-based Home Bancshares Inc., parent company of the Centennial Bank, has also attempted to keep pace with its Arkansas-based, publicly traded rivals by purchasing distressed assets from the FDIC’s “Failed Bank List” following the last recession in 2008. Home Bancshares today has total assets of $16.9 billion, growing its banking footprint mostly across Arkansas and Florida, with 5 branches in Alabama and one loan office in New York City. 


Arvest Bank of Bentonville, which is owned by the Walton family, has also expanded its footprint through key acquisitions in Arkansas, Missouri and Oklahoma. The privately held bank’s total assets now exceed $20 billion and is the largest bank in Arkansas in terms of deposit market share and over 270 locations. The Northwest Arkansas regional bank’s last acquisition occurred in late 2018 when it purchased Little Rock-based Bear State Bank for $391 million.



Total Arkansas bank assets top $130 billion, nearly 24,000 employees


Altogether, Arkansas banks and savings institutions have total assets of nearly $130.3 billion, a 14.4% gain from $111.5 billion a year ago. The 74 Arkansas larger community banks with assets of more than $100 million held the lion’s share of those second-quarter profits at $513 billion compared to only $5 million for the 12 smaller local banks below the $100 million asset threshold.


In other key metrics, deposits at Arkansas banks eclipsed the total amount of loans and leases. Loans held at the end of the second quarter totaled $88.2 billion, up 10.4% from a year ago. Deposits rose 15.3% to $104.9 in the second quarter amid higher consumer savings rates and individuals, families and businesses sitting on cash as COVID-19 cases and hotspots continue to grow.


Unlike other industries impacted by the pandemic, second-quarter FDIC data shows Arkansas banks added more workers to payrolls even as Arkansas’ unemployment rate jumped well over 11% when the state instituted shelter-in-place orders that shut down the economy. Altogether, there were 23,559 full-time employees at Arkansas banks at the end of the second quarter, up 676 from the previous year.


Other key highlights from the FDIC’s quarterly review of the nation’s banking sector was that the FDIC’s “Problem Bank List” declined from 59 to 56 nationwide during the second quarter, the lowest number of problem banks since the first quarter 2007. Total assets of problem banks increased from $46.7 billion to $48.5 billion. In the first six months of 2019, five new banks opened, 60 institutions were absorbed through merger transactions, and one institution failed.


Nationally, other key second quarter benchmarks for the nation’s banking industry showed net income for community banks reflected annual growth of $202.5 million despite higher provision expenses and continued net interest margin pressure due to lower interest rates. The FDIC said the stronger than expected performance by the nation’s community banks with assets below $10 billion was primarily attributable to higher revenue from gains on the sale of loans the sale of securities.


The FDIC’s The Deposit Insurance Fund (DIF) balance touched a record $114.7 billion in the second quarter, up $1.4 billion from the first quarter. For the three-month period, one new bank opened, one failed, and 47 were absorbed through mergers, said the federal regulator.  


  • FDIC Chairman Jelena McWilliams
    FDIC Chairman Jelena McWilliams