Arvest Bank Thinks Expansion

By Kim Souza

Posted: November 15, 2009 at 7:05 a.m.

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SPRINGDALE — Slimmer profits haven’t deterred Arvest Bank’s expansion plans as shown with the recent conversion of three Kansas City, Mo., branches formerly operated as Harrington Bank and a hefty capital investment made inthe third quarter.

The $105 million capital injection to the bank’s balance sheet is further indication the locally chartered Arvest is pursuing other possible acquisitions in the coming months.

The large capital injection came from the bank’s holding company, Arvest Bank Group, under the leadership of Jim Walton.

Bank officials said the capital contribution purpose was twofold.

“We have always been well capitalized and plan to stay there. But given the troubled economy in our markets and nationwide, we feel regulators are more confi dent in banks with higher than normal levels of capital,” said David Short, president of Arvest Bank Bentonville.

Short said the big reason shareholders anted up more capital was to be better positioned to act quickly on other acquisition opportunities.

“The regulators generally give banks only a week or so to bid on distressed bank acquisitions so it is important for the institutions bidding to have extra capital in place and demonstrate appropriate wherewithal to have any hope of having a deal accepted,” said Tim Yeager, Arkansas Bankers Chair at the University of Arkansas.

Arvest Bank’s recent expansion into Kansas City occurred when regulators forced Harrington Bank’s holding company to sell the bank branches because of inadequate capital.

The Federal Deposit Insurance Corp. has 416 banks on its problem list, and Yeager said there will be ample opportunities for further bank consolidation. The list grew from 305 banks in the previous quarter, he said.

Simmons First National Bank and Home Bancshares of Conway also recently expressed desires to pursue FDIC acquisitions and other expansion opportunities.

Simmons recently announced a $65 million stock oft ering to fund such ventures, while Home Bancshares raised $100 million in new capital for expanding its Florida footprint, where capital spends like gold, according to bank chairman John Allison.

Earnings Recap

Arvest Bank controls a lion’s share of Northwest Arkansas deposits and mortgage loan originations, but the bank is not exempt from the dampening effects of the recession and subsequent recovery.

Arvest Bank came up nearly $30 million short of last year’s profit through the third quarter, according to call reports recently filed with the FDIC. The region’s largest local bank posted $40.97 million in net profit through three quarters of this year, down 42 percent from $70.69 million in profit earned a year ago.

For the three months ending Sept. 30, Arvest earned $8.05 million, compared with $20.99 million in the same quarter of the previous year.

“Earnings are scarce this year across the nation. Arvest posted respectable returns because they are conservatively managed,” said John Dominick, banking professor at the University of Arkansas.

One primary reason for the earnings shortfall was $63.93 million set aside in the recent quarter by the bank to build up its loan loss reserves. Arvest had loan loss reserves worth $151.61 million to off set its rising loan delinquencies through September.

P rovisions set aside toward reserves are not lost by the bank, but rather dedicated to cover losses resulting from defaulting loans. Loss reserves do not flow through to the bottom line, having a negative impact of net income.

“We are trying to be aggressive, making sure where we have decent earnings, we are funding our loss provisions. Customers throughout our markets are struggling some and we have to account for a higher degree of risk,” Short said.

Net interest income between Jan. 1 through Sept. 30 totaled $249.61 million, down 6.6 percent from $267.25 million in the same period of 2008.

“This is clearly a challenging time for bankers as well as consumers. The decline in our net interest income is a reflection of flat loan growth in 2009. We saw some growth at the end of 2008, but it has since leveled off ,” Short said.

One bright spot in 2009 has been Arvest Bank’s mortgage loan originations.

Short said the bank is on track to make $1.9 billion in mortgage loans by the end of the year, almost double the mortgage loan volume in 2008.

Much of the increase came from lower interest rates that spurred a robust refinance demand, in addition to the first time home buyer taxcredit boosting new loan sales during an otherwise stagnant lending environment, Short said.

As Arvest manages through the uncertain economic climate, the bank is not exempt from escalating loan delinquencies and foreclosures.

The bank has $63 million in other real estate owned - OREO - property the bank recovered from delinquent borrowers. Arvest Bank’s OREO increased from $37.62 million a year ago.

Short said much of the OREO increase relates to Village on the Creeks, a large commercial oftce and retail complex in Rogers.

The bank took the property back from local developer Carmen Lehman earlier this year following her Chapter 13 bankruptcy filing. There was $27.3 million in outstanding debt on the property at the time.

Arvest got Village on the Creeks on July 24 after Judge Ben T. Barry of the western district bankruptcy court approved transferring the property from Lehman.

“We still have a lot of confidence in this project. We are actively managing the property, but it is for sale,” Short said.

In addition to more OREO, Arvest bank also reported $220.46 million in nonaccrual loans at the end of September, $61.76 million was added in the third quarter alone.

Nonaccrual loans are typically delinquent at least 90 days and represent the last stop before charge-off .

Short said the bank aggressively identified problem loans and wasted no time writing the value of the loans down as appraisals are considerably lower today on underlying collateral.

“We have also put loans on nonaccrual status if we think there is an outside chance the loan won’t pay back,” Short said.

In the near term, reducing loan values will hit the profit and loss column, but Short said longer term the bank recovered some assets through fairly quick liquidations.

News, Pages 22 on 11/15/2009

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