2018 State of Banking

ARKANSAS

STATE OF BANKING REPORT JUNE 2018

CONTENTS Arkansas Banking by the Numbers............................................. 2 The Landscape of Arkansas Banks.............................................. 4 Loan Makeup................................................................................ 5 2016-18 Arkansas Bank Mergers & Acquisitions....................... 5 Economic & Banking Environment Summary............................ 6 ABA Regulatory & Legislative Priorities..................................... 7 National Regulatory & Legislative Update................................. 7 Meet #ARHometownBankers...................................................... 10 #ARHometownBankers in Our Communities............................. 11

ARKANSAS STATE OF BANKING REPORT

2

ARKANSAS BY BANKING THE NUMBERS 120

96

Out-of-state banks do business in Arkansas

Arkansas HQ (80%)

24

20 3 9

$100-$250M (36.5%)

Customers Served (As of 12/31/2016)

Others with deposits in Arkansas (20%)

Asset Size Diversity of Arkansas-Based Banks

< $100 M (20.8%)

4.7 million 11

Banks with Deposits or Offices in Arkansas

Profitability & Credit Quality

94%

35

Profitable in 2017

99%

29

$250M - $1B (30.2%)

Loans Being Paid On Time

$1-$10B (9.4%) > $10B (3.1%)

Statewide Bank Performance

15% Earnings Increase in 2017

12% Loan Growth

8%

Deposits at Record Highs

One great state.

MAY 2018

3

ARKANSAS BANKING

BY THE NUMBERS: FACTS & FIGURES There are 120 FDIC-insured banks and savings institutions with deposits and offices in Arkansas serving people from 1,345 offices. Of those, 96 are Arkansas-based institutions.

Arkansas-based banks employ more than 21,400 people. Conservatively, ABA estimates that all banks operating in Arkansas employ about 27,000 people.

Net income of $1.3 billion, up 15% and total assets of $97.7 billion, up 10%.

Total deposits of $78.1 billion, up 8% and are at record levels.

Total loans and leases of $66.4 billion, up 12%.

94% percent of all Arkansas banks were profitable.

Net interest margin increased and is above national average.

Return on assets and return on equity were above national average.

Credit quality remained very good, with about 99% of loans being paid on time and capital levels remain strong.

Year-to-date Results $ in thousands

Arkansas Banks 12/31/2017

Arkansas Banks 12/31/2016

National Banks 12/31/2017

Number of Institutions Reporting

96

101

5,670

Total Employees (FT Equivalent)

21,380

21,037

2,076,106

Total Assets

$97,715,739

$88,140,349

$17,416,262,137

Other Real Estate Owned

$189,693

$240,652

$8,450,546

Total Deposits

$78,114,744

$71,760,310

$13,399,022,394

Noncurrent Loans & Leases

$499,153

$588,802

$116,385,408

Total Loans & Leases

$66,411,314

$58,883,094

$9,721,052,770

Net Income

$1,255,159

$1,084,968

$164,793,076

Net Charge-offs

$135,573

$103,711

$46,782,807

% of Profitable Institutions

93.81%

93.07%

94.6%

% of Institutions with Earnings Gains

58.76%

64.36%

56.16%

Net Interest Margin

4.02%

4.00%

3.25%

Return on Assets (ROA)

1.34%

1.32%

0.97%

Return on Equity (ROE)

10.11%

10.43%

8.64%

Loss Allowance to Loans

1.08%

1.11%

1.27%

Noncurrent Loans to Loans

0.74%

0.99%

1.20%

Equity Capital to Assets

13.78%

12.84%

11.22%

Total Risk-based Capital Ratio

14.31%

13.79%

14.57%

Net Charge-offs to Loans

0.21%

0.19%

0.50%

ARKANSAS STATE OF BANKING REPORT

4

THE LANDSCAPE OF ARKANSAS BANKS

State-Based Banks December 31, 2017

Arkansas remains a well-banked state, with significant choice and access to banking for families and businesses. Banks from across our region are attracted to Arkansas because of the economy and business diversity. Competition is robust in terms of rates, terms, and products and services.

11

Banks from 11 different states do business in Arkansas

25

1,435 $77.1

Arkansas banks have a presence in 25 other states.

Arkansas offices

Billion in Arkansas Deposits as of 12/31/2017

Where Our Banks are From

Texas

454

Missouri

270

Kansas

247

Oklahoma

247

Ohio

189

Georgia

177

Louisiana

125

Alabama

120

Arkansas

96

Mississippi

77

South Dakota

68

North Carolina

52

SD OH KS

MO

NC

OK TX

LA

GA

MS AL

Arkansas Deposit Market Share (FDIC 2017 Summary of Deposits)

21%

Non-Arkansas HQ

79%

Where Our Banks are Present WA

Arkansas HQ ND

OR

WI

CA

NY MI IN

CO AZ

KS

OH

MO

NC

TN

OK TX

CT

LA

MS AL

GA

SC

FL

RI

MAY 2018

5

LOAN MAKEUP New Home Loans Booked in 2016*

$27 Billion

$6.3 Billion Total Value

Small Business Loans Outstanding*

42,438

Number of Loans

$1.7 Billion

$116,000 Median Loan Size

Small Farm Loans Outstanding*

*Based on 2016 American Bankers Association Survey Data

2016-18 ARKANSAS BANK MERGERS & ACQUISITIONS Target or Issuer

Buyer

Announcement Date

Completion Date

Status

Bank SNB (Stillwater, OK)

Simmons Bank

3/9/2018

--

Pending

Southwest Bank (Fort Worth, TX)

Simmons Bank

11/21/2017

1/25/2018

Approved

Heartland Bank

Simmons Bank

10/27/2017

12/7/2017

Approved

Bear State Bank

Arvest Bank

10/25/2017

12/7/2017

Approved

First South Bank (Jackson, TN)

Simmons Bank

6/2/2017

8/17/2017

Approved

Stonegate Bank (Pompano Beach, FL)

Centennial Bank

4/27/2017

8/17/2017

Approved

Farmers Bank (Hamburg)

Southern Bancorp Bank

2/27/2017

4/18/2017

Approved

Bank of Commerce (Sarasota, FL)

Centennial Bank

12/5/2016

1/19/2017

Approved

Landmark Bank, NA (Ft. Lauderdale, FL)

Centennial Bank

11/23/2016

2/16/2017

Approved

Twin Lakes Community Bank

Anstaff Bank

11/9/2016

1/19/2017

Approved

Little River Bancshares, Inc.

First Community Bancsahres, Inc.

10/20/2016

12/13/2016

Approved

Little River Bank

First Community Bank

0/17/2016

12/13/2016

Approved

Pinnacle Bancshares, Inc.

Central Bank

9/27/2016

12/19/2016

Approved

Allied Bank

Todayâ&#x20AC;&#x2122;s Bank

9/23/2016

9/23/2016

Approved

Community First Bancsahres, Inc.

Equity Bancshares, Inc.

8/2/2016

10/3/2016

Approved

Citizens National Bank (Athens, TN)

Simmons Bank

7/21/2016

10/6/2016

Approved

ARKANSAS STATE OF BANKING REPORT

6

ECONOMIC & BANKING ENVIRONMENT Arkansas is the 33rd most populous state, with over 3 million people.

More Arkansas residents than ever are employed. At year end, 1,356,900 Arkansans were employed.

The unemployment rate as of 2017 year end was 3.7 percent.

Consumer loan growth is pretty solid. Business loan demand is a challenge, with many companies using ample cash reserves to invest, benefiting from tax-law changes and reluctant to take on additional debt.

Housing is still relatively affordable, especially compared to other regions in the country.

Business relocations remain good, especially for Northwest Arkansas.

Ports, rail, air and highway transportation infrastructure are general advantages as ongoing challenges are being addressed by state leadership.

Arkansas is a leader in the financial services technology sector, and the agribusiness, healthcare and education sectors are economic development strengths.

Competition for high-quality borrowers is strong, with attractive rates and terms for borrowers.

250

Arkansas-Based Banks 1997-2017 Total Institutions

200

150

100

9 20 9 00 20 01 20 02 20 03 20 04 20 05 20 06 20 0 20 7 08 20 09 20 10 20 11 20 12 20 1 20 3 14 20 15 20 16 20 17

98

19

19

19

97

50

Arkansas De Novo Banks 1997-2017 1997

7

1998

2

1999

2

2000

3

2001

0

2002

0

2003

0

2004

0

2005

2

2006

0

2007

0

2008

0

2009

0

2010

0

2011

0

2012

0

2013

0

2014

0

2015

0

2016

0

2017

0

MAY 2018

7

ABA REGULATORY & LEGISLATIVE PRIORITIES To promote the general welfare and usefulness of banking and the preservation of a sound banking system.

Support policy and regulatory actions that enable lending and foster job creation.

Remove excessive regulation and other barriers to serving families, businesses and our hometowns.

Advocate for regulatory structures that are tailored to varied bank business models and risk profiles.

Advocate for continued charter choice and a level playing field with nonbank financial services providers.

Bankers in Washington

The ABA connects with our nation’s lawmakers in Washington with two annual visits to our nation’s capital — one in the spring, and one in the fall.

NATIONAL REGULATORY & LEGISLATIVE UPDATE The first year and three months of the Trump Administration with control of the House and Senate in Republican hands has shown that progress can be made, sometimes on a bipartisan basis, on important issues to banking.

At the legislative level, the Senate in mid-March passed S. 2155, the major regulatory reform package we supported. It was a bipartisan bill, and Arkansas Sen. Tom Cotton co-sponsored and played a key role in ushering the bill through committee hearings and open Senate debate. Sen. John Boozman was fully supportive. Some highlights of the bill include provisions that: Provide Qualified Mortgage designation for mortgages held in portfolio by banks with less than $10 billion in assets.

Raise the threshold for designation as a systemically important financial institution from $50 billion in assets.

End stress tests entirely for banks with under $100 billion in assets.

Simplify capital calculations for community banks.

Provide relief from appraisal requirements for smaller mortgages.

Institute longer exam cycles for community banks.

Discussions are ongoing with House leadership about how to reconcile the Senate version with the more comprehensive Financial CHOICE Act passed last year. Many of the provisions in the CHOICE Act have been broken out into standalone bills that have also passed the House, which provides some flexibility about how the bills may be combined. French Hill (R-AR) serves on the Financial Services committee and was a vocal proponent of the CHOICE Act and other legislation.

All of the Arkansas delegation has sent strong signals that it does not want to add much, if anything, to its version to maintain the bipartisan support that was cobbled together. However, we’re guardedly optimistic that a final bill will emerge and pass. Congressmen Rick Crawford, Bruce Westerman, French Hill and Steve Womack have been supportive of many of the Regulatory Reform bills passed by the house this year.

8

ARKANSAS STATE OF BANKING REPORT

On the regulatory front, President Trump has followed up on his promises about less regulation through the appointments he’s made to the major financial regulatory agencies. In addition to Secretary Steven Mnuchin, the President has named and the Senate confirmed Jerome Powell as Chairman of the Federal Reserve Board, and the Vice Chair of Supervision, Randal Quarles, a former investment banker, has been confirmed. Awaiting confirmation to the Federal Reserve Board is Marvin Goodfriend, a Carnegie Mellon economist. That would leave three additional vacancies on the Fed Board. Joe Ottley, a former banker and colleague of Mnuchin, has been confirmed as the new Comptroller of the Currency to oversee nationally chartered banks.

Confirmation hearings have been held for Jelena McWilliams, the President’s nominee to head the FDIC, and the nomination awaits action by the full Senate. She is the general counsel for Fifth Third Bank and prior to that was chief counsel for the Senate Banking Committee. Leadership of the CFPB was disrupted when the original director Richard Cordray left suddenly in November.

Acting director is OMB director Mick Mulvaney who has announced the halt for a number of new pending rules. Significant among those are the proposed rules ABA filed an extensive comment letter on related to granular data reporting for certain small business loans.

Since specific rules, regulations and legislation change quickly in this environment, the ABA uses the following broad guidelines to inform positions and statements as the process unfolds: Sensible regulation. Oversee banks in a way that promotes growth and innovation, while avoiding arbitrary and capricious penalties and providing robust exam review and appeal channels. Update rules to reflect changes in technology. Restore balance to the regulatory process, including Consumer Financial Protection Bureau reform and a focus on promoting both economic growth and safety and soundness.

Tailored regulation and arbitrary thresholds. Tailor regulation to correspond to a bank’s business model and risk, eliminate artificial and arbitrary regulatory asset thresholds, and pursue a more balanced supervisory process that eliminates drag on bankers’ ability to employ capital to support economic growth.

Mortgage rules. Reform mortgage regulations that have raised costs and prevented banks from flexibly serving their customers without enhancing consumer protections or safety and soundness. Most crucially, deeming loans held in portfolio as Qualified Mortgages will expand safe and responsible access to credit.

Housing finance reform. Constrain the role of the federal government—and potential taxpayer liability—in housing finance to a well-defined, explicit and fully priced guarantee of loans made by private lenders. Ensure equitable access to such programs by lenders of all sizes and from all communities.

Flood insurance. Help homeowners protect themselves by providing more incentives to participate in the National Flood Insurance Program and encouraging development of a strong private flood insurance market.

Level playing fields. Reduce economic distortions by providing more charter flexibility and capital options for thrift institutions, including mutual banks, and protecting S-Corp banks from arbitrary disadvantages due to the Basel III capital and other rules.

Small business growth. Fuel lending to job-creating businesses through both increased funding for key SBA loan programs and eliminate regulations that artificially dictate business lending decisions.

Tax reform. Eliminate poorly targeted subsidies to massive credit unions and Farm Credit lenders that no longer pursue their missions.

Student debt. Change the tax treatment of student debt repayments to help unburden those who have invested in their own potential.

One of the most important things bankers need to do is

participate in our trips to Washington.

We can’t

expect change in regulation if we’re not willing to be on the front line and go fight for it.

Cathy Owen Eagle Bank

MAY 2018 Fintech and nonbank competitors. Facilitate partnerships of banks and technology firms, ensure customers are protected through consistent and effective oversight of all providers and encourage innovations by providing a regulatory “greenhouse” for testing new products before roll-out.

Data breaches. Ensure that all parties share accountability for protecting customer information and notifying the public after a breach, with the responsible party bearing the costs of their failure to protect customers.

Cybersecurity. Expand collaborative public-private efforts to fight cyber threats through information sharing and self-reporting of cyber risks without fear of regulatory sanctions or reputation risk.

Rural growth. Pursue pro-growth policies to help farmers manage debt burdens and pricing challenges, fight deposit flight through encouraging access to longer-term stable funding sources, and address the shortage of qualified appraisers in rural areas that hinders real estate transactions.

We will keep an eye on formulation of next Farm Bill.

Interchange. Restore market pricing on debit interchange fees so that consumers can once again enjoy more flexibility in the products and services that banks offer.

AML/BSA. Limit the burdens of Bank Secrecy Act compliance and reporting—especially new requirements that place undue burdens on customers—and eliminate potential sanctions for banking legal businesses.

Small-dollar credit. Preserve banks’ ability to serve customers with small-dollar loans and overdraft protection.

9

ARKANSAS STATE OF BANKING REPORT

10

MEET #ARHometownBankers

26,750 Arkansans Employed (Estimated)

$1.6 Billion in Total Annual Compensation,

$61,245 Average Total Compensation*

Including Wages & Benefits*

122,744 Statewide Volunteer Hours*

*Based on 2016 American Bankers Association Survey Data

MAY 2018

11

#ARHometownBankers IN OUR COMMUNITIES Arkansas banks and bankers are cornerstones of their communities. They provide financial support, guidance and expertise to local government, economic development, educational and other civic entities. They teach financial literacy to kids and adults and support the arts, charities, community festivals, sports and other activities. Bankers volunteer hundreds of thousands of hours for community service projects each year. Here are just some of the major initiatives Arkansas bankers support in our communities.

Economics Arkansas. Arkansas banks are longtime supporters of Economics Arkansas, a statewide initiative to fuse school curriculum with financial education through programming and workshops. In 2017, Economics Arkansas trained more than 2,000 teachers, and touched more than 117,000 students.

Teach Children to Save. Every April bankers from around the state join a nationwide campaign to teach children good money habits. Bankers visit schools and community groups with specialized, grade-appropriate lesson plans, worksheets, games and other learning materials.

Safe Banking for Seniors. An ongoing public awareness and education campaign to protect older Americans from Financial Fraud. The campaign features four comprehensive modules: Identifying and Avoiding Scams, Protecting Your Assets by Preventing Identity Theft, Choosing a Financial Caregiver, and Acting as a Responsible Financial Caregiver.

Get Smart About Credit. National get Smart about Credit day takes place each October, but a number of Arkansas banks participate in this campaign throughout the year.

Through school and community presentations, volunteer bankers work with young people to raise awareness about the importance of using credit wisely.

Bankers Give Back. Started in 2017, Bankers Give Back is a collaborative movement that brings bankers together to benefit statewide charities. Over the past year, bankers have collected more than 530 meals for the Arkansas Food Bank, as well as made sizable contributions to the Ronald McDonald House Charities of Arkansas and Dress for Success of Northwest Arkansas.

As bankers, we have the opportunity and responsibility to be a positive influence in the communityâ&#x20AC;&#x2122;s growth and prosperity.

That role also includes a social

responsibility to participate and many times lead the efforts to improve the lives of all people in the communities we serve.

Don Gibson

Legacy National Bank

Arkansas Bankers Association 1220 West Third Street Little Rock, Arkansas 72211 501.376.3741 www.arkbankers.org