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A separate peace: cap issue divides banking industry but still may bolster it.

CONTROVERSIAL STATE legislation raising the limit of in-state customer deposits any one bank holding company can control has the potential to strengthen both small and large banks, industry observers say.

The state's two largest holding companies -- Worthen Banking Corp. and First Commercial Corp. -- are expected to increasingly look for acquisitions within the state's borders, and small banks may see a salutary effect from that.

"What it will do, of course, is to allow Worthen and First Commercial to continue to expand in Arkansas," says John Dominick, a professor at the University of Arkansas at Fayetteville who holds the Arkansas Bankers Association Chair of Banking.

"The independent banks -- those that want to -- will survive and prosper. They can compete against Worthen and First Commercial."

By allowing the state's largest holding companies to make more in-state acquisitions, the stock value of small banks is protected, Dominick says.

"If you were to take, let's say, Worthen and First Commercial out of the picture and say they could not acquire any more banks in the state because of their size, you eliminate significant demand for bank stocks. That would have an adverse impact on the value of independent banks."

Bill Bowen, an advocate of abolishing the deposit cap altogether and letting federal antitrust laws shape the playing field, agrees.

"Who's going to buy the independent banks if there's not an Arkansas presence large enough to do so?" asks Bowen, alluding to likely purchases of those banks by out-of-state concerns. Bowen is a director of First Commercial Corp. and the holding company's former chairman and chief executive officer.

Only about nine states place deposit caps on the percentage of deposits state banks can control.

As a result, proponents of raising the deposit cap from 15 percent to 25 percent argued that by giving Arkansas banks more room to grow, they could better meet the demand for large loans to in-state companies.

Also, some state legislators such as Rep. Ben McGee of Marion saw the bill as one that would pave the way for large in-state banks to have a presence and infuse capital into poor regions of the state, like the Delta.

Fears of Dominance

Much of the opposition to raising the deposit cap centered on concerns that Worthen and First Commercial, in particular, would become too dominant.

But one banker close to the issue says the lines weren't drawn according to bank size.

"This was not a big bank vs. small bank issue. There were both large banks and small banks opposed, as well as large banks and small banks in favor," says Floyd L. Parker, president of the Arkansas Bankers Association and the chairman, president and chief executive officer of The Malvern National Bank.

The ABA opposed the deposit cap increase after a survey of its 254-bank membership showed 65 percent were against bumping the legal limit up to 25 percent. Of the remaining 35 percent of the ABA membership, Parker says many of them favored raising the limit to 18-20 percent.

Led by Curt Bradbury, its chairman, president and CEO, Worthen championed the bill because when the merger of Worthen and The Union of Arkansas Corp. is completed, Worthen's deposits will grow from about 11 percent of the state's total to around 15 percent.

Without a higher cap, Worthen's in-state growth would have been stunted, forcing the company to look out of state for acquisitions.

At the time the bill passed the Senate, Bradbury hailed its passage as a triumph of the free-market forces over protectionism.

"I've never seen a circumstance that's been to Arkansas' advantage to limit the growth of any of its homegrown companies," Bradbury says. "I think it's a staggering thought that you would say to a company, 'OK, you're big enough. You can't grow anymore.'"

First Commercial is not as close to the cap as Worthen will be after the merger, but the corporation also supported the higher cap, says Joe Hatcher, vice chairman of the First Commercial Bank board of directors.

Twin City Bank, the third largest in the state, didn't lobby for the legislation because the bank doesn't believe there should be any deposit cap, says Susan Blair, TCB's marketing director and a senior vice president.

Primary Concern

Parker says the ABA members opposing a higher deposit cap cited one primary concern.

"They were fearful," he says, "that with a 25 percent cap the two major holding companies would control 50 percent of the deposits, and if they were to sell to some bank outside the state, then what would those banks do with our deposits with our usury limitations as they are?"

The ABA's stance on the deposit cap led Worthen to withdraw its 10 affiliate banks from the professional association. First Commercial remains an ABA member and has no plans to withdraw over the issue, Hatcher says.

Joseph B. Ford, president and chief executive officer of Central Bank & Trust, says there always will be a niche for the small, community bank.

Still, he fears an unhealthy situation if the three largest banks were to end up with 75 percent of the state's deposits.

"Suppose they want to start cutthroat competition and say, 'We're just going to drop our loan rates to 5 percent and give you 10 percent on your deposits,' just to wipe out competition. That's not healthy," he says.

While there is concern a disproportionate amount of the state's deposits might be concentrated in the hands of a few, some say it may never come to be.

"That's theoretically possible, but it's probably highly unlikely," Dominick says. "There's nothing that says that an independent bank has to sell out. These independent banks can survive and be very prosperous."

Parker notes that independent banks are often more profitable than their bigger peers in the industry.

"The independent bank can compete," he says. "And if you look at the figures, they are more profitable on average than the large holding companies."

Bowen says he believes the higher deposit cap was essential to the state's banking industry.

"In my opinion, it was crucially important to the survival of a significant banking presence in Arkansas," he says. "If you can't be big enough to play with giants that surround us and your own state won't allow you to grow, that means you have to grow by acquisitions out of state."

At First Commercial Corp.'s annual meeting last month, Barnett Grace, the chairman and chief executive officer, noted that the higher cap would allow the holding company to double its deposit base in the state.

And Worthen recently announced it will acquire First Bentonville Bancshares Inc., the parent corporation of First Bank of Bentonville.

These developments could be signs of what is to come.
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Author:Walters, Dixie
Publication:Arkansas Business
Date:May 3, 1993
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