LITTLE ROCK — Arkansas banks are having to dig deep and offer commercial loans at very low interest rates so they can make money as the state and country continue to climb out of the recession that formally ended nearly three years ago.
Most Arkansas-based banks have sufficient capital, said Ashton Adcock, chairman of the board at Dumasbased Merchants & Farmers Bank. “And they need to do something with their cash to generate profits,” Adcock said.
Since the recession ended in June 2009, the Federal Reserve has kept key lending rates at historically low rates in order to promote economic growth.
As a result, some Arkansas bankers offer interest rates at the 3.25 percent prime rate or slightly above on some commercial loans. The prime rate, which has remained at 3.25 percent since December 2008, is a benchmark, shortterm interest rate that banks charge their best commercial customers. The discount rate, the rate the Federal Reserve charges on loans it makes to banks, has been under 1 percent since December 2008.
“There is probably some prime rate lending being done all over Arkansas, especially in Little Rock and the bigger towns where commercial lending is more prevalent,” said Philip Hensley, chief executive officer at Union Bank of Mena. “In smaller towns like Mena, there is not that much activity in commercial loans. There are more residential real estate loans in smaller towns.”
Forty percent of Arkansas banks had loan-to-deposit ratios of more than 75 percent in the first quarter, meaning 75 percent of their deposits have been loaned out, according to the Federal Reserve Bank of St. Louis.
Having 75 percent of a bank’s deposits loaned out is a healthy ratio, said Julie Stackhouse, a senior vice president with the Federal Reserve Bank of St. Louis.
Six Arkansas banks have loan-to-deposit ratios above 100 percent, meaning they’ve borrowed money from the federal government or used other sources to fund some of their loans, Stackhouse said.
That in itself is not necessarily bad, Stackhouse said.
“Some banks have unique operations in addition to traditional lending operations,” Stackhouse said. “As a general rule of thumb, those banks are willing to extend loans using sources of funds that are not traditional core deposits.”
Bankers are being pressured on both the terms of the loan — such as the length and whether the loan is adjustable or fixed — as well as the interest rate when the loan is of high quality, said Garland Binns, a banking attorney in Little Rock.
“Some banks are more sophisticated,” Binns said. “One banker told me he would be doing floating-rate loans. But what you have to be careful to do is not to put a bottom or an upper limit [on the rate] so you can float the [interest rate] up if you need to.”
Interest rates Arkansas banks are charging are not close to some rates nationally. A recent article in the American Banker reported that some relatively small banks are offering commercial prospects floating-rate loans as low as 1.99 percent. The rates are being offered to persuade large commercial borrowers to move their accounts to another bank or to stay at their existing bank, the American Banker said.
The Arkansas State Bank Department isn’t aware of any Arkansas bank offering rates that low, said Candace Franks, commissioner of the agency.
Randy Dennis, president of Little Rock bank consulting firm DD&F Consulting Group, agreed.
“Arkansas bankers have always been more conservative and less prone to the excesses of some of their brethren in other states,” Dennis said. “We did see some excesses in Northwest Arkansas, but I hope that the lessons they learned will continue to hold.”
Brian Davis, director of investor relations at Home BancShares in Conway, said the bank wouldn’t make a loan as low as 2 percent.
“We used to have a floor of 6 percent,” Davis said. “And anything lower than that needed [approval of the bank’s chairman].”
Home BancShares, the parent company of Centennial Bank, wants to make at least 4 percent after its borrowing expense on most of its loans, Davis said.
The economy in Arkansas seems to be picking up, said Reynie Rutledge, chairman and chief executive officer at First Security Bank in Searcy.
“There are some businesses that are starting anew or adding a new location,” Rutledge said. “There still seems to be a slowness in commercial real estate development. But as a rule, since 2008, there has not been near the demand for loans, and people have been more concentrated on paying them back.”
Business, Pages 65 on 05/27/2012