Northwest Arkansas Democrat-Gazette
Experts: Low interest, recession lessons still deter bankers
The recession is over, but the memory of that bust in 2008 remains. So do the low interest rates in response to the slowdown, banking experts said in interviews. Both of those factors limit enthusiasm for lending despite the competitive regional market.
Northwest Arkansas’ pre-recession boom in banking gave borrowers a variety of lenders to choose from. There are 42 banking institutions operating a total of 352 banking locations in 12 counties in the Northwest Arkansas region, federal banking records show.
Locally based banks and the Northwest Arkansas branches of banks based elsewhere survived the downturn, although some changed owners. The area hosts a competitive market, experts said.
Banks are also out from under much of the expense of property that was turned over to them that was never fully developed and earned no net income. Much of the foreclosed property has sold, said John A. Dominick, professor of finance at the Sam M. Walton College of Business at the University of Arkansas. Less expense means more money for lending.
The biggest barrier to more lending now is the near-certainty that interest rates will go up, said both Dominick and Robert Taylor, chief executive of Parkway Bank. Taylor also is chairman of the Arkansas Bankers Association, the chief banking lobby in the state.
“You make money in banking with net interest income — interest income minus interest expense,” Dominick said.
The net is the amount of interest the bank collects minus the costs of administering the loan. The margin is thin at current interest rates and could get thinner, he said.
Banks in this region obtain money for much of their lending through the Federal Home Loan Bank in Dallas, one of 11 such regional home loan banks in the United States. No bank wants to make loans at a low rate and then see the home loan bank’s rates go up, as will happen someday, he said.
The customers of local banks, such as real estate developers, want low interest loans with locked-in rates.
“People come in and want to lock in a five-year rate,” said Dominick, a member of the board of Signature Bank of Arkansas. “If we don’t give it to them, they go to another bank.”
“The pattern’s changed,” Dominick said. “People used to develop real estate a few lots at a time and work with one bank. Now they want to develop 100 or 200 acres at a time and will choose between banks.
“I’ve seen people move to another bank for less than one-eighth of a point of interest,” Dominick said.
Much the same picture was described by Taylor. Of course borrowers want to lock in low interest rates, he said.
“They used to ask for a locked-in rate of two or three years,” he said. “Now they want it out to five or seven, and some are even asking for 10 years.”
Caution has prevailed in the region after the hard lessons of the recession, Taylor said.
“We found out that nothing is foolproof,” he said. “You want competitors, but you want your competitors to be smart. What you don’t want is somebody making loans that aren’t smart, but you have to match them to do any business.”
Dominick also said the recession gave sobering lessons to lenders, but those memories will fade.
“You have to be an eternal optimist to be a real estate developer, and bankers want to make loans,” he said. Eventually, persistence will overcome caution, he said.
Northwest Arkansas’ banking alternatives boomed during the “gold rush days” before the recession, Taylor said.
“A lot of smaller banks in southeast Arkansas that had made agricultural loans
“We found out that nothing is foolproof. You want competitors, but you want your competitors to be smart.”
— John A. Dominick, professor of finance, Sam M. Walton College of Business
forever came up here to expand and diversify,” he said.
The expanded banking outlets in Northwest Arkansas survived the nationwide collapse of the housing market in 2008. Both Taylor and Dominick gave credit to leadership from bank managers and boards. Taylor also credited the Arkansas Bank Department.
“The state regulators really kept on top of the situation,” he said. “They were hands-on, making sure everybody did what they were supposed to do.”
Banks consolidated and still are. Parkway, for example, is being taken over by the Bank of the Ozarks, which is based in Batesville. The agreement was finalized in December. The Farmers & Merchants Bank, with headquarters in Stuttgart, purchased the Bank of Fayetteville with its eight branch locations in November.
Arvest Bank, headquartered in Fayetteville, was the largest bank based in Arkansas in 2015 with $15.8 billion in assets on Dec. 31, according to information from the Federal Reserve Bank of St. Louis.
Bank of the Ozarks of Little Rock was the second largest bank in the state last year with $9.9 billion in assets. Others, in descending order, are: Centennial Bank of Conway with $9.3 billion in assets, Simmons First National Bank of Pine Bluff with $7.5 billion in assets and First Security Bank of Searcy with $4.9 billion in assets.