Northwest Arkansas banking market holds strong

The banking sector is strong in Northwest Arkansas and bankers and financial analysts expect it to stay that way, even as they plan for higher interest rates.

Interest rates have stayed low since the recession that began in December 2007. Those rates have nowhere to go but up, said John A. Dominick, professor of finance at the Sam M. Walton College of Business at the University of Arkansas. Yet customers still want long-term loans with fixed rates at current low levels. Customers can find those rates in the region's competitive banking market -- for now, he said.

The financial market

The numbers of financial institutions and bank branches and offices in Benton and Washington counties have fluctuated over the past several years, but the amount of deposits has steadily increased since the recession. Dollar figures are in millions.

;2000;2002;2004;2006;2008;2010;2012;2014;2016

Benton County

Institutions;19;16;15;21;23;26;27;28;27

Offices/branches;61;65;68;88;103;103;96;89;92

Deposits;$2.1;$2.22;$2.64;$3.91;$3.42;$3.41;$4.74;$4.01;$4.38

Washington County

;2000;2002;2004;2006;2008;2010;2012;2014;2016

Institutions;15;15;15;20;21;21;21;21;25

Offices/branches;66;73;81;91;100;98;95;90;96

Deposits;$1.87;$2.19;$2.534;$3.27;$3.44;$3.69;$3.71;$4.09;$4.75

*Dollar figures are in millions

Source: Federal Deposit Insurance Corp.

Forty financial institutions compete for loans in the Fayetteville-Springdale-Rogers Metropolitan Statistical Area, according to the Federal Deposit Insurance Corp. The metropolitan area includes Benton, Washington and Madison counties in Arkansas and McDonald County in Missouri.

If a customer cannot get the fixed-rate loan he wants, he will go to another bank, said Dominick. The regional economy is healthy enough to spread the business around, but bankers who know interest rates will rise do not want to be in a position of being committed to too many low-interest loans.

"The market is healthy, banks are healthy, and people are locking in 2.25 and 2.5 percent interest rates for five years," Dominick said.

"But rates are going to start to go up," he said. "The employment figures, especially here, are almost unbelievable."

Northwest Arkansas' population reached 513,559 in 2015, up 10 percent from 2010, according to the U.S. Census Bureau. Employment grew 17 percent over the same five years, reaching 235,300 in 2015 and unemployment dropped from 6.7 percent to 3.8 percent, according to the U.S. Bureau of Labor Statistics. The unemployment rate dropped to 2.7 percent in December.

The low interest rates meant to spur economic growth took a long time to work, but they worked, Dominick said.

"You want competition, but you want your competition to be smart," he said of the banking sector. On one hand, bankers see the warning signs of greater economic pressure on interest rates. On the other, they do not want to lose business to competitors. The competition for loans increases the pressure to keep making those loans. Everyone wants to stop making lower interest loans before federal regulators raise the rates, but where that edge is exactly is still unknown.

Don Gibson agreed that a higher interest rate is a matter of "when" and not "if." Gibson is CEO of Legacy Bank, a regional bank with headquarters in Springdale.

"We are in a rising rate environment," Gibson said.

The Federal Reserve raised its benchmark interest rate March 15 by a quarter point to a range of 0.75 percent to 1 percent. The Fed expects to increse rates three times this year and the group's Open Market Committee expects a rate of 1.4 percent by the end of the year.

President Donald Trump's administration is expected to make changes to banking regulations that the industry has sought for years, Gibson said. Still, other changes increase the uncertainty banks have to operate under, making bankers more wary of an increase in interest rates, he said.

"We have a new administration and a lot of talk about trade, taxes and tariffs," Gibson said. "People wonder where this is going to go. Business thinks it will be a positive movement, but all this adds to the pressure for the interest rates to go up."

The market today is different that it was in the early 2000s, before the 2008 crash in the housing market, Dominick said.

The housing bubble was a main component of the recession that gripped the country from December 2007 to June 2009. The U.S. fell into a mortgage crisis in 2007, but it wasn't felt locally until late 2008. Home values in Benton and Washington counties dropped 27 percent and foreclosures shot up 852 percent.

Commercial lending now makes up a larger share of the loan market in Northwest Arkansas compared to housing, he said. The housing market is healthy, though, and banks are out from under much of the expense of property that was turned over to them in the recession that was never fully developed and earned no net income.

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, Dominick 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 bankers that survived the nationwide collapse of the housing market in 2008 have not forgotten those lessons yet, and are wary, Dominick said.

Nine financial institutions have their headquarters in Northwest Arkansas, including the second-largest bank in the state. Arvest Bank of Fayetteville reported $16.68 billion in assets in its last quarterly report, according to records provided by the Federal Reserve Bank of St. Louis. Signature Bank of Arkansas, also of Fayetteville, reported $526 million. Legacy reported $388 million.

Six of the nine banks with headquarters in the region showed increases in their total assets compared to this time last year, reserve bank records show.

NW Business on 03/26/2017

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