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Credit crunch with plenty of cash.


Central Arkansas Banks Have $2 Billion To Loan But Commercial Borrowers Are Still Complaining

As head of First Commercial's commercial lending department, EVP Bob Armstrong is the first to admit that deciding why one commercial project gets funded and another doesn't, involves weighing a few intangibles.

"Somebody else's idea of a good project may not be ours," Armstrong says. "There are a lot of judgment calls."

Bank loan committees have general policy guidelines, he says. Many of the conclusions they come to are unique to that bank.

But what most bankers -- and borrowers -- will agree on today is that over the past five years, lending for commercial construction projects has tightened up considerably -- whether through regulatory mandate, collapsing real estate values or skittish loan committees. The predictable result has been a steady decline in commercial lending throughout the area and complaints of a credit squeeze from businesses.

The numbers support the conclusion.

An analysis of central Arkansas banks shows that the total dollar amount of commercial lending has dropped 8 percent over the past three years in non-inflation adjusted dollars to $622 million in 1990.

A year earlier, that figure was even grimmer, with commercial loan totals 17 percent smaller than they had been in 1987.

Even more significant, when you compare loan-to-deposit ratios -- a good predictor of how actively a bank is investing its depositors' money -- central Arkansas banks in 1987 were at a 66 percent loan-to-deposit ratio.

Three years later that level dropped to 61 percent in 1990. The decline is nearly all in commercial lending.

"We don't ever want a problem loan," Armstrong says. Problem loans cost money to work out, add to loan loss reserves and don't look good on the bottom line.

In the 1990 post-S&L-bust climate and with the FDIC now threatening to extract a one-time, $180-million insurance fund premium from Arkansas banks, central Arkansas lenders are a cautious group: deposit-rich, but reluctant. Most banks have loan-to-deposit ratios hovering around 60 percent, well down from the 65-70 percent levels of the mid-1980s.

So, it's no surprise that real estate developers and small businessmen will tell you a loan is pretty hard to come by in central Arkansas. With a recession already arrived, it's not getting any easier.

Awash In Deposits

How liquid are central Arkansas banks? Very.

If banks wanted to make loans for every free dollar they had (which they wouldn't), they could pour an additional $2 billion worth of loans into the marketplace, increasing the overall lending level by 64 percent.

Gone are the easy days of the early 1980s when S&Ls would often lend 100 percent, or more, of a project's appraised value with nothing but the project to back it up. As a consequence, overbuilding on apartments, office space and residential subdivisions occurred everywhere.

Today's lenders want not only a good project and a sound business plan, but an independent cash flow stream to bail out the development in case it fails.

Armstrong says the cash-flow approach started in the mid-1970s as real estate loans went bust in major cities across the nation. By the late 1980s, it had burrowed its way deep into commercial lending committees in Arkansas.

In an earlier time under a project-based, asset approach, a bank would make a loan to a developer based on the rule of thirds: one-third for the value of the land, one-third for the value of the improvement and one-third for the profit in the deal.

If the borrower got in trouble, the lender figured it could sell the project to someone else for at least two-thirds of the total and still come out ahead.

Under the cash flow approach, the project's value is heavily discounted and the lending committee looks at the financial backing of the borrower asking one question: In a worst case scenario, does the borrower have the bucks from other sources to pay the loan off?

"Lenders are obtaining more information about the financial stability of the borrower," says Ronny Clay, assistant bank commissioner for the Arkansas Bank Department. That includes asking for more of everything: more back-up financing, more money down and more documentation on the borrower's worth.

"They (loan committees) have changed in that they look more and more at the ability of the borrower to repay."

This summer, national bank regulators made things even tougher by requiring all commercial project loans over $50,000 to be appraised by an independent appraiser. Even in small towns where a banker might feel he knows best what a property is worth, the outside appraiser has the final say.

Some say the stiffer lending climate has also affected start-up professionals like beginning dentists, CPAs and attorneys, who can only promise a future income stream to pay off a business loan.

Despite the new stringent approach, bankers continue to say workable loans get made.

"A good loan should be made in any economic condition," says Twin City Bank's interim COO Bob Birch. "That's one of the things banks are in business for."

Like other banks, TCB's loan-to-deposit ratio has changed with the times. In the mid-1980s, TCB had 70 percent of its deposits tied up in loans. Today, it's just 55 percent, and Birch says that ratio makes sense in the current recessionary climate.

"If it's a good loan, then we try to find a way to make it," Birch says. "(But) we would not want a 70 percent loan-to-deposit ratio today."

And just like other banks, it is TCB's commercial loan portfolio that has shrunk over the past three years. Today, commercial loans make up 35 percent of the commercial loan portfolio. Three years ago, that number was 42 percent.

"All that we do is price risk," Birch says. "We are more conservative in our real estate loans in February 1990 than February 1989."

Also tying their hands, bankers say, is Arkansas' usury law.

Banks can't build adequate interest charges into loans to compensate for additional risk. With the failure of Amendment 2's attempt at reforming the state's usury law this past fall, those higher-risk loans will continue to flee the state and be made elsewhere, Arkansas bankers say.

Some Surprising Ratios

Statewide loan-to-deposit ratios are much the same, except for northeast Arkansas.

In the state's northeast sector -- Greene and Craighead counties -- loan-to-deposit ratios are 67 percent. Bucking the statewide trend, the loan-to-deposit ratio has climbed three points since 1987.

Across the state in booming northwest Arkansas -- home to Wal-Mart, J.B. Hunt Transportation and Tyson Foods -- the news is uniformly good these days, but loan-to-deposit figures are similar to central Arkansas.

With $1.9 billion in total assets, northwest bankers in Benton, Washington and Madison counties have a slightly lower loan-to-deposit ratio (59 percent) than central Arkansas banks.

Unlike central Arkansas, commercial lending totals declined 4 percent over the past year, while deposits climbed 12 percent.

Easing Up Regulatory Constraints

This month, The Wall Street Journal reported that national bank regulators are considering accounting changes that would allow banks to report lower amounts of non-performing loans, smaller loss reserves and higher profits.

The goal would be to encourage the nation's 4,200 nationally chartered banks to restructure real estate and other troubled loans before writing them off as a complete loss. The new guidelines are expected by the first of next year.

PHOTO : COMMERCIAL LENDING DOWN: Dillard Department Stores new corporate headquarters completed this past summer is the type of multimillion dollar project real estate developers yearn for. Figures compiled this week analyzing central Arkansas bank lending show commercial loans overall have shrunk 8 percent over the past three years.
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Title Annotation:Central Arkansas bankers have $2 billion to loan but commercial bankers are still complaining
Author:Walker, Wythe, Jr.
Publication:Arkansas Business
Date:Dec 31, 1990
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