Report says Arkansans cautious with loans, bankers comment on costs

A new report from the Federal Reserve shows that Arkansas borrowers have shown a willingness to take on more risk, but are still acting more cautiously in today’s environment than before the Great Recession.

In addition, Arkansas community bankers also indicate that borrowers are paying more attention to their finances and are trying to not repeat some of their past mistakes. For example, borrowers are keeping equipment longer and are trying to maintain some level of equity in their businesses, the report says.

Community bankers in Arkansas also report that borrowers now spend more time shopping for the best rates and terms. Many businesses have built up cash reserves and now use their own cash rather than financing new projects.

Those were some of the highlights of the annual survey of community bankers by Federal Reserve System. The latest 88-page Community Banking in the 21st Century survey was released last week, following the Fed’s annual community banking research and policy conference in St. Louis.

The conference featured an appearance by Federal Reserve Chair Janet Yellen and James Bullard, president of the expansive St. Louis-based Eight District region that includes Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, the eastern half of Missouri and West Tennessee.

The Fed’s annual community bankers’ survey was administered by state bank commissioners in 39 states and offers views of some 974 community bankers in every state. Arkansas Bank Commissioner Candace Frank represented Arkansas banking regulators in the survey.

One recurring theme among community bankers in Arkansas and other states is complaints concerning the over burdensome regulatory climate imposed by the Dodd-Frank legislation following the nation’s banking crisis that nearly led to the collapse of U.S. economy. The report notes that community bankers in Arkansas continue to operate in a regulatory and compliance environment that limits the types of services that can be offered.

“Nonbank competitors are able to provide certain financing to traditional bank customers because they do not have to operate under the same rules and guidelines that govern the banking industry,” the report says. “(Arkansas) bankers want to provide additional products or services similar to their nonbank competitors, but are fearful of unintended compliance violations.”

SUCCESSION PLANNING, LOAN FLEXIBILITY
Arkansas bankers surveyed by the Fed also indicated that succession planning has become a challenge for many of their customers as the owners of companies look to make ownership or business changes.

“Bankers want to assist their customers in these very important shifts within their operations but have not been able to do so,” the survey states.

Lastly, Arkansas bankers cited a need for more latitude in issuing small-dollar loans. However, they reported that these services are subject to heavier regulation than nonbank competitors, causing customers to seek financing outside the banks.

Other critical challenges noted by Arkansas community bankers was attracting and developing “human capital to ensure of the future of rural banks across the state.

“Because of an anticipated large number of employees with substantial experience set to retire in the upcoming years, many institutions have focused on developing mentoring programs so new staff members can learn from more experienced bankers,” the report noted.

Still, several bankers said it is more challenging to attract quality staff in rural areas. Bankers acknowledged that they must Arkansas compensate at a higher rate to motivate employees to begin their career away from a more urban area.

“One banker noted success in attracting good talent by looking within their smaller community and identifying individuals that have high credibility and good business reputation. These people have strong working backgrounds and understand their communities, intangibles that are much harder to train than the specifics of the banking industry,” the report stated.

THE ‘GOTCHA’ PROCESS
Arkansas bankers surveyed by the Fed say compliance exams are not useful tools for banks.

“Bankers would like to see compliance exams be more constructive versus critical. The exams are not transparent and are about how well the bank ‘checked the box.’”

In the report, one unnamed Arkansas banker noted, “It is unbelievable the amount of money, time, energy and mental stress that goes into the compliance function.” The banker further noted that instead of seeing the compliance exam as a tool to help manage the bank, it is viewed as a “gotcha” process.

Arkansas community bankers, which are generally view as regulated financial institutions with assets of less than $1 billion, also said compliance is the fastest-growing area with regards to bank staffing and the most costly function with no corresponding source of revenue.

All bankers surveyed agreed that banks must be fair and should not take advantage of customers, but the current compliance environment is resulting in more hardships for consumers looking to obtain credit in a timely manner.

In the final section of the report on Arkansas community bankers, the Fed report said the main emerging issues include the ever-changing world of payment systems and the related increase in cybersecurity concerns.

On a positive note, the Fed report said the overall economy in Arkansas has been fairly constant, with pockets of growth presented in recent months.