As rates fall, banks take advantage of fixed rate loans

“Interest rates are historically low,” he said. “With an economy sizzling, it’s weird that we’re lowering rates. If we were to go into a recession, one of the levers the Federal Reserve has is to lower interest rates, and if we’re already low, that removes that tool. “

The Fed announced on September 18 that it would cut short-term interest rates by a quarter of a percent, following its quarter-point cut in July, in order to stimulate economic activity. A third rate cut this year is possible in December if the national economy continues to cool.

Lower rates are theoretically good for businesses and bad for banks. But it’s not always the case. Lower rates benefit those who have floating rate loans tied to a benchmark such as LIBOR, the London Interbank Offered Rate. But many Houston-area small and medium businesses have fixed rate loans and have yet to see the benefits of the rate cuts. Banks in the Houston area, meanwhile, are doing quite well.

“It will take a few quarters for this to really come to fruition,” said Dan Bass, managing director of investment banking in Houston for Performance Trust Capital Partners. “Generally speaking, with lower rates, banks make less money. It’s not good for the banks, but it depends.

David Zalman, chief executive officer of Prosperity Bancshares, said his bank charges around 4.5% to 5.5% for commercial real estate loans, a rate that has remained stable for several years. “We are trying to develop relationships with customers,” he said. “We have never been the bank that tries (to get) the best price. We will be there for our customers in the best and worst times.

Fixed rate cushion

Prosperity and Allegiance Bancshares, both based in Houston, have a lot of fixed rate and small business loans, which means rates don’t drop quickly when the Fed moves. Theoretically, small businesses could refinance fixed rate loans and save money if they don’t have prepayment penalties, but small businesses have a harder time getting a loan and charging a lower rate than to their much bigger competitors, said Brad Milsaps, managing director and equity analyst for investment bank Sandler O’Neill + Partners.

“For Allegiance, on their last quarterly conference call, it didn’t look like news lending rates were that far off historical rates,” he said. Allegiance declined to comment for this article.

On HoustonChronicle.com: Houston’s small banks bank in a vibrant local economy

Even on variable rate loans, Bass explained that there are ways for banks to lessen the impact of lower rates. Variable rate loans often have a floor, or a rate below which the interest rate for a particular loan will not fall. In addition, small banks sometimes do not link their floating rate loans to an independent index such as LIBOR or prime rate, which is published in the Wall Street Journal, he said.

Given that rates haven’t come down so far for many borrowers, it’s no surprise that many banks are doing quite well. For most Houston-area banks, a key indicator of profitability actually improved in the second quarter compared to the same period last year. The improvement was particularly true for smaller banks.

Net interest margin, the difference between interest earned and interest expense relative to earning assets, has grown on average for Metro Houston banks with less than $ 1 billion in assets, from 3.81% to 3.85%, according to data from S&P Global Market Intelligence. . Margins increased for Houston-based Allegiance, CTBX, Texas First Bank and Moody National Bank.

These banks can have a large portion of their loans in the form of fixed rate loans, often commercial real estate loans with terms of three to five years. These banks may also have customers who don’t spend a lot of time buying rates. “They’re smaller banks, and the reason you do business there is for customer service,” Bass said. “You can get your lender on the phone. If you’re trying to rate the store, you’re going to the bigger banks.

Value in relationships

Davis of DHI Telecom said his company was less interested in rate buying and more interested in having an established relationship with his 10-year-old bank, the Bank of Houston. “We are getting the best rates,” he said. “We know them. It’s relationship-based.

Many banks, of course, offer variable rate loans that change with an index. Amegy Bank, a subsidiary of Zions Bancorporation, based in Salt Lake City, Utah, has significant amounts of variable rate loans tied to LIBOR. The environment “puts pressure on us,” said Shannon Drage, chief financial officer of Amegy Bank, which has approximately 74 branches in the Houston area. “Amegy is not immune. However, we are well positioned to maintain strong earnings regardless of the interest rate cycle we find ourselves in.

What hurts Amegy is helping some of her clients.

Mustang CAT, the region’s Caterpillar equipment dealer and Amegy customer, finances its inventory with variable rate loans. “We are noticing (the rates) going down,” said Todd Fisk, chief operating officer of the company. The company used the savings to purchase additional inventory this year, hoping to boost sales if equipment like backhoe loaders and excavators are in stock.

Lower rates could also convince Mustang CAT customers to buy equipment rather than lease it. “Interest rates give them that opportunity,” Fisk said.

Reduce money costs

Other business customers take the opportunity to repay loans.

Amegy’s commercial and industrial loan balances declined by $ 74 million between the first and second quarters of this year. Drage said this was not a trend and the drop was due to one-time payments. Amegy increased its second quarter net lending by $ 220 million from the first quarter, in part on strong demand for refinanced mortgages.

Wealth management firm Janney Montgomery Scott analyst Timothy Coffey covers Amegy’s parent company Zions. He said further rate cuts threatened to erode net interest margins.

“This is the situation the bankers find themselves in right now,” he said. “Are they too big for their operating income? Do they need to cut their expenses to increase their income? Does it make sense to keep growing as others retreat? “

It’s a struggle, but the banks have been here before. Three-month LIBOR has fallen below 0.3% on several occasions in the years since the last recession, according to the Federal Reserve in St. Louis. Now it’s above 2 percent.

“It’s not pleasant, but they’re used to operating in a low interest rate environment,” Bass said.