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RIGHT RATIO: Commerce Bank CEO Doug Neff says the bank aims for a loan-to-deposit ratio around the 70 percent mark.
SBJ photo by Jessica Rosa
RIGHT RATIO: Commerce Bank CEO Doug Neff says the bank aims for a loan-to-deposit ratio around the 70 percent mark.

Local loan-to-deposit ratios contrast national trend

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A metric used to measure liquidity in the banking industry has trended upward nationwide in recent years, but not so for most banks in the local market.

The national loan-to-deposit ratio, determined by a bank’s loans divided by its deposits, was 80.5 percent in 2018, according to Federal Deposit Insurance Corp. Five years ago, the nationwide loan-to-deposit ratio was at 70.6 percent, according to the FDIC.

Bucking the national trend, the local ratio is declining.

In Springfield, 10 of the area’s largest banks had an average loan-to-deposit ratio of 90.4 percent in 2018, down from 113.7 percent four years earlier among the largest banks, according to Springfield Business Journal research.

At that rate, for each dollar coming into the bank, a dollar and change goes out in loans. Regulatory requirements and industry standards for traditional banks suggest a loan-to-deposit ratio of 80-90 percent.

“After the [2008] recession, the loan-to-deposit ratio came down for a while. Now that the interest market is more competitive, it’s climbing,” said Doug Neff, CEO and chairman at Commerce Bank for the Springfield region.

The upward trend in the past five years stems from an improvement in the economy, Neff said, with loan demand beginning to rise. At Commerce, the loan-to-deposit ratio averages 70 percent, he said.

By trending in a more favorable direction for banks, officials are keeping a close eye on loan-to-deposit ratios.

It’s on the radar of Springfield First Community Bank CEO Rob Fulp.

“I can assure you I look at that on a daily basis,” he said. “It’s a balancing act.”

Doug Parker, southwest Missouri president at Simmons Bank, acknowledged the upward trend, pointing to good loan growth coming from years of the Federal Reserve staving off increasing interest rates.

“It’s easier to get a loan, but it’s hard sometimes to get deposits because customers at other banks have multiple accounts,” he said.

Parker said the loan-to-deposit ratio is a metric that “keeps you honest” and is a way to look for liquidity.

“That way you don’t outrun yourself,” he said.

Different approaches
Bank officials say there are multiple strategies for managing loan-to-deposit ratios.

“Every bank has a different philosophy and every bank has a different focus on growth,” said Fulp.

At SFC Bank, Fulp said the target is 80-95 percent for its ratio, though it operated much higher at the end of 2018 with $482 million in loans and $439 million in deposits for a 109 percent ratio, according to SBJ research.

Five years ago, the bank’s ratio was 106 percent.

When the loan-to-debt ratio exceeds 100 percent, it indicates a bank may need to borrow to cover its loans.

“It’s just the timing,” Fulp said. “We just focus more on deposits. You can always increase rates to get money in the bank. It’s a strategy position that we made due to our high-quality credit portfolio.”

Parker, at Simmons Bank, said another strategy is that of planned growth. He said the bank’s healthy spot is around 87 percent.

“We’ve had a healthy deposit growth over the last quarter,” he said.

Parker said Simmons had $728 million in loans and $967 million in deposits for a 75 percent ratio in southwest Missouri. Five years ago, the bank operated with a 105 percent ratio in the local market.

“It’s just a soundness issue,” he said. “When you start getting to 90-100 [percent], you don’t have a lot of safety factor in there.”

Neff said Commerce, which operates across 11 states, recorded $14.16 billion in loans and $20.23 billion in deposits companywide in 2018, for a ratio of 70 percent.

“Commerce is running around the high 60s and low 70s,” he said. “That’s a pretty comfortable spot for us.”

Mid-Missouri Bank had $508 million in loans and $563 million in deposits for a 90 percent ratio in 2018, said Jayson Cox, vice president and controller at the bank. That’s slightly elevated from 2014, when it’s ratio was 84.5 percent with $452 million in loans and $535 million in deposits, he said.

Chief Financial Officer Dan Cannefax said the bank puts more focus on its loan-to-asset ratio, which is currently operating at about 76 percent, though officials like to be in the 80 percent range.

“When we are in that position, we’re looking to raise deposits either wholesale or local,” he said, adding Mid-Missouri Bank officials look to a school district, city or institutional investor in the wholesale market.

Funding
Fulp said SFC’s focus is on high earnings and capital, with interest working with established companies with high credit and developing long-term relationships with business owners.

SFC has two branches, though Fulp said the bank would work with current clients who may do businesses outside of the state.

SFC was acquired by Moline, Illinois-based QCR Holdings Inc. (Nasdaq: QCRH) in July 2018, according to past SBJ reporting. It was locally chartered in 2008.

Similar to SFC Bank, funding streams at Mid-Missouri Bank focus on its existing clientele’s deposits at its 14 branches in central and southwestern Missouri, Cannefax said.

On a larger scale, Neff estimates Commerce’s revenue funding stream is 60 percent net interest margin with the 40 percent coming from other fee-based products, like card services.

“Fee-based business is very consistent because it doesn’t fluctuate with interest rates,” he said, adding a large portion of Commerce’s income is card-based fees, like credit, debit and small business credit cards. “As interest rates move up, people start to see that their money is more valuable. They may invest in stocks, bonds, money markets.”

On Jan. 30, the Fed announced it would keep its benchmark rate between 2.25 percent and 2.5 percent. After four rate hikes in 2018, Chairman Jerome Powell said on March 20 it will not recommend increases in 2019.

Commerce’s scope is mostly in the Midwest, Neff said, with 169 branches operating mostly in metropolitan areas.

Simmons Bank operates in seven states, Parker said, with 208 branches and corporate offices.

He said over 50 percent of the bank’s revenue funding stream comes from customers with commercial and agriculture loans and deposits making up the remainder.

“We’re all chasing the same dollars,” Parker said.

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