Low interest rates create headaches for lenders, but they can benefit banks that are interested in borrowing funds.

West Bancorp. (WTBA) and BNC Bancorp (BNCN) are among the financial institutions that have taken out loans in recent weeks. West used its funding to buy back stock; BNC's loan helped it buy back preferred stock it issued under the Troubled Asset Relief Program.

Though atypical, taking out loans for those types of strategic initiatives makes sense given historically low borrowing costs, industry experts say.

"The big trend here is there money available from lenders," says Ralph "Chip" MacDonald 3rd, a partner at Jones Day. "For a while, banks have been doing more workouts than lending. This shows that the bank market is strengthening."

West Bancorp. in West Des Moines, Iowa, borrowed money to buy back 1.4 million shares of common stock from a big investor. The $1.4 billion-asset company paid American Equity Life Holding about $16 million for the shares. The insurer was interested in redeploying its funds, says Douglas Gulling, chief financial officer at West Bancorp.

West Bancorp., which has been historically reluctant to buy back stock, determined that it could justify the deal and borrow money at a rate where "earnings wouldn't be materially affected," Gulling says.

After taxes, the interest rate on the loan should be between 1.5% and 1.75%, Gulling says. In comparison, West Bancorp. pays a 3.5% dividend yield on its common stock. The loan is tax deductible and can be prepaid without a penalty.

"I think the alternative cost of funds enters into the decision making," Gulling says. "If the rates had been significantly higher it may not have worked out."

West Bancorp., a growing mortgage lender, can now use the cash it saved to keep making loans, says Andrew Liesch, an analyst at Sandler O'Neill. (The investment bank advised West Bancorp.. on the deal.)

Buying back the stock also allowed West Bancorp. to control what happened to the shares. Otherwise, they could have ended up in the hands of an unknown investor, says Anita Newcomb, president of A.G. Newcomb & Co.

BNC Bancorp in High Point, N.C., took out a $30 million term loan from Synovus (SNV) to buy back preferred stock associated with Tarp. The Treasury Department had already auctioned the shares to other investors.

The $3.1 billion-asset company has been using cash and stock to buy other banks in North Carolina. Earlier this month, BNC agreed to pay $10 million to buy Randolph Bank & Trust in Asheboro, N.C.

It's encouraging that banks are lending to each other, since that type of activity slowed during the financial crisis, industry experts say. Correspondent lenders used to dominate the business, but other banks are beginning to view such loans as a way to grow, says Dory Wiley, president and chief executive at Commerce Street Holdings.

Commerce Street recently handled a $20 million loan involving two unnamed banks, Wiley says. Besides banks looking to repurchase stock and Tarp shares, some may consider loans to finance acquisitions, he says.

A bank's common stock often serves as collateral for the loans, industry experts say. Most small banks could consider lending to other banking companies because the loans may feature variable rates at a time when lenders "don't need any more fixed-rate loans on the books," Wiley says.

Lenders must consider a borrower's Camel rating, how the funds will be repaid, and the potential earnings of the bank taking out the loans, Wiley says.

Still, lending to other banks has risks, says Steve Brown, president and CEO at Pacific Coast Bankers' Bancshares. Most loans are made to the holding companies, which then move the cash to their banks.

Banks need regulatory approval before moving cash back up to their holding companies to repay loans, creating a risk that unexpected regulatory problems could block repayments, Brown says.

Brown says he has seen "limited" interest from banks looking to borrow. Before the financial crisis, small banks were growing aggressively, "so you had a natural need for more capital," he says.

Most banks have been deleveraging since then, which has tempered the pace of borrowing. Uncertainty about regulation, such as Basel III, and excess liquidity have also put a chill on demand, he says.

"The biggest issue is where do we get more loans than rather than more capital," Brown says.

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