Balance-sheet pressures weigh heavily on community lenders

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Bankers are searching for the right mix of yields and durations on loans and securities, while trying not to overpay in battling each other for consumer deposits.

A flat yield curve, and questions about the path of interest rates given lingering political and economic uncertainties, have created headaches for bankers looking to optimize their balance sheets. There is extra pressure on community banks, which have less fee income to fall back on than larger institutions.

On the deposit side, large national banks have been offering higher prices, said Paul Hoffmann, president and CEO of Monona Bank in Wisconsin. Competition from credit unions and online banks is another factor, and depositors are comparing the $885 million-asset bank’s rates against offers outside its local market.

Monona’s treasury management team has been looking for what Hoffmann calls “sleepy money” that many not be getting the best rates. “But it’s getting much harder to find, and our cost of funds show it,” he said.

Summit Bank in Oakland, Calif., will be lucky to produce mid-single-digit deposit growth in 2019, said Thomas Duryea, the $281 million-asset bank’s CEO. The bank’s loan-to-deposit ratio has increased to 75% from 65% at the end of 2017.

That ratio stood at 86% for all banks with less than $10 billion in assets, based on Sept. 30 data from the Federal Deposit Insurance Corp.

Deposit-gathering is more difficult now because many banks are paying meaningfully higher rates than they had after the financial crisis.

Credit unions are feeling the pressure, too.

For NorthCountry Federal Credit Union in Burlington, Vt., the battle for deposits has been intense over the past year, particularly for money market accounts and certificates of deposit with maturities of 24 months or less, CEO Bob Morgan said.

“We prefer more longer-rate certificates than what we’re seeing, but the premiums needed to attract those deposits are prohibitive,” Morgan said.

Some bankers are holding out hope that the Federal Reserve is done raising rates for awhile, with some buying into speculation that a rate cut could take place in the not-so-distant future. Then again, a cut would likely be the result of a slower economy, which would present its own set of challenges.

“If the economy starts to drop off really quickly, I think that there’s a good possibility that rates could go down,” said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America.

A rate cut “would send a strong signal that we’re on the cusp of a recession,” said Curt Long, chief economist for the National Association of Federally-Insured Credit Unions.

Rate uncertainty has created situations where banks are pursuing a wide variety of lending strategies.

Summit is looking to add more longer-term, fixed-rate loans to guard against a potential decline in interest rates, Duryea said. The bank has $90 million in fixed-rate loans, or triple what it had on its books two years ago.

The bank is also adjusting its securities portfolio, but with the flat yield curve, it “doesn’t make too much sense to be going out too long” with durations, Duryea said.

Many of Monona’s clients want fixed rates, though the demand reflects borrowers’ beliefs that rates could still rise.

VeraBank in Henderson, Texas, says its longer-term, fixed-rate products are now spread wider to treasuries than they had been historically. But the bank is not pricing shorter-term loans any differently relative to treasuries, which is not atypical in a flatter yield curve environment. "Otherwise shorter borrowing rates would be very similar to longer-term fixed borrowing rates, said Todd Engemoen, the $1.8 billion-asset bank’s chief financial officer.

“It’s been a moving target as to how to compete in this interest rate environment,” Engemoen said.

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