The Federal Reserve's latest hike in short-term interest rates is adding more fuel to the already hot market for certificates of deposit, bankers said in a round of interviews last week.
The Fed's Feb. 1 decision to raise key short-term rates by half a percentage point has convinced some bank customers that interest rates have peaked, according to Peter M. Martin, president of Provident Bank of Maryland, Baltimore.
As a result, customers of the $2.2 billion-asset bank are shifting to longer-term CDs. "They're viewing it as an investment," Mr. Martin said.
He said the bank pulled $8 million into its certificates of deposit over the last four months. At the end of January, the bank had a total of $254 million in its CDs.
The bank's gains reflect the dramatic growth in small CDs - those of $100,000 or less - at commercial banks and thrifts nationwide.
In the first four weeks of 1994, deposits these CDs grew at an annualized rate of 26.9%, to $836.4 billion, according to Federal Reserve data. That's well above the 7.2% growth rate for the 12 months ending Jan. 23.
Though deposit balances for early February aren't yet available, the Fed rate hike is likely to have accelerated the growth. According to Bank Rate Monitor, Boca Raton, Fla., average one-year CD rates have risen by five basis points, to 5.83%, since the Fed's Feb. 1 rate hike.
Bankers expect even more money to flow in as rates rise, and many are eagerly working to get their fair share.
Among these bankers is Rodney B. Scarborough, president of the $84 million asset Pee Dee Bank, located near the Pee Dee River in Timmonsville, S.C.
"We're having a lot of difficulty funding our asset growth and we're fighting for this CD money," he said.
Mr. Scarborough explained that his bank started suffering from an exodus of money from CDs two years ago as customers switched into more lucrative investments.
But, he added, the outflows have reversed recently. And Pee Dee Bank is aiming to get even more money by aggressively marketing a "money market CD" which is a money market deposit account that pays interest pegged to the prime lending rate.
Another bank that is getting more CD money since the Fed rate hike is Bank of New Mexico, Albuquerque. George L. Clark, president of the $260 million-asset institution, sees a clear reason for the turnabout: Every time the Fed has raised interest rates, the bank has paid higher yields on its CDs.
To make sure the money keeps rolling in, last April the Bank of New Mexico rolled out an indexed CD tied to rates on one-year Treasury notes. The product has been a barn burner for the tiny bank, raising more than $40 million of new deposits by yearend.
"I think some people put their money in mutual funds and got burned," Mr. Clark said. "They're probably thinking, 'I should never have gotten out' of CDs."
Amy Celento, a vice president of the $15.5 billion-asset UJB Financial Corp., Princeton, N.J., said that her institution, too, has been getting more CD money since the Fed rate hike.
But the inflow has not been nearly as steep as the approximately $200 million the banking company got from a CD promotion in January, when CDs with above-average rates were offered through branches on a Saturday.
Sharon E. Fawcett, a spokeswoman for Society National Bank, Kokomo, Ind., said that rising rates appear to be pushing many bank customers to chase the highest CD rates they can find.
As a result, area banks have started a rate war to offer the best deals. Indeed, soon after Society, a unit of Cleveland-based Keycorp, started advertising a 23-month CD with a relatively attractive 7% annual yield, rival First of America Bank started selling one, too.
The difference, Ms. Fawcett said, is that the required $500 minimum deposit for her bank's CD is half that of First of America's.
"You'll always have the loyal customers who stay with the bank," she said.
But she added, many rate-conscious customers are actively looking for the best deals.