To reduce interest expense and boost liquidity, a growing number of community banks are cutting the rates they pay on standard certificates of deposit while offering one dazzling, high-rate CD.
The technique, termed "predatory" or "transfer" pricing, has been used by larger banks for years. But to attract the deposits needed to fund loan demand while keeping costs down, many smaller banks are now following suit.
"Aggressive pricing on CDs is really catching on," said Thomas J. Parliament, president of Parliament Consulting Services Inc., Johnsburg, Ill. "CDs are used for short-term liquidities, so you shouldn't pay for them like lifetime savings."
About 50 bankers at a session of last month's Bank Administration Institute conference for chief financial officers in San Antonio heard Mr. Parliament's tips for repricing CDs.
After reducing the interest rates paid on all CDs, banks need to offer the local market's highest rate on an odd-term certificate to draw in new funds, he said. Odd-term CDs are used because, at maturity, the deposits automatically roll into a standard, low-rate certificate. For example, a high-rate, 13-month CD might roll into a low-rate, 12-month certificate, Mr. Parliament said.
Community bankers who have tried predatory pricing say it has worked. In fact, many bankers interviewed for this article asked not to be identified for fear their competitors would learn about their programs.
One such bank, a $200 million-asset community bank in Indiana, has increased its deposits by 16% but cut its overall cost of deposits by 0.05% since adopting such a program in March. Its chief executive officer said the bank had brought in $16 million of deposits this year and hopes to add $4 million by yearend.
Willow Grove Bank, Willow Grove, Pa., has used the tactic to help fund growth in its assets of 44%, to $360 million, in two years. One odd-term CD special brought in $17 million in new deposits in eight weeks, according to John J. Foff Jr., Willow Grove's chief financial officer. Willow Grove has also saved about 0.10% on its deposit costs overall. "Deposit interest rates are the single biggest expense on your balance sheet, and you have to do something to control that," Mr. Foff said.
In addition to reducing deposit costs, a $100 million-asset bank in Pennsylvania is also using fresh deposits to boost liquidity levels. The bank's CEO said the deposits help the bank meet the market's growing loan demand.
Mr. Parliament said most customers allow their CDs to roll over into lower-paying certificates. Mr. Foff said Willow Grove retains about 80% of its price-shopping CD depositors.
To keep customers who do want to leave, one community bank in Florida has authorized bank employees to offer unhappy customers higher rates on their CDs within an approved range.
"It makes the client feel like they're special and they're getting something that's not offered to everyone," the bank's marketing director said. u