Slideshow Dilemmas for banks in new rate environment

  • March 17 2017, 4:39pm EDT
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Banks eagerly raised their prime rates after the Federal Reserve’s latest rate hike, but the debate about how they should react on the deposit side is robust, and conversations are beginning on how to respond on the investment portion of the balance sheet. Here is a sample of the lively discussion that is emerging.


It’s no secret — lenders have been thirsting for higher rates to boost margins after years of getting little bang from loan growth. Each Fed increase has been incremental, but after three quarter-point hikes in 15 months and more expected to come, the revenue impact should become more noticeable. Five Midwestern banks, including U.S. Bancorp and Huntington Bancshares, announced they were raising their prime rates to 4% immediately after the latest Fed action.

But small banks are perhaps the most enthusiastic as many of them had fewer sources of noninterest income to fall back on during a decade of accommodative monetary policy. “We’re so dependent on the net interest margin that any increase in rates” will make a significant difference, James Sills, CEO of the $256 million-asset M&F Bank in Durham, N.C., said Wednesday.

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Shh … Don’t tell depositors

Bankers did a lot in recent years to trim higher-cost deposits, and many are reluctant to return soon to the days of higher-yielding certificates of deposits and other savings. For example, the $125 billion-asset Regions Financial in Birmingham, Ala., plans to hold off as long as possible on raising deposit rates. “We have to be competitive, and we will be, but we don’t have to rush the increased rates,” Chief Financial Officer David Turner said recently.

Then again, customers will probably wise up

Depositors, out of a yearslong habit, may stay patient for a while. “The consumer really hasn't been sensitized to a true rate cycle,” Gagan Singh, PNC's chief investment officer, said at a recent conference, referring to the fact that the rate increases so far were small and took so long to occur.

However, eventually banks will need to adjust deposit pricing. "When rate increases start happening with shorter intervals inbetween ... then you start to see reactivity come up because consumers start to wake up a little bit to what's going on,” Darren King, CFO at the $126 billion-asset M&T Bank in Buffalo, N.Y., said during an investor conference.

Go ahead and deliver for savers

Sometimes it pays to be small and nimble. The $4.5 billion-asset Middlesex Savings Bank in Natick, Mass., started raising deposit rates immediately after the previous two rate hikes, "and we didn’t see many followers," CFO Brian Stewart said Wednesday.

Mutual thrifts like Middlesex have more flexibility to reward customers with higher CD yields sooner than publicly traded banks, Stewart said. "We're in business for our depositors and our borrowers, and we feel like it's the right thing to do," he said.

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Anchors aweigh!

In anticipating multiple rate actions by the Fed this year, many bankers began booking more floating-rate loans.

"Due to the higher level of variable-rate loans produced in the quarter, we will certainly benefit from a rising rate environment going forward," Jim Sandgren, chief operating officer at the $15 billion-asset Old National Bank in Evansville, Ind., said during an earnings conference call in January.

That is looking like a good move considering that expectations firmed this week that two more rate increases could be coming this year and three more next year.

Managing the investment portfolio

The $15 billion-asset United Bankshares in Charleston, W.Va., has "just held our powder dry" in its securities portfolio, but a rebalancing could ultimately be in order, CFO Mark Tatterson said at a recent investor conference.

"If we see rates rise, we have opportunities to do more in the investment portfolio than we’ve done the last couple of years," Tatterson said. For example, United could change the mix of its securities portfolio to hedge against a decline in mortgage refinancings, he said.