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WASHINGTON Lenders are moving too quickly to return to the loose underwriting standards that caused the housing crisis, according to a report released Tuesday by the Office of the Comptroller of the Currency.
December 16 -
Stronger margins are no automatic byproduct of next year's anticipated increase in interest rates. Higher rates are expected to spark a runoff of deposits at various banks, and some of those banks are more vulnerable than others to steep losses of low-cost funding.
August 5 -
A number of community banks are relying on fixed-rate loans to produce short-term profits, but the move could backfire when interest rates rise.
April 3
It's been like waiting for the rocket liftoff that never happens.
Banks eagerly anticipate a rise in interest rates, as a way to boost net interest income, and the increase may come sometime during the middle of next year,
Some banks have been preparing and waiting for what's seemed like an eternity. Their preparations have included piling up on variable-rate loans and bulking up on low-cost deposits, in order to create balance sheets that are as asset-sensitive as possible.
"If you have a highly asset-sensitive balance sheet, like we do, you're well positioned," said Doug Williams, president and chief executive of the $1.3 billion-asset Atlantic Capital Bank in Atlanta.
Many bankers may feel ready for rates to rise, but the wait has been anything but comfortable. Profit margins have been razor-thin and steadily compressing over the past year or longer.
"Our bank's net interest margins have been squeezed during this low interest rate environment," said John Womack, the CEO of Arvest Bank's central Arkansas region.
The $15 billion-asset Arvest in Fayetteville, Ark., posted a net interest margin of 3.03% at the end of the third quarter, down 73 basis points from the end of the third quarter of 2012, and down 72 basis points from the same period in 2010.
The same trend has been true across the industry. The average net interest margin for all insured institutions at Sept. 30 was 3.14%, according to the Federal Deposit Insurance Corp.'s latest Quarterly Banking Profile. That is down 29 points from the same period two years ago, and down 61 basis points from four years ago.
There have been banks that have tried to skirt the low-margin environment by reaching out on the yield curve, said Stephen Gordon, chairman and CEO of the $4.7 billion-asset Opus Bank in Irvine, Calif. Opus could have juiced its profits by the same method, but the strategy would have been too risky, he said.
"We've left a lot of money on the table by not taking those risks," Gordon said.
Not every bank can count its lucky stars. Banks that have a high concentration of fixed-rate loans, combined with variable-rate deposits and a large portion of time deposits that will mature soon, could face challenges, Williams said.
"Regulators have made a big deal out of that in their examinations, evaluating an institution's rate risk and the vulnerability they may have" when rates rise, Williams said.
Atlantic Capital's $1 billion loan portfolio is made up of about 90% variable-rate loans, "so they're subject to immediate repricing" when rates rise, Williams said.
Opus Bank's Gordon predicts there that a large number of institutions will be caught flat-footed when rates rise because they tried to reach for yield in their bond portfolios. Regulators will force those banks to take markdowns on their balance sheets and be thrust into a position where they must raise capital.
"In past cycles, I had the opportunity to see how banks screw this up," said Gordon, a former Sandler O'Neill investment banker. "It's incredible how you end up with your steepest yield curve when rates are at their lowest, and you end up with an interest rate disaster on the balance sheet."
"I sleep very well at night knowing we don't have a securities portfolio that needs to be massively restructured," Gordon said.
Many banks have tried to fortify their balance sheets by gathering low-cost deposits. The $386 million-asset CommerceWest Bank in Irvine, Calif., has focused on increasing its base of core deposits ahead of rates rising, said Ivo Tjan, the chairman and CEO. Non-interest-bearing deposits make up between 53% and 55% of CommerceWest's deposit base, and Tjan hopes to increase that figure to about 65%.
"The higher your percentage of non-interest-bearing deposits is, the better you can control your own cost of funds in a rising-rate environment," Tjan said.
"That's a mistake a lot of small banks are making," Tjan said. "When they bulked up in size, they took in a lot of certificates of deposit, or time deposits."
In some ways, service shortcomings at big banks make it easier for a community bank to maintain lower-cost funding. Wayne Doiguchi, chairman and CEO at the $119 million-asset Pan Pacific Bank in Fremont, Calif., said he will never chase after deposits by constantly boosting rates.
"For us, it's about the relationship we hold, and we want those people to bank with us because of that, so they'll not leave for a quarter-point," Doiguchi said.
Banks can also protect themselves, when a customer asks for longer-term fixed rates, by hedging specific loans with swaps or Federal Home Loan bank advances, Arvest's Womack said.
Arvest also avoided making some loans that would have exposed the institution to more interest rate risk. That strategy "probably resulted in an opportunity cost that we will not be able to quantify," Womack said.
"What we can quantify is what would have occurred if rates had risen quickly without employing these strategies," Womack said. "It would have been painful."
