Title: Rational Pricing Makes a Comeback: Uptick in Net Interest Margins Results from Reduced Competition, a Normal Yield Curve, and Ability to Set a Floor. "We're Still Lending"
Abstract: Combine low-cost funds with an influx of de novos and nonbank lenders plus a booming economy and it's not surprising that net interest margins have been squeezed. Actually, margins for the industry as a whole have been trending downward since the end of the last big banking downturn (see nearby chart), reaching their nadir early this year. Now that the ranks of lenders have been thinned, and borrower demand cooled off, margins have turned back up. Was that the bottom? Several bankers interviewed believe it was. But when it comes to margins, industrywide figures are not always relevant. Much depends on balance sheet composition, deposit pricing, local market conditions, and more. One thing all agreed on, however: higher margins are better! Furthermore, net interest income is still the key to bank performance, and has become even more so with increased pressures on service charges and less-than-stellar success in building noninterest income from other sources, such as Trust or securities brokerage. The latter point applies mainly to community and midsize banks. Large banks generally speaking have been more successful building fee-based businesses. Arthur Johnson, newly elected ABA Chairman and CEO of United Bank of Michigan, Grand Rapids, commented recently that the upward movement of margins is particularly important right now. Every other element of our revenue stream is under extreme pressure, and we've got to make money at something. [ILLUSTRATION OMITTED] In rural Missouri, John Klebba reports that margin pressure has been much less than in urban markets. Of the eight communities where Legends Bank operates, only one--on the western fringes of St. Louis--saw extreme pricing behavior, says Klebba, who is chairman and president of the $235 million-asset based in Linn, Mo. That behavior was driven in part by a large number de novo banks and branches, he says. We saw deals [priced] far below where they should have been, just to get the business, says Klebba. Now, he adds, we're starting to see pricing there based more closely on risk. I have a real sense it's going back to the models, says Klebba. By old models, he means traditional intermediation-based banking, which is what Legends Bank does. We never really transformed ourselves into a fee-based bank, says Klebba. The bank's net interest margin, in contrast to the industry average, has stayed pretty close to 4% for years. It's a little under that now because with Fed funds below 20 basis points, it's difficult to keep the margin at 4%. In south central Ohio, Park National Corp. Chairman and CEO Daniel DeLawder likewise sees more rational pricing of late. As a general rule, the big banks are not lending that much in his markets, he notes. Community banks like the 12 banks that comprise the $7 billion, Newark-based holding company he heads are still lending, however. With less competition, rates can be set higher. Return of the rate floor Like several banks contacted, Park National has instituted a rate floor to compensate for the unusually low prevailing rates. When rates fell to 3.25%, we understood what the Fed was doing, says DeLawder, we said to ourselves, 'We don't have to lend at that rate'. The bank set a floor at 5%, with some exceptions. Some existing customers who were at prime, stayed there, but new customers come in at the floor. With large banks not lending, Park was able to grow its loan portfolio at the higher rate and improve its margin, which at 4.22% is 75 basis points above its peers among $3-$10 billion banks. That margin was up from 4.16% for all of last year, but down from the 4.50% range in 2006-7, according to DeLawder. Cost of funds, of course, is part of the equation and Park National enjoys a 36 basis point edge there over peers, as well. The traditional model for community bank commercial loan pricing has been a floating rate above prime (or LIBOR). …
Publication Year: 2009
Publication Date: 2009-11-01
Language: en
Type: article
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