Bankers have been thinking and preparing for “rising rates” since December 2008. It has been a month since the first “baby step” toward higher rates was executed (Fed Funds and Prime moved up 25 basis points) and we have seen very little effect on the vast majority of the banks we work with.
In fact, only a few banks made the decision to raise rates approximately 25 basis points on their non-maturing deposits while leaving their time deposits alone. The rationale for immediate action was based on the notion that an increase now will hopefully allow them to stand pat for at least the next move, and maybe the next two increases. The greatest increase in the COF (cost of funds) we noticed was about three basis points. But, most community bankers shrugged their shoulders and took the wait and see approach. As it turns out, considering the current price of oil and the slowing Chinese economy, the next move may be much later than we anticipated. So, wait and see was a good choice.
The increase in the National Prime Rate (New York Prime if you like) of 25 basis points actually has a positive effect on some loan portfolios. For those bank’s with variable rate loans at or above their floors and not contractually locked out (i.e. they were immediately repriceable), a 25 basis rate increase hit the books increasing interest income. In banks with a large percent of their loans in this category the income received will be significant. Plus many banks improved their position for the next rate hike because many of the rates (index plus spread) moved closer to “piercing the floor!” Of course floors are a good thing when rates decline and remain low, but if the rates (index plus spread) are substantially below the floors there is a fair amount of “wheel spinning” before the floor is actually pierced, thereby delaying the increase in income.
In terms of fixed rate loans, very few banks have been able to increase rates they receive based solely on the Fed move. We monitor the “offering” rate on every single loan made (both fixed and variable) in every bank and to date we have seen no material rate increases. Unrelated to the Fed move however, many Ag banks have suggested that they may be increasing rates as loans renew because of cash flow issues related to cattle and grain prices. If you want to see what the market is saying how you should be pricing your fixed-rate loans, then use our Loan Builder
to find out.
Many of the economic “gurus” have toned down their expectations of further rate hikes this year, but you should be prepared for the unexpected. Determine how an increase in deposit rates will impact the COF and thus the Spread and Margin. Know what the cost is before you make the move, and compare the income expected to be received (if any) from the variable loan portfolio.
In short, be prepared for “rising rates”, even if they may not be expected any time soon. You never know.