Ready for New Rates

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Positioning loan portfolios for the inevitable upturn in interest rates—whenever that might be

By Howard Schneider

Don’t try to guess where rates are going,” suggests Chris Bergstrom, executive vice president and chief risk officer at Cardinal Bank, a $3.3 billion-asset community bank in Tysons Corner, Va. “All we know is that they’ll either go up, down or stay the same.”

That’s Bergstrom’s real-world observation that community bankers across the country—and occasionally their regulators—have been admitting for several years regarding the future movement of interest rates. Right now, at basically zero, they can only turn up.

Higher interest rates “are going to happen eventually,” adds Chris Jundt, senior vice president and chief lending officer at First National Bank & Trust Co., a $470 million-asset community bank in Williston, N.D. “But when—I’m not sure.”

“We can’t wait for interest rates to go up.”
—Chris Jundt, First National Bank & Trust Co.

Bergstrom notes that 10-year U.S. Treasury rates quickly moved up from 1.7 percent to 3 percent in 2013. At that time, he points out, who would have predicted that Treasury yields would come back down to 2.2 percent this year?

While it’s impossible to forecast how or when rates will move, it’s an inherent part of the banking game to be prepared for volatility, one way or the other. In fact, community banks already should have made adjustments to their loans and loan portfolios to prepare for rising interest rates, Bergstrom and Jundt agree.

Several years ago Cardinal Bank began analyzing the floor rates on its floating-rate commercial loans to ensure that loan payments will rise when the prime rate and LIBOR go up, adds Bergstrom.

Falling rates haven’t been a concern since Bank of Louisiana started putting interest rate floors on all its loans a few years ago, recalls Amber Shafer, president, CEO and chairman of Bank of Louisiana, a $53 million-asset community bank in Louisiana, Mo. “We’re not dreading higher rates by any means,” she observes. “We’ll be happy when rates go up.”

Both personal and commercial loans held by Bank of Louisiana typically are one- or three-year adjustable rate loans, Shafer says.

Commercial real estate lending makes up 30 percent of her portfolio. Home loans and farmland combine for 36 percent.

Producing loans with shorter interest rate locks is a primary goal at First National Bank & Trust, Jundt agrees. No assets at the community bank have a fixed-rate period of more than five years, and rates then are adjusted annually. All loans have floor rates, he adds.

Rapid local economic expansion has caused First National Bank & Trust to transition from being primarily an agricultural lender—with loans that reset annually—to financing more long-term commercial real estate projects. Drilling in the Bakken oil field underneath Williston has revved up the regional economy.

Williston has grown from a population of 12,000 residents five years ago to more than 40,000 today, Jundt explains. One new First National Bank & Trust lending program provides working capital for oilfield service companies.

Creating more adjustable-rate personal loans is a priority at Cardinal Bank. Bergstrom says a new home equity credit line product has been introduced this year with monthly adjustments after a 12-month introductory period.

The big picture

Bergstrom encourages community banks to adopt “a holistic view” for managing interest rate risk. He says lenders should “look at the entire balance sheet” and try to anticipate how assets and liabilities will behave in different rate environments.

Envisioning possible interest-rate movements produces “many scenarios,” he adds. He notes that the yield curve would become steeper if five- and 10-year Treasury rates rose, but the Fed funds and prime rate stayed the same. However, it’s possible all rates could ratchet up simultaneously as well.

Another concern is how quickly rates will rise—and at what point they’ll level off. Bergstrom says Cardinal Bank attempts to position its assets and funding sources to produce adequate results no matter how rates move in the future.

A low-rate environment makes it difficult to earn adequate returns on bonds or other securities held by banks. Close to one-third of Bank of Louisiana’s assets are devoted to investments, comments Shafer, while loans comprise 55 percent.

Secure deposits

Just 45 to 50 percent of First National Bank & Trust’s deposit base is being loaned out. Much of the remaining funds are in securities such as municipal bonds and U.S. Treasuries. “We can’t wait for interest rates to go up,” Jundt admits.

He explains that landowners who are leasing property to drilling companies can bring in as much as $1 million monthly. But if someone isn’t already a bank customer and wants to make a “seven-figure deposit” at First National Bank & Trust, they are likely to be turned away. The bank doesn’t have productive uses for those funds, and accepting more deposits could require the bank to raise extra capital.

“All we know is that they’ll either go up, down or stay the same.”
—Chris Bergstrom, Cardinal Bank

Shafer also benefits from having “a very stable deposit base.” Some of Bank of Louisiana’s business customers have held accounts there since its 1887 founding.

Several local municipalities also deposit their cash at Bank of Louisiana—and customers generally give the bank a chance to match rates quoted elsewhere before moving their funds, she notes.

Bergstrom says loans at Cardinal Bank “are overwhelmingly funded by customer deposits.” Superior customer service encourages depositors to keep community bank accounts, he asserts, even if other alternatives offer savers higher rates.


Howard Schneider is a freelance writer in California.