Rates, regulation make bank business a challenge

03/01/2014 11:33 AM

03/02/2014 8:03 AM

Last year proved to be a tough environment for Wichita-area banks, and 2014 promises much of the same.

Bankers said persistently low interest rates and more and more regulation are making it harder to show profits in banking.

“It’s a challenge, and it’s a challenge every day,” Brian Chamberlin, CEO of Andover State Bank, said of the banking business today.

One challenge is winning new commercial loans. Chamberlin said because such deals are few, there are many banks competing for the same business. What makes the difference generally is price: The bank that offers the lowest rate wins. He said an interest rate between 3.75 percent and 4.25 percent can provide enough margin to make some profit.

In highly competitive loan deals, Chamberlin said, it’s not unusual to see some competitors offer a 3 percent interest rate on a five-year, fixed-rate loan.

“If somebody needs a loan bad enough, it forces you to play ball in that rate arena or let it go,” he said. “Sometimes you’ve got to let it go.”

Chamberlin said competing on rates is harder for smaller banks such as his, which has $68 million in assets.

Brad Elliott, CEO of $1.2 billion-asset Equity Bank, said overall demand for loans, especially commercial ones, is still relatively low.

“We would like to make more commercial loans than we have demand for,” Elliott said.

Related to the competition for loans is the growing expectation of a slow climb in what have been historically low-interest-rate loans.

While it may seen that higher interest rates would be welcome by bankers, it’s the transition from low to higher interest rates that has banks and their regulators concerned.

“Interest rate risk is really tough,” Equity’s Elliott said.

Such concerns prompted federal bank regulators late last year to formally alert banks that they needed to prepare for interest rate risk. The Federal Deposit Insurance Corp., for instance, produced a video for bank officers and directors on preparing for and managing interest rate risk.

The concern over interest rate risk is monetary loss. If a bank doesn’t manage its interest rates, it could be caught in a situation where its profits disappear because the rates on the payout of deposits – such as certificates of deposit – swing higher at the same time their loans are still locked into lower interest rates.

If that isn’t enough to worry banks, they can think about regulation and compliance. Many of the new rules and requirements come from the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, and the recently created Consumer Financial Protection Bureau.

For example, Elliott said a new regulation that emerged from Dodd-Frank concerning certain mortgage clients that went into effect in January is making it difficult for some of his bank’s “good borrowers” to obtain mortgages.

In turn, “it’s making it difficult for us to make mortgages,” he said.

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