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BANKS ADAPT
TO MARGIN MASHING INTEREST RATES.
By Kevin Kipp
For those who make bread on the spread, declining interest rates
can mean “squishy margins.” And for the past few years, banks of
all different shapes and sizes have had to adapt.
At core, it seems to come down to what Missouri State Bank’s chairman,
CEO and president Jim Saitz calls “basic tackling and blocking”:
pay attention to the balance sheet, don’t bet on rates, earn some
fees and keep your costs down.
Moreover, in the eyes of Peter Benoist, chairman and CEO of Enterprise
Bank, a division of Enterprise Financial Services Corp., macroeconomic
relief is in sight. “Rising GDP numbers, consumer confidence and
durable purchase orders bode for rising rates in the next three-to-five
years,” he says, “even if not dramatically so.”
Paul Kalsbeek, market manager for corporate and institutional banking
at Wells Fargo in St. Louis, also sees a waxing economy, if nothing
“meteoric.” And he sees “a fairly stable interest rate environment
for the next year, assuming there are no unusual shocks to the system.
So for the next 12 months, we see steady as she goes, and that’s
okay, because it’s healthy and it’s sustainable.”
Kalsbeek says his institution—age, 150; weight, $370 billion in
assets; height, fourth largest bank in the country—is somewhat insulated
by its enormity.
“You can’t pay zero percent for someone’s savings account,” he says.
“At some point, especially at smaller banks where they’re almost
entirely dependent on deposits, margins start to squish.
“For a diversified outfit like us,” he continues, “low rates really
aren’t a help or a hindrance,” he says. “It helps that we’re the
largest mortgage lender in the country, originating something like
one out of every seven or eight. With all the new homes and refinancing,
it’s been fabulous for us.”
There is that fee income.
"I
SEE A FAIRLY STABLE INTEREST RATE ENVIRONMENT FOR
THE NEXT YEAR, ASSUMING THERE ARE NO UNUSUAL SHOCKS
TO THE SYSTEM. SO FOR THE NEXT 12 MONTHS, WE SEE STEADY
AS SHE GOES, AND THAT'S OKAY, BECAUSE IT'S HEALTHY
AND IT'S SUSTAINABLE."
Paul Kalsbeek
market manager for
corporate & institutional banking,
Wells Fargo
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If interest rates, aren’t steady, Wells Fargo is prepared, Kalsbeek
says. “We have a group in Clayton of about 100 people. All they
do is manage interest rate risk for our mortgage company through
different hedging mechanisms. It’s very sophisticated, using publicly
traded financial instruments and techniques.”
“We don’t speculate on interest rates,” he says, “It’s more like
an insurance policy.”
(In addition to those 100 hedge honchos, Kalsbeek says Wells Fargo
has about 600 employees in St. Louis and 900 more throughout Missouri.)
He cites more benefits to world-class size: “We have the lowest
capital costs of any bank in the country with a strong deposit base,
extensive deposit gathering capabilities and one of the best credit
ratings in the country at AA.”
And more. “We have the third largest insurance brokerage in the
country: Accordia,” Kalsbeek says. “And our money management and
international business—facilitating international trade—are fee
driven. You combine that with the upside from volume in consumer
lending and the mortgage business, and we’re showing record profits.”
Benoist’s five banks (three in St. Louis, one at The Plaza in Kansas
City, Mo., and one in Johnson County, Kan.) have about $1 billion
of assets. He says Enterprise is doing fine, too, but doing it differently.
Noting that St. Louis has been “a slow growth economy” for the past
couple of years, he says banks have responded to competitive and
margin pressures by offering lower rates of their own to borrowers.
“What they are tending to ignore is the risk element of the credit
that they’re quoting rates on,” he says.
Why? “In the low growth environment, they’re trying to price to
volume. At Enterprise, we continue to price to risk, and that’s
why our margins are holding up. If you’re a price-only borrower,
we may not have what you want. If you are looking for a long-term
relationship with a financial partner, it may be worth 15 basis
points on your borrowing.”
Benoist believes borrowers—whether price shopping or relationship
banking—have an historic opportunity.
“These rates are at a 40-year low. That accrues to the benefit of
our borrowers, both consumer and commercial,” he says. “Since January,
we’ve been saying to our clients, ‘From a cash flow standpoint,
if they have debt and you can lock up the rates now, lock it up
now. Don’t speculate that rates will go lower.’”
"AFTER
24 MONTHS OF THE MOST PRECIPITOUS DECLINE OF SHORT-TERM
INTEREST RATES IN HISTORY, WE OPERATE IN A LOW OVERHEAD
ENVIRONMENT."
Jim Saitz
chairman, CEO & president,
Missouri State Bank
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Saitz quips that holding three titles is one way Missouri State
Bank has responded to declining rates: “After 24 months of the most
precipitous decline of short-term interest rates in history, we
operate in a low overhead environment.”
With seven locations in metropolitan St. Louis, 90 employees, and
$540 million in deposits, Saitz can appreciate the advantages that
an organization with 600 or 700 times his bank’s assets might enjoy:
“They have off-balance sheet hedging as well as the flexibility
to concentrate in markets that are more robust, or to de-emphasize
less profitable products. But we have to play the cards we’re dealt
in this market.”
Saitz describes his game plan. “We need to improve gross margins
on our earning assets, we need to improve our ability to create
non-traditional or fee-based income, and—or we need to contain or
reduce our costs.”
Step one: Missouri State increased personnel outlays. But you just
said...
“Our most valuable assets are our people,” Saitz explains (after
apologizing for the frequency with which it is said). “They are
how we grow the business. They are who our customers do business
with. They are our advertising.”
Everything else was cut to “the barest minimum including a reduction
in the cost of gathering deposits,” he says. Missouri State put
those associates on the horn with customers, and it worked.
“Deposits held steady at a time of year when they tend to shrink
by 10 percent as people pay their taxes and corporations pay bonuses,”
Saitz says. “One hundred percent of that growth came from our lowest
cost category, demand deposits.” (If increased appropriations can
be a cut in Congress, then—sure-“holding steady” can be growth in
banking.)
He says Missouri State’s efforts to improve gross margins on earning
assets centered on improving the quality of the loan portfolio and
holding or improving rates.
As at Wells Fargo, fee income protected earnings at both Enterprise
and Missouri State.
“In the near term, the mortgage business has been strong,” Benoist
says. In the long term there’s that trust company.
Saitz, like Benoist, a Mark Twain Bank alum, says Missouri State
has also enjoyed “a remarkable improvement in mortgage loan origination
fees, consistent with the rest of the market.
“At least as important,” he continues, “we started a wealth management
program at the tail end of 2002, focused on the commercial banking
market we serve: owner-operated companies and the people who own
those companies and work within them.”
Saitz says clients continue to deal with their core relationship
manager. But back-office, support, processing and legal matters
are outsourced to a “state-of-the-art, world-wide company. Outsourcing
all that reduces costs and shortens the wait for profitability.”
After six months, Missouri State Bank had $30 million under management
and had earned $297,000. The alternative, he says, “is to build
your own system.”
Benoist says that is what his colleagues at Enterprise Trust are
doing.
“To their credit,” Saitz says, “they have a long-term approach to
profitability; they’re willing to wait the four-to-seven years it
takes.”
Patient or not, Benoist says since its establishment in 1998 under
the leadership of Paul Vogel, Enterprise Trust—now with $1 billion
under administration—gained the distinction as the fastest growing
trust company in the United States during two of the intervening
years.
"THESE
RATES ARE AT A 40-YEAR LOW. THAT ACCRUES TO THE BENEFIT
OF OUR BORROWERS, BOTH CONSUMBER AND COMMERCIAL."
Peter Benoist
chairman & CEO,
Enterprise Bank
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What’s more, Benoist says, “The fee is not the focus. There are
a lot of ‘middle market’ business owners looking at asset transfer
and succession issues. Those are our customers and that’s our trust
company’s mission—to put together a plan that benefits them and
their family. Once we get that squared away, we’re confident that
at some point we will manage the assets.”
Then, let there be fees.
Meanwhile, Enterprise Trust is about on schedule, as described by
Saitz. Benoist says, “Our trust operations reached break-even after
four and a half years. It will make money next year.”
Just in time for margins to firm.
Kevin Kipp runs Bubble Communications, a creative services and
community relations firm in St. Charles.
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