Earlier this week, our COO shared with me a recent WSJ article titled “Banks’ Cry, Give Us Your Cash”. The gist of the story is that our national savings rate is at an all-time low, while loan demand remains high, which translates to Banks (and Credit Unions) scrambling for deposits to fund loan demand. This article definitely struck a nerve with me, as I spend much of my working day trying to figure out how Verity is going to continue to fund loans while maintaining an ample interest margin. Interest margin is the difference between the rate we charge for loans and the rates we pay on our deposits. This margin is the primary source of revenue for banks and credit unions and provides for us the resources to build branches, offer technology and maintain a skilled staff.
Verity, and most other financial institutions have seen margins erode during the past 12-18 months. This is due in large part to the flat/inverted yield curve, where short term rates are equal to or higher than longer term rates. Most financial institutions price their deposits off the short end of the curve, while loans are priced off the longer end of the curve. Another major factor, as I alluded to earlier, is the low/negative national savings rate. Increased competition, including sky-high rates and fantastic offers is a third major contributor to our margin squeeze. We did this ourselves with our recent “Pick Your Term” CD special where we offered 5.6% APY for a 6, 9 or 12 month CD. While the dollar results of that special were fantastic (it was our largest dollar-growth special ever), I am finding it difficult to find investment outlets for those dollars where Verity can make much of a spread.
“So what’s your point”, you might ask. I think 2007 is going to be a very interesting and challenging year for financial institutions. We at Verity are not forecasting much of a change in interest rates, at least for the first part of the year. That means, if we want to grow we will need to be aggressive with rates and innovative with products. That’s ok, we’ve got some great things in the hopper and at the end of the day, it’s great for consumers; especially those with dollars to deposit.
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