Interest On Deposits Pressures Area Banks

Higher interest rates for bank depositors are stressing local and regional banks.

Caught in a squeeze, the banks generally are reporting declining profits. Some are considering cutting staff or closing branches. Others have been propping up earnings per share by buying back their own stock.

"The customer wins, but obviously . . . the bank's negatively impacted," Provident Bankshares chairman and chief executive Gary N. Geisel said. "It's very difficult to make money or make a lot of money."

It remains to be seen whether the pressure on banks to cut costs will lead to a significant reduction in neighborhood branches, because eliminating them cuts both ways: It could reduce the banks' ability to compete for customers.

Changes in the interest rate environment have turned the normal economics of the banking business upside down.

Banks make money on the difference or "spread" between the rates they pay depositors and the rates they charge borrowers. Ordinarily, the long-term rates they can charge on loans exceed the short-term rates they must pay to compete for deposits.

But over the past few years, the spread has narrowed, partly as a result of action by the Federal Reserve. Worse for the banks, during the second half of last year, prevailing short-term rates exceeded long-term rates through a phenomenon that econowonks refer to as an "inverted yield curve," squeezing the institutions further.

"Until we return to a positive-sloped yield curve, you won't see earnings improving much in the bank and thrift business," said Steven E. Wilson, chief financial officer of United Bankshares, parent company of United Bank.

"We really don't look for that to change until summertime at the earliest," Wilson said.

Smaller banks tend to be more vulnerable to an inversion than the behemoths of the financial world, because the smaller banks have less-diversified sources of income.

In this region, homegrown banks also have faced bigger competitors, whose branches dominate the market.

For some, "the pain will become too much and they'll decide it's timely to sell," said banking analyst Gary Townsend of Friedman, Billings, Ramsey. "Most others will hunker down and wait for the environment to improve."