THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Thursday, August 25, 1994 TAG: 9408250552
SECTION: BUSINESS PAGE: D01 EDITION: FINAL
SOURCE: By TOM SHEAN, STAFF WRITER
LENGTH: Long : 111 lines
Almost every week, banks throughout Hampton Roads ask themselves many of the same questions about interest rates and loan demand.
What happened at Monday's Treasury-bill auctions?
What is the outlook for making new loans?
Do we have many deposits that are about to mature?
And what is our competition doing?
Depending on the answers, bankers will decide how much interest to offer for new certificates of deposit - some of the raw material for their loans on cars, homes, and credit-card borrowing and business expansion.
Since late February, banks and thrifts in Hampton Roads have gradually boosted the rates they pay for savings certificates. That's welcome news to interest-starved savers, who have witnessed a steady plunge in CD yields since the late 1980s.
However, the averages for CD rates in Hampton Roads remain lower than what is offered in major markets elsewhere in the country, according to Bank Rate Monitor, a North Palm Beach, Fla., publication that tracks rates paid for consumer deposits.
The reason, bankers say, is because of lackluster loan demand in the region.
Nationally, rate hikes on CDs have not kept pace with the rise in the prime lending rate, the benchmark for bank loans to business borrowers and for many variable-rate loans to consumers. Bankers say the spread between their CD rates and their rates on loans is shaped by an array of factors, including expectations of future loan demand and interest rates.
When officers at Central Fidelity Bank gather each week to discuss the prices of the bank's CDs and loans, ``they are making assumptions about what market conditions today might mean for us down the road,'' said Nancy K. Eberhardt, senior vice president and retail products manager at Richmond-based Central Fidelity.
In response to the higher cost of borrowing from other banks and from the wholesale money market, banks throughout the country have boosted the prime rate 1.75 percentage points since late March. The latest increase - a half-point last week - pushed the prime to 7.75 percent.
During the same period, the interest rates paid on many bank CDs in Hampton Roads have climbed less than a half percentage-point.
In Hampton Roads, the average annual percentage yield for six-month CDs at 10 banks was 3.21 last week. That compared with a 3.53 percent average for six-month certificates at 100 institutions in 10 major markets, according to Bank Rate Monitor's index last week.
One-year CDs in Hampton Roads had an average annual percentage yield of 3.21 percent, which was less than the 4.19 percent yield on Bank Rate Monitor's index of one-year CDs.
However, the 5.58 percent average yield for five-year CDs at area banks was slightly higher than the Bank Rate Monitor's 5.53 percent yield for comparable certificates in major U.S. markets.
The rates that banks offer on their five-year CDs could dip in coming weeks. On a Treasury auction Wednesday, the yield on new five-year notes fell to its lowest level in two months. The notes will yield 6.91 percent, the lowest rate since June 22, when five-year notes sold at a 6.77 percent yield.
LOCAL BANKERS ATTRIBUTE the slow rise in CD rates to the relatively subdued demand in Hampton Roads for new loans and to an abundance of lendable funds. Without ways to put their funds to work profitably, banks have little incentive to increase what they pay for deposits.
To meet a strong demand for loans elsewhere in the state, First Virginia Bank of Tidewater recently offered an above-average rate for a five-year CD. ``The money just poured into the bank, and we had to cut (the CD promotion) off,'' said James F. Babcock, chairman and chief executive officer of the Norfolk-based unit of First Virginia Banks Inc.
Tennessee, Georgia, North Carolina and Florida have seenrobust loan growth so far this year, said Mark Vitner, an economist with First Union Corp., the Charlotte-based parent of First Union National Bank of Virginia.
But lending activity has been relatively weak in South Carolina, Maryland, and parts of Virginia, he added. ``There is (loan) growth in the Norfolk area, but it is still lagging behind the rest of the country,'' Vitner said.
ANOTHER REASON area banks have been able to hold down CD rates is the reduced competition from faltering savings and loan associations, which were fierce competitors for deposits in the 1980s.
``The biggest change (in deposit-gathering) is that we don't have brain-dead thrifts trying to bring in deposits just to keep their doors open,'' said Vitner. Many of the nation's faltering S&Ls found acquirers or were eventually closed by federal regulators.
Vitner predicted that the Federal Reserve will raise short-term interest rates once more this year and will continue hiking rates during 1995. That could push up the rates that financial institutions have to offer to attract consumer deposits.
One exception to the pattern of rate restraint in Hampton Roads has been Central Fidelity Bank, which began promoting higher-than-average rates on certain CDs in July. Offering better rates than its competitors has been part of a campaign to attract customers who will bring an entire banking relationship to Central Fidelity, not just deposits for a single CD, said Eberhardt, Central Fidelity's retail products manager.
Partly by offering a quarter-point discount on consumer installment loans, Central Fidelity has generated the loans to use the additional deposits, Eberhardt said. Although the pace of residential mortgage lending at Central Fidelity has slowed since last spring, ``we've seen good demand in second mortgages and car loans,'' she said. ILLUSTRATION: Staff color graphic
CD Rates in Hampton Roads...
...VS. the U.S. Average
Source: The banks; Bank Rate Monitor
For copy of graphic, see microfilm
KEYWORDS: INTEREST RATES
by CNB