Riding the Spread

Some deposit types are particularly sought after. “By law, banks can’t pay interest on business checking, unlike consumer checking,” says Chuck Mueller, executive vice president of Edina-based Fidelity Bank. “Those are good deposits to get.” Similarly, Mueller says, Fidelity Bank finds business savings accounts stabilizing, because they pay a variable rate that’s tied to prime. “If rates go up a quarter on my loans, prime goes up a quarter on my deposits,” Mueller says.

Other banks try to get depositors who aren’t also borrowers. “There are many industries that don’t borrow,” Zenk says, citing insurance agencies and property management firms as examples. “Many borrowers have average loan balances that far exceed their average deposit balances with the bank. To offset that, we strive to obtain non-borrowing business customers.”

Banks that need deposits find that they must offer competitive rates on interest-bearing accounts. “We do some specials on CDs when we’ve needed deposits,” says Heidi Gesell, president and chief executive officer at St. Paul’s BankCherokee. In summer 2006, for instance, the bank offered a six-month CD   at 6 percent, in part to generate notice for the bank’s new branch in Savage, and in part to get additional deposits to fund loan growth. “We knew it was a higher rate than was typical, but thought we could bring it in even though it would squeeze our margins,” Gesell says.

Banks also find it helpful to match deposit and loan durations. “Generally, you take deposits and make loans of similar duration,” Mueller says. “You build a consistent book of business where you can accurately rely on having those deposits.”

Loans and Options

Most banks have both fixed- and floating-rate loans on their books—there’s customer demand for both. In a rising interest rate environment, however, it’s important to keep a good amount of those loans on variable terms. “We try to float at least three quarters of our loans in relationship to prime,” Zenk says, noting that the vast majority of Venture Bank’s loans are commercial. “When we do a floating rate, the customer is taking the interest rate risk, particularly in a rising rate situation. When we fix the rate, we take the risk.”

At Fidelity, Mueller says, “it’s no coincidence that our primary product is short-term working capital lines of credit.” Those credit lines are variable, a variability that works in concert with the bank’s other strategies to minimize interest rate risk.