Cleveland Thrifts Expect Relief as Federal Reserve Anticipated to Raise Interest Rates

Strategic Insights -

The impending interest rate hike by the Federal Reserve, scheduled to meet on June 29, may bring welcome relief to Cleveland area thrifts struggling with declining net incomes due to low mortgage loan rates. Despite long-term rates hitting bottom last fall, banks have seen their net interest margins dwindle, with many reporting their lowest levels in a decade. However, experts believe that the interest rate increase may provide some reprieve, allowing thrifts to regain their footing and potentially improve their financials.

Key Takeaways:

  • The Federal Reserve is expected to raise interest rates for the first time since 1997, which could provide relief for Cleveland area thrifts struggling with low mortgage loan rates.
  • The decline in rates charged on mortgage loans has squeezed net incomes for thrifts, with many reporting their lowest net interest margins in a decade.
  • Thrifts have been trying to diversify their loan portfolios to counteract the decline in long-term rates, with some focusing on short-term consumer loans and commercial mortgages.
  • Charter One Financial Inc. has reduced its loan portfolio tied to residential mortgages from 77% in 1995 to 56%, and Great Lakes Bank is focusing on reducing interest expenses through products such as interest-free checking and commercial accounts.
  • Historically, when the Fed hikes the discount rate, banks usually move to raise lending rates before deposit rates, potentially pushing up net interest income.
  • Cleveland-area thrifts have been "getting squeezed" by the decline in net interest margins, with some net interest margins as low as 2.76% in the first quarter of 1999, compared to 4% in 1997.

Statistics:

  • The Federal Reserve is expected to raise interest rates for the first time since 1997.
  • The net interest margin of Metropolitan Financial Corp. fell to 2.76% in Q1 1999, compared to 3.45% in the same period in 1998 and over 4% in Q1 1997.
  • Charter One Financial Inc.'s loan portfolio tied to residential mortgages decreased from 77% in 1995 to 56%.
  • Great Lakes Bank has around $105 million in assets.
  • Charter One Financial Inc. has $25 billion in assets.

Sources:

  • "Federal Reserve expected to increase interest rates." Cleveland Plain Dealer, June [citation missing]
  • "Area thrifts pray for interest rate relief." Cleveland Plain Dealer, June [citation missing]
  • Interview with Richard T. Flenner Jr., President and CEO of GLB Bancorp Inc. in Cleveland Plain Dealer, June [citation missing]
  • Interview with Ellen Batkie, Director of Investor Relations at Charter One Financial Inc. in Cleveland Plain Dealer, June [citation missing]
  • Interview with Jim Kirk, Chief Investment Officer for the private investment advisers at National City Corp. in Cleveland Plain Dealer, June [citation missing]
  • "KeyCorp's Mayland: Interest rates likely to rise." Cleveland Plain Dealer, June [citation missing]