As St. Louis Fed President James Bullard said at the recent WBA Economic Forecast Luncheon, 2019 was a "tumultuous" year for rates. After raising the fed funds rate by 25 bps each quarter in 2018, the FOMC decreased rates by 25 bps on Aug. 1, Sept. 19, and Oct. 31 in 2019. While this dramatic fluctuation works to stave off or mitigate an economic recession, it has also wreaked havoc on bank margins by shrinking yields on the short end of the yield curve. The infinitesimal spread between the short end of the curve and the five- to seven-year range is causing "margin havoc," according to Nate Zastrow, executive vice president and CFO at First Bank Financial Centre, Oconomowoc.

"The current shape of the yield curve is the primary challenge to NIM going into 2020," explained Christopher Del Moral-Niles, executive vice president and CFO at Associated Bank, N.A., Green Bay. "We would hope to see a more sloped yield curve emerge, ideally with a stable front end and a higher long end of the curve." Until the shape of the curve changes, banks are under pressure on both sides of the books. "Banks are struggling to keep healthy margins because of the competitive nature on both sides of the balance sheet," said Ami Myrland, CFO at Capitol Bank, Madison. To effectively push back against margin compression, bank leaders must deploy strategies that address issues on both sides of the balance sheet. "Margin comes down to small decisions," said Marc Gall, vice president at BOK Financial Corporation. "It's a combination of many small actions that result in performance."


On the liabilities side, banks are playing a giant game of chicken with all depository financial institutions; no one wants to be the first to lower rates and potentially lose deposits as a result. Fortunately, rates have started to fall—albeit slowly—and should continue to do so, according to Niles. "From a NIM strategy perspective, we are also carefully monitoring deposit pricing trends, which we believe should continue to trend lower into 2020," he said. 

Potential Strategies:

Maximize Value from Current Customers ⇒ If your bank originates mortgages, Gall advises using the deposit statements collected as part of asset verification to determine if those customers keep deposits elsewhere. If so, bring in those outside balances; encourage customers to consolidate their funds with you. Also, identify which deposit accounts are rate-sensitive (Ask how was the account sold? What is it used for? What is the average balance? etc.) and determine whether the bank can lower rates a few basis points without losing a significant number of deposits.

Consider Brokered Deposits ⇒ Still shaking off a bad reputation from the S&L crisis in the 1980s, brokered deposits could become a useful tool for banks to get some breathing room. The FDIC released a proposed rule modernizing the regulatory treatment of brokered deposits; the previous rule was enacted in 1989. For example, banks might now seek a partnership with a fintech company where the fintech provides deposit or payment services and then deposits consumer funds into an account at a bank.

Focus on Sales ⇒ Gall recommends training front-line staff, anyone who has contact with current or potential customers, to bring balances into the bank by discovering how to better serve customers (finding the right type of account, etc.). "The banks I've seen have success use more of a sales process where they really engage with their customers on a one-to-one basis," he said.

Make Alternative Adjustments ⇒ Myrland says their current NIM management strategy is to continue doing what's best for their customers in an effort to retain them. "Ultimately, we may make less margin, but we can try to combat that in other ways like driving non-interest income and managing expenses."


On the asset side of the balance sheet, intense competition has forced rates even lower than the yield curve pushed them down. "To make up for the tightening margin, banks need volume," Zastrow explained. "In a low-growth market, volume comes from refinancing credits from other institutions, pushing prices further down." The silver lining is community banks don't typically cater to price shoppers, so they maintain some control over pricing in those relationships. 

Potential Strategies:

Add Value ⇒ "Banks that have better margins have found a way to add value for their customers beyond just price," said Gall. "For commercial lenders, that means understanding your customers' business." Providing a better customer experience than the competition allows the bank to extract a few more basis points on the transaction. 

Price to Risk, Not Rates ⇒ Price to your risk appetite and credit risk instead of the market rate. "Pricing and credit decisions are becoming eerily similar to the ones made before the last downturn," said Zastrow, who also noted that each bank's balance sheet should be structured to fit their philosophy and niche.

Be Odd ⇒ Don't default to round numbers when pricing loans. Gall suggests 1-10 bps increments versus a more traditional 25 bps. "There may be a negotiating point where you can get a slightly more advantageous rate by not always landing on nice round numbers," he said. 

Leverage Your Investment Portfolio ⇒ Since the investment portfolio is a large piece of the margin puzzle and banks control it directly, manage it to offset risk in other areas. "Don't set and forget your investment portfolio," said Gall. "Reviewing it more frequently so you can get more yield and protect against risk is an easy way to help your margin."

Seitz is WBA operations manager and senior writer.
BOK Financial Institutional Advisors is a WBA Gold Associate Member.