Falling interest rates hurt savers

Plummeting interest rates on savings accounts are proving to be a win-lose situation for banks and t
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Plummeting interest rates on savings accounts are proving to be a win-lose situation for banks and their customers.

As an economic malaise spoils investors’ appetite for stocks, they are increasingly looking for safe places to put their money with the promise of decent returns.

But people who retreat to Capital Region banks are not finding the high savings interest rates that popped up in 2006 amid fierce competition for consumer dollars. Savings interest rates are dropping as the Federal Reserve cuts short-term interest rates and inflation jumps to 4 percent.

Lower savings interest rates, of course, also mean lower costs for banks.

“For many savers and anyone living on a fixed income, this is a double whammy,” said Greg McBride, a senior financial analyst for Bankrate.com, a North Palm Beach, Fla., rate research and analysis firm.

Gone is the 1-year certificate of deposit with a 5 percent or greater annual percent yield. The nation’s highest-yielding 1-year CD, according to Bankrate.com, is the 4.15 percent APY offered by the Pasadena, Calif.-based IndyMac Bank.

However, similar products offered by area banks feature smaller APYs in the mid-2 percent range. Many savers use CDs to shield cash from inflation, but many now fail to achieve that goal, McBride said.

For the past two years, the balance sheets of Capital Region banks have slumped as slim gains from low-interest loans and hefty payouts on deposits dug into their net interest income. As area banks post their first quarter results this month, a growing number are showing improvements in their net interest margin — their primary driver of revenues calculated as net interest income as a ratio of average earning assets.

“If that’s growing, it should be positive earnings,” TrustCo Bank Corp Vice President and Treasurer Kevin Timmons said of banks’ net interest margin.

First Niagara Financial Corp. reported Thursday that its net interest margin rose by 0.8 point to 3.33 percent. That three-months gain followed a 0.5-point decline during the fourth quarter of 2007. The Lockport-based First Niagara Bank parent had a net interest income of 3.62 percent in 2006 and 3.75 percent in 2005.

First Niagara attributed the first quarter’s net interest margin jump to “substantial easing in deposit pricing.” It also posted a 1.6 percent uptick in net income to $18.8 million, compared with the first quarter of 2007.

Although TrustCo’s net interest margin did not rise over the first quarter, it also did not decline, instead remaining flat at 3.07. Timmons viewed that development as promising, given that the Glenville bank holding company’s net interest margin had declined during eight of the previous nine quarters. TrustCo’s net interest margin was 3.16 percent in the first quarter of 2007 and peaked at 4.03 during the first quarter of 2005.

Timmons said the deposit pricing pressure relief TrustCo is feeling comes as online banks tone down their aggressive CD tactics. Those financial institutions, such as Countrywide Bank and Citigroup, are struggling amid the nation’s credit and subprime mortgage crises.

Despite lowering rates on its savings rates from the 5 percent range, Saratoga National Bank & Trust Co. saw a “dramatic” increase in first quarter deposits, particularly with money market accounts, said bank President and Chief Executive Officer Raymond O’Conor. He attributed that spike to consumer flight from Wall Street’s gyrations.

“People are growing increasingly uncomfortable with institutions with which they are not familiar,” O’Conor said.

Saratoga National’s parent, Arrow Financial Corp., last week reported a 23.7 percent increase in first quarter earnings. Its net interest margin was 3.56 percent, up from 3.32 during the previous quarter. Arrow, which also owns the Glens Falls National Bank & Trust Co., saw its net interest margin stabilize and increase in 2007 after two years of steady declines.

O’Conor attributed Arrow’s lower savings rates to a lower federal funds rate, which the Fed has kicked down six times from 5.25 percent in September to 2.25 percent at present. The Fed has been lowering that rate in a bid to stave off a severe recession and spur economic growth.

The federal funds rate is the rate at which depository institutions charge each other for overnight funding. It also influences savings rates offered by banks.

With savings rates not even keeping pace with inflation, area financial advisers are steering clients away from safe, federally insured depository products at banks.

“There’s a million places you can put your money. It all depends on how much risk you want to take on for returns,” Timmons said.

Sanford “Sandy” Family, managing director of investments at the Sanford Family Financial Division of Wachovia Securities in Latham, is recommending tax-exempt municipal bonds that feature APYs around 4.25 percent. Joseph Ventura, manager of William Tell Financial Services in Latham, is also recommending municipal bonds and annuities sponsored by insurance companies.

“There’s still a cautious tone in terms of stocks,” Family said. “We don’t think the market has cleansed itself.”

Categories: Business

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