With a 25-basis-point cut in the Federal Reserve’s benchmark interest rate expected in September, some local banks are eying improved profit margins. iStock illustration

An end to successive quarters of profit margin compression at Massachusetts banks could be near, thanks to an expected September Federal Reserve rate cut that opens the door to reduced deposit expenses.

Federal Reserve Chair Jerome Powell dropped his latest hint that the central will not wait for inflation to shrink to 2 percent before cutting rates, possibly in September, when speaking at the Economic Club of Washington, D.C. on July 15.

The Fed’s benchmark interest rate has steadily climbed since 2022 and plateaued at between 5.25 percent and 5.50 percent starting in July of 2023.

For financial institutions, the current rate environment has depressed net interest margins – lenders have had to pay depositors more for the privilege of holding their money, and the higher rates have made most real estate developers and some business borrowers reluctant to take out large loans.

Among a select group of Massachusetts stock and mutual banks analyzed by Banker & Tradesman for this story, the peak net interest margin of any one bank sat at 3.9 percent in the fourth quarter of 2022 while the lowest sat at 2.32 percent in Q1 of 2024, the most recent data available from the FDIC.

The same could be said when looking at net interest income. For the majority of the banks analyzed, net interest income has been on the decline since 2023. Net interest income peaked at 3.62 percent among the group of banks while bottoming out at 2.2 percent in Q1 of 2024.

Berkshire Bank saw its net interest margin peak at 3.9 percent in the fourth quarter of 2022 but have since dropped to 3.15 percent according to FDIC data dating back to the start of 2020. Other Massachusetts banks, like Reading Cooperative Bank, saw their NIM hit 2.5 percent, or lower.

The net interest margin of a selection of Massachusetts banks, according to FDIC data through the first quarter of 2024. Image by Sam Minton | Banker & Tradesman staff

NIM on the Upswing?

During this month’s second-quarter earnings calls, some Massachusetts stock banks sounded optimistic notes.

Rockland Trust Co. reported a slight increase in net interest margin, from 3.23 percent in the first quarter to 3.25 percent, with the company’s earnings presentation saying it could increase to 3.3 percent in the third quarter.

Berkshire Bank reported a slight increase to 3.2 percent in Q2, which executives estimated could be a stable figure.

“While we expect continued funding cost pressure, the worst of the NIM compression is behind us and we’re seeing NIM tailwinds emerging such as fixed-rate assets maturing and repricing higher,” Berkshire CFO Brett Brbovic told stock analysts.

Still, Brbovic said that the benefits of rate cuts won’t be felt until 2025 and beyond. Berkshire Bank CEO Nitin Mhatre said that Berkshire is “relatively agnostic” to the current rate environment although yields on its loan portfolio will likely grow faster than deposit expenses if the Fed cuts rates.

“The balance sheet is neutral,” Mhatre said. “So, we’re relatively agnostic to the rate environment at the moment, but in this cycle, so far, our deposit betas have been at the 42 cumulative and that’s kind of where the peer averages are, but on loans our betas about 47 whereas the peer average is about 35. So, we believe it allows us to have better spreads if we continue down this path.”

The net interest income of a selection of Massachusetts banks, according to FDIC data through the first quarter of 2024. Image by Sam Minton | Banker & Tradesman staff

Expensive Deposits to Get Cheaper

Reading Cooperative Bank President and CEO Julieann Thurlow also has a positive outlook on the effect of potential rate cuts, noting that banks will be able to start cutting the interest they pay on some of their most expensive forms of deposits. Thurlow said in an interview that both borrowers and customers will reap the rewards.

“High-yield accounts are priced off the short end of the yield curve, so as the Fed lowers rates, consumers should expect the yield on their [money market deposit accounts] or high-yield savings account will be lowered in direct correlation to the Fed’s actions,” she said. “This is the point that consumers should look to extend into term accounts and attempt to lock in rates longer. Borrowers will see the benefit on the other side of the balance sheet with a lowered prime lending rate for variable-rate products such as home equity lines and consumer credit cards.”

Sam Minton

Aaron Jodka, capital markets research director at commercial brokerage Colliers, said while the Fed’s signaled rate cut will be welcome, many borrowers will wish it had come sooner.

“The market’s been waiting anxiously for those Fed cuts,” Jodka said. “The market was expecting by this time, several rate cuts in 2024.”

While any cut might seem like some relief for consumers Jodka said that a Fed rate cut this year could only be 25 basis points, which might not have a large impact.

Paul P. Schaus, managing partner at bank consultancy CCG Catalyst, said that the effects of Fed rate drops lag behind the central bank’s decisions. “You’re not going to see all of a sudden the credit card company lower their interest rates,” Schaus stated. “Rates can go up and down, but the economic factors also affect how banks will pass [along] the rate decreases and who they pass [them to] because again, on the other side, you could have losses going up even with rates coming down.”