Federal Reserve Board Chairman Kevin Warsh speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 16, 2026. The Fed’s decision to raise its benchmark interest rate is foregrounding balance-sheet challenges at local banks. Photo by Mark Schiefelbein | Associated Press

With interest rates rising for the first time in three years and long-term bond yields on the rise, Massachusetts banks have to sort out a trio of problems.

Increasing interest rates squeeze multiple areas of a bank’s balance sheet. There is increased competition for deposits while commercial real estate loan repricing and future involvement in CRE lending can shift.

Taken together, it means banks trying to grow will face more headwinds.

If Massachusetts bankers had been told this at the beginning of the year, they would have been surprised according to the bankers and industry experts interviewed for this story. The expectation was for more rate cuts but that changed when Iran war began, they said.

The Federal Reserve recently decided to increase its benchmark short-term interest rate by 25 basis points to a targeted range of 3.75 percent to 4 percent. The hikes are its first since 2023.

And U.S. Treasury bonds have been forced to sell at higher interest rates amid competition from corporate bonds backed by AI investments and early market worries about energy-driven inflation fears.

This all trickles down to Massachusetts’ community banks.

The Problem: Future Rates

Currently the effective federal funds rate is actually lower than it was a year ago. In 2025 the EFFR was 4.09 percent according to the Federal Reserve while currently the EFFR sits at 3.88 percent. But bankers expect that there will be two more hikes within the next six months, according to Cambridge Savings Bank CFO Dan Carey. And that’s what’s forcing bankers to start making plans now.

While the EFFR serves as a primary economic indicator, banks are tracking other yields. Federal Reserve data shows the 10-year Treasury rate climbed from 4.15 percent in September 2025 to 4.96 percent in September 2026. The 30-year rate rose from 4.77 percent to 5.29 percent over the same period.

“Long-term rates going up almost the full [100] basis points in a short period of time is very fast, very difficult to navigate that kind of change in the environment,” South Shore Bank Chief Commercial Banking Officer Stephen DiPrete said.

Balance Sheet Pressures

Rising interest rates mean if a bank wants to grow its deposits – fuel for what actually makes banks money – they must offer higher rates, especially on products like certificates of deposit and money market accounts.

But not every institution is willing or able to pay more for its deposits. If they are unable to afford it, they risk customers moving some or all of their money to a more lucrative option elsewhere.

“Now that rates are going up, you’re going to see a lot more competition for those dollars,” Carey said. “There’s a lot of pressure with pricing across every industry right now so that’s the benefit of it. I think anytime we have a rate movement, CSB is well positioned, from a balance sheet perspective, to take advantage of it. We want to grow new customers and we want to do the best by our customers. Volatility can provide opportunity as well.”

Banks across Massachusetts will also have to deal with loans that are coming to term, especially ones made during the COVID-19 pandemic.

That can put a strain on borrowers. Higher rates will eat into their cash flow, DiPrete said.

“It’s a concern for the banks,” he said. “It’s a concern for the client, and yes, it can stress the property significantly. That is a challenge, and is probably going to continue to be.”

This can lead to a “rightsizing” of a loan when it no longer meets the underwriting standards that a lender has or can’t service its debt. Lenders will ask for additional equity or some sort of payment reserve in these cases, according to DiPrete.

Loan Rates Headed Higher?

The changes in the rate environment also have an effect on future CRE lending. With costs increasing due to higher rates, the ability to lend can become more difficult. Up until this point, many banks were hesitant to raise their rates due to competition for loan customers, according to Darling Consulting Group Managing Director Jeff Reynolds.

Now, the trajectory of both short- and long-term rates has intensified downward pressure on bank growth, according to Reynolds. Banks will need to create new frameworks for their lending to deal with higher costs, he said.

While banks do have the capability to hold firm on rates even when the Fed makes changes, banks can feel forced to update rates according to DiPrete or even decide not to go through with a project.

“The bank doesn’t need to make that decision,” he said. “Higher interest rates [means] less ability to leverage. Therefore, you can only lend so much on a certain loan or a certain project. Once you start doing the numbers, the decision’s really made for you.”

Mutuals Feel It Differently

While banks have been able to take advantage of low rates to expand their net interest margin, loans coming to term and not being replaced on a bank’s books by new loans have impacted cash flows according to Reynolds. This can add some stress when a bank is focused on increasing earnings.

“Because publicly traded companies are answering to shareholders, I think they’re going to be more compelled to hit the accelerator on growth, more so than mutuals,” he said. “[Mutual banks] just don’t have a shareholder base to report to, and if they’re profitable, they probably have a little bit more latitude to see how this environment goes.”

After working at both types of banks, Carey said he found outside pressure can impact publicly traded banks more than mutuals.

Sam Lattof

“You can get a lot of pressure from outside voices,” he said. “From voices that don’t necessarily live in this area, either. We [mutuals] want to do what’s best for the customer. That pressure is certainly to be there for the customer, which means higher rates and can lead to changes in profitability, but maximizing profitability is not our main goal.”

Whether a mutual bank or a publicly traded one, Reynolds believes banks need to focus on the needs of a balance sheet and not solely what the rate environment is like.

“The best piece of advice that I could give community bankers is to look at what their balance sheet risk profile is and let their balance sheet tell them what to do or what it needs,” he said. “Don’t manage your balance sheet based off of a rate forecast.”

Additionally, bankers need to be skeptical when it comes to the trajectory of the economy according to DiPrete.

“As a banker, you should be preparing for the worst,” he said. “You should be preparing for higher vacancies or lower sales prices and stress testing your portfolios and stress testing underwriting sensitivity. In addition to preparing for more challenging economies, you should be prepared for higher rates. There was a time when 6.5 percent was the rate we used to stress our portfolio, now that’s the current rate.”