Lately, lenders have relied on rock-bottom interest rates to spark an otherwise sluggish lending market – a strategy that can eventually hurt unwary banks’ balance sheets. And according to one analyst, the northeast’s highly competitive banking environment has likely pushed local institutions to be less cautious than they should be.

In an examination of 7,000 banks nationwide, Weiss Ratings pinpointed the northeast U.S., including New England, as being the region most exposed to risk as interest rates rise and squeeze balance sheets.

The company’s claims, however, are a matter of some debate.

“They have dramatically overstated the situation,” according to Bruce Wandelmaier, treasurer for Webster Bank, who said the company was irresponsibly spreading false information. Webster, based in Connecticut but with locations in eastern Massachusetts, was specifically called out as at-risk by Florida-based Weiss.

Weiss Ratings found that nearly 74 percent of its surveyed banks were highly vulnerable to rising interest rates, and that the northeast had the biggest concentration of at-risk banks. Among large banks with $10 billion or more in assets, Webster and First Niagara Bank – which has locations in central Massachusetts after its recent acquisition of NewAlliance Bank – were among the top-10 most vulnerable. First Niagara’s treasurer, Michael Harrington, also strongly disputed the Weiss report, saying the bank was in far better financial health than the researcher suggested.

“The information in the report is wrong – it’s factually incorrect.”

Intense Competition

Weiss largely drew its conclusions from call reports, which are public regulatory filings. Wandelmaier said call reports are not detailed enough to show the full picture of a bank’s rate risk, an assertion Weiss strongly contradicts.

The question is an important one, as the historically low rate environment has created a classic environment for risk.

Put simply, interest rate risk is the danger that comes from loading one’s books with long-term, fixed-rate loans in a low-rate market. That low-rate income is locked in for years to come, but interest rates paid on deposits are shorter-term and more volatile. Rising deposits will become more costly, while banks’ income would be constrained by loans made cheaply during low-rate periods.

“Everybody is worried about rising rates – and you have to be worried about it. Because if you don’t do something, you’re going to have more problems,” said George Darling of Newburyport-based Darling Consulting Group. Darling couldn’t say whether the northeast was particularly at-risk for this problem, but he questioned whether call reports would provide enough data to make Weiss’ claims.

Banks generally hedge against these risks by selling off their lower-rate, long-term loans to the secondary market and getting them off their books.

That’s the strategy of Arlington-based Leader Bank, which has grown its mortgage business in recent years. President Sushil Tuli told Banker & Tradesman that the bank would actually benefit from a rate increase, as $58 million of its portfolio is in home equity lines of credit that will adjust upward along with rising rates. And as refinance business dries up, the lender is working to attract purchase business from first-time homebuyers, he said.

Customers want to get loans at low rates and deposits at high ones, Darling said, so banks have to use other methods to beat out competition while keeping profits up.

It’s that intense competition that might lead northeastern banks to make lots of low-interest loans while overpricing deposits, said Gene J. Kirsch, senior banking analyst at Weiss. The northeastern states have a crowded field to work in, he added, while other states’ banks can afford to stand firm on rates.

“[Northeastern banks] have to be more aggressive on both sides, which is going to shrink their earnings,” he said. It’s possible, however, that these banks are willingly taking on rate risks because they believe they can make up the rate-risk losses elsewhere, or perhaps because they believe it’s worth taking a hit if it means that bank can scoop up customers in a hotly contested area.

Dangerous Assertions

Kirsch disputed the claim that call reports were too broad for this kind of conclusion, noting that the documents included details of different types of loans as well as thorough information on deposits.

Wandelmaier, for his part, said assets and liabilities are far more nuanced than anything captured on call reports. For example, a bank has to report how many 30-year, fixed-asset loans it has, he said, but in reality very few loans last that long as borrowers move or refinance. That one number can’t show how different loans are paid off.

On the expenses side, not all deposits are the same either. The bank has money market accounts, savings accounts, interest-bearing checking accounts and more that do not move uniformly. Some are actually very insensitive to rates, he said.

To reach its conclusions about Webster, Weiss apparently assumed all the bank’s deposits would uniformly reset to the highest degree possible, Wandelmaier said – an unlikely scenario in real life.

“It’s kind of, quite frankly, dangerous for a company to be publishing numbers like this,” Wandelmaier said. “It tends to scare people without any real basis in fact.”

First Niagara’s Harringon defended his bank’s rate risk as well. He was also none too pleased to see the company gave First Niagara a D+ in overall financial health, noting that a recent Barclays report had the bank ranked No. 2 in a list of top-25 performing banks nationally.

“We’re at the top of the heap,” he said. “Wherever [Weiss] is getting their data from, it doesn’t match ours.”

While the level of danger for local banks is arguable, Darling said vigilant banks are hedging their risks in a variety of ways. Most of his customers are selling their long-term loans and extending their deposits where they can. While most customers are trying to keep their deposits short, some still do buy certificates of deposit of three to five years, which will provide more balance as rates rise.

Banks also go through third-party brokers to sell their CDs, such as Smith Barney or Merrill Lynch, which gets them a better rate, or they take out longer-term borrowings of their own from the Federal Home Loan Bank of Boston. Larger banks have more frequently tried interest-rate swaps through a third party, where the borrower’s rate is fixed but the bank’s rate is variable – providing a useful compromise between both parties’ goals.