Pressured by interest rates that decreased more on loans than customers' deposits, Central Bank's parent company saw its first-quarter earnings fall nearly 80 percent.
The Lexington-based bank holding company, which operates 28 locations throughout Kentucky, earned $671,325, down from $3.21 million in the same period a year ago.
Besides the rates, the drop was driven by the bank's provision for credit losses on loans nearly doubling from $1.32 million to $2.59 million.
But "what really has hurt us is the margin between what we earn on loans and pay on customer deposits ..." Chairman, President and CEO Luther Deaton Jr. said, noting that Central Bank finds itself continuing to offer higher savings rates to keep customers happy and compete against rivals. "Before all these banks started announcing they were getting in trouble, they were going after deposits."
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The interest the bank paid on deposits did fall 24.9 percent to $7.27 million from $9.69 million, but the drop in interest rates paid by the bank has not been as pronounced as the drop in interest rates paid to the bank by people with loans.
A year ago, the top money-market rate paid to customers by the bank was 2.2 percent. It has dropped just 0.70 percentage points to 1.5 percent. The one-year CD rate has fallen even less, just 0.5 percentage points from 2.5 percent to 2.
Over the same period, the prime rate, which is used as a base for loans, has fallen 2 percentage points from 5.25 percent to 3.25 percent.
The interest and fees the bank received on loans fell 12.4 percent year-over-year to $22 million in the first quarter. Deaton said that Central Bank's loans are up but that "you can only get so much for your loans in a competitive market."
"We're making loans," he said. "We're just not getting the big rates."
Steve Kelly, executive vice president for marketing and sales for the bank, said the company does expect economic conditions to improve.
"If that happens, loan losses should decline and deposit growth should improve, which would both enable the bank's earnings to improve as well," Kelly said.
"It's going to take a while for it all to even out and get back on an even keel," Deaton said. "We're just going to have to stay with it until it does.
"If we're in the black, we're doing well in the banking business today."
The company also announced along with earnings this week that it won't be seeking U.S. Treasury assistance as other banks have done. Instead, it announced it has issued $22.6 million in Trust Preferred Securities to a "very limited group of in-state investors" to enhance growth.
"We're very grateful they approved us, but we felt like we were a strong enough bank that we could go to our customers and get it, and that's what we did," Deaton said.