CD rates reflect upward pressure, competition

Let’s face it: Bank customers have options. Northern Colorado is a market in which bankers must compete for every dollar.

Couple this with the fact that developers need money to keep building as fast as the concrete will dry and the result is a region in which interest rates for certificates of deposit are in constant flux.

There are several factors driving up rates, both nationally and locally. First and foremost, the Federal Open Market Committee has boosted the prime lending rate 17 successive times since mid-2004 – raising the benchmark for the federal funds rate to 5.25 percent. If the Fed holds rates steady, it is likely that CD rates will do the same, but until then there’s money to be made in the spread between loan rates and CD rates.

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For some banks, though, it isn’t all about the loan-CD spread. More banks are offering credit-card products that carry much higher rates than loans. Banks looking to gather money to fund credit cards are able to offer higher CD rates.

Locally, the number of startup banks is also putting pressure on rates. Case in point: Fort Collins Commerce Bank, which is offering a 12-month CD product at 5.7 percent.

“We have to be more competitive,´ said Mark Kross, president of Fort Collins Commerce. “We’re a small bank and we’re trying to grow as fast as we can.”

Paying out such high rates must be balanced with keeping the bank profitable. But Kross said it is necessary for a small, one location bank to compete at the local rates. Bigger banks, he explained, can draw deposits from their other markets.

“We have to compete only in this marketplace,” Kross said. “Fort Collins happens to be one of the more expensive markets.”

The CD market presents the ultimate “you can’t beat ’em, join ’em” scenario. When some banks boost their rates, others must do the same if they have a need for deposits.

“CD rates more or less go up with the Fed,´ said Ronnie Phillips, a professor of economics at Colorado State University. He adds that competition is adding fuel to the fire.

“People can shop around a lot more,” he explained.

The Internet allows consumers to shop for the best rates on various investment options, all of which compete with bank CDs. Online transactions have made it much easier to buy direct – from the government, that is.

Philips said that consumers can find competitive rates at treasurydirect.gov, a Web site that allows people to buy and redeem securities directly from the government.

Creative competition gives a leg up

Some institutions have a leg up on the competition.

“In the case of credit unions, the stockholders are our members,´ said Ed Bigby, president and general manager of Norbel Credit Union.

Bigby said Norbel is able to stay competitive since its profits and its interest rates are paid out to the same individuals. Norbel is currently offering CD rates from 4.31 percent to 5.25 percent.

“There’s a lot of competition for the consumer dollar right now,” Bigby said.

And the competition is getting creative. Many banks, but not all, are offering hybrid products in order to attract the customers who might have shied away from tying up cash in a CD.

Fort Collins-based First National Bank offers two hybrid products: The Investor’s Choice CD carries a 24-month term and allows the customer to make one withdrawal per month. The caveat is that the balance must stay above the minimum to open the account.

Additionally, the Investor’s Choice CD allows customers to ratchet up their rates twice during the 24-month period to match a higher rate the bank may be offering for the product.

The flip side of such a flexible product is that it doesn’t pay out the highest return. As of July 11, First National’s Investor’s Choice product was paying 4.35 percent, while the bank’s First Treasury CD product, which also carries a 24-month term, paid 5.49 percent. The First Treasury CD requires a minimum balance of $1,000, compared to $5,000 for the Investor’s Choice. However, it only allows one no penalty-withdrawal after the first year.

“Right now, the First Treasury rate is so good that we’re getting a lot of interest in those,´ said Fred Jacobs, director of marketing for First National.

New Frontier Bank has traditionally offered the highest CD rates in the region, but increasing competition during the past year has made it harder to stay on top. Currently, the bank is offering rates from 4.4 percent to 5.55 percent – near the top but not the best.

“For a long time, we were the leader,´ said Joe Tennessen, New Frontier’s senior vice president of cultural enhancement. “In the last year, it’s definitely gotten more competitive.”

New Frontier also offers hybrid CDs. The Step Up CD allows customers to step up their rate twice during the CD’s 12-month term. It requires a $25,000 minimum deposit and is the bank’s highest paying CD with an interest rate of 5.55 percent.

New Frontier also offers a 12-month Flex CD, which offers one deposit addition or withdrawal per month and requires only $5,000 to maintain. On the flip side, at 4.4 percent the rate is the least attractive offered.

Whether it’s a new bank looking to build its base or an established bank looking to meet deposit need, whether it’s a high rate on a straight CD or a flexible hybrid product, there can be little argument that Northern Colorado has a competitive CD market.