In Rising Rates, a Silver Lining

Community bankers are helping homeowners lock in exceptionally low fixed‑interest rates and becoming attractive options for small-business owners.

By Phil Britt

The Federal Reserve’s latest interest-rate increase in June, paired with subsequent hikes expected later this year and in 2018, could provide some short-term spikes for certain community bank business lines.

The Federal Reserve System increased short-term interest rates 25 basis points in June, and Federal Reserve Chair Janet Yellen indicated that another 25 basis-point hike was likely later this year, with as many as three interest-rate increases on tap for 2018. Additionally, Yellen said the Fed expects to unwind some of its balance sheet, putting more upward pressure on rates.

The Federal Reserve’s actions have no immediate effect on long-term rates, but experts agree that a continuing trend of rising short-term rates will eventually push up long-term rates.

Homeowner lending considerations

While the Fed has increased interest rates this year, fixed rates on mortgage loans have actually dropped slightly, from 4.2 percent in January to 3.9 percent at the end of June, says Jim Reber, president and CEO of ICBA Securities. Adjustable rate mortgages (ARMs), on the other hand, have been moving up in concert with the Federal Reserve’s moves.

Nationally, 88 percent of mortgages are 30-year, fixed-rate loans, Reber adds. Continuing interest-rate increases also affect the creditworthiness of potential homebuyers, decreasing their borrowing capacity when rates increase. Prospective borrowers are also seeing a rise in home prices in most areas of the country. As a result, homeowners who have been on the fence about purchasing or refinancing a home could be spurred to take action this fall, rather than waiting until spring of 2018, when rates would likely be higher, says David Kreiman, executive vice president for $1.3 billion-asset Glenview State Bank in Glenview, Ill.


The number of interest- rate increases on tap
for 2018

This rising interest-rate environment provides community banks with an opportunity to offer home equity lines of credit to homeowners with adjustable-rate loans, Kreiman adds. With fixed-rate, 30-year mortgages at about 4 percent, community banks may be moved to zero in on outreach to customers with ARMs that will be adjusting higher, or home equity lines of credit whose interest rates have increased. These customers could be good candidates for converting to a fixed-rate loan to lock in the interest-rate expense.

Securing such business now will help community banks protect against the eventual runoff of these adjustable-rate products. As interest rates increase, refinancing and home equity products will become more expensive and therefore less popular with consumers, Reber points out.

Joey McDuffee, director at Wipro Gallagher Solutions, urges community banks to tailor products and services to the needs of their customers. Millennials, for example, will often prefer ARMs with lower initial rates to maximize their initial home purchase since they expect to be moving in a few years, anyway. More established borrowers typically want second mortgages at fixed rates to tap into the equity of their homes without the interest-rate risk of floating-rate home equity loans.

Locking in a known, historically low-interest-rate expense may also be advantageous to customers who might be cashing in an IRA or other investment to pay for a child’s wedding or a similarly large personal expense. The investments could well earn more than the customer’s interest expense on the mortgage.

Business lending considerations

Like ARMs, small-business loans also move up with Fed action on short-term interest rates. As rates increase, some small-business owners may reconsider community banks over online lenders. Online lenders have typically offered quicker decision making but charge several hundred basis points more for that convenience.

The advent of the smartphone has led small-business owners to expect to handle all of their needs quickly online, says Terry Renoux, group president, commercial lending solutions for ProfitStars, an operating division of Jack Henry & Associates. They expect similar convenience from their community banks in the form of online applications and quick loan approval. Safety and soundness considerations may dictate that community banks ramp up due diligence before awarding a loan. They also may lead community banks to offer credit to business owners they know who are good credit risks but who would be rejected by automated scoring. At the very least, a bank’s loan approval technology should be able to immediately notify an applicant how long before he or she could expect an approval.

Mike Horrocks, vice president with Baker Hill, says the current interest-rate environment is favorable to community banks—if they can keep up with the expediency of online lenders. “Community banks need to balance their culture with the convenience of fintech,” he says. He recommends they use technology to enable the quick decision making and funding common to alternative lenders alongside the deposit services and local decision making that community banks are known for.

“The biggest need at most community banks is to improve the application process and to expand the available channels,” Horrocks says. “Banks need to look at their existing processes and streamline the loan renewal process.” The easier community banks make the loan renewal process, the less reason they will give renewing small-business borrowers to look elsewhere.

John Robertson, Baker Hill senior business process consultant, adds, “Technology is a tool; it shouldn’t drive the bank. It can help the bank more effectively price its products.”

McDuffee agrees, pointing out that just because community banks add technology tools to quicken the small-business lending process, it doesn’t mean that they should change their risk tolerance for the small-business loans that they approve.

Reber recommends that community banks considering beefing up their small-business lending activities do so through SBA loans. The fees pay for the guarantees on the loans, and there is a lucrative secondary market with investors who will pay premiums of 10 percent and more on the securities.

The rising interest-rate environment can provide enterprising community banks with some business expansion opportunities if they take the initiative to reach out to those creditworthy borrowers who may be seeking lower rates.

Phil Britt is a writer in Illinois.