How to coach lenders in a rising-rate environment

For lenders who came on the scene during or after the Great Recession, rising rates are uncharted territory. The key is to give them the knowledge they need to navigate it.

By Cheryl Winokur Munk

Alending boot camp of sorts is underway at some community banks. With loan rates finally ticking up after holding steady for many years, the lending climate is quite different from what it had been when rates were in a prolonged holding pattern. Over the course of their careers, many lenders—even those with nearly a decade of experience—haven’t experienced a rising-rate environment and the challenges that come with it. Some older, more seasoned lenders could also stand to brush up on certain negotiation tactics that can be essential in a rising-rate environment.

That’s why some community banks are taking matters into their own hands, doing one-on-one and group training exercises to impart crucial know-how for lending in the new climate. This includes updating lenders regularly on what’s been happening in the capital markets, teaching them how to manage customer expectations in a rising-rate environment, and offering tips for effective negotiation on loan terms that both the bank and the customer find acceptable. “Managing loan officers in a rising-rate environment is one of the hardest things to do in banking,” says G. Scott McComb, chairman, president and chief executive of Heartland Bank, a $960 million-asset bank in Whitehall, Ohio.

Take the pulse
To be sure, rates are still at somewhat of a directional crossroad. They have risen, but not so outlandishly that borrowers are giving significant pushback—at least not yet, bankers say. That’s why now’s an especially good time for community banks to take the pulse of their lending staff and determine where additional training may be warranted. The higher rates go, the more difficult conversations with customers are likely to be and the more prepared lenders need to be to face those challenges head on.

“You have to have the finesse to have the dialogue,” says Noah Wilcox, president, chief executive and chair of Wilcox Bancshares in Grand Rapids, Minn., and vice chairman of ICBA. He offers the hypothetical example of a customer whose rate has long been steady but is now rising. Previously, the loan may have been priced at 4 percent, but now, because of the rising interest-rate cycle, offering that same rate won’t be prudent from the bank’s perspective, even though the customer might be expecting it. Loan officers need to be prepared to talk with customers, manage expectations accordingly and offer alternatives to which they may be amenable. Options might include a fixed loan for three years at 5.5 percent, a loan fixed for five years at 6 percent or a variable-rate loan for five years, says Wilcox, whose banking company operates two bank charters with a combined $335 million in assets, including Grand Rapids State Bank.

Not every customer will choose the same option, so lenders need to be well-versed in each one, says John Watts, senior vice president of lending solutions at Baker Hill, a Carmel, Ind.-based provider of technology and services that support lending, risk management and analytics for community and mid-size banks.

That’s where proper training comes in. The approach a community bank takes will depend on its size and the makeup of its lending department. Younger lenders may need more direction, while more seasoned veterans may only need a minor refresh of their skills.

Some banks are focusing their efforts on monthly and quarterly group trainings for lenders. Other ideas include internal webinars or providing loan officers with written case studies that illustrate the multiple pricing and term structures that are acceptable to the bank, says Watts, a former commercial banker.

Wilcox Bancshares has been handling the challenge in a few ways. Members of the bank’s Asset-Liability Committee have been speaking to groups of lenders to offer detailed explanations of how the bank prices and structures loans and deposits, for example, and the effect on earnings and net interest margin of making changes to the structure, term and pricing of the loans, Wilcox says.

Management has also been conversing with lenders in group settings to leverage their collective experience from the years when a seven-year rate cycle was typical. The bank is working on preparing a talking-points document to help lenders in their conversations with borrowers. It offers pointers on how to react when a customer objects to the proposed terms of a loan, for instance, Wilcox says.

Communication is key
It’s not just a matter of telling customers the bottom line, though. It’s important to help them understand why the rates are changing and, if possible, offer multiple ways the bank can work with them, says Heartland Bank’s McComb.

This type of dialogue is important because the interest rate is only one factor customers consider when choosing a bank. McComb says conversations with borrowers will go more smoothly if lenders are kept well-informed about what’s happening in the capital markets. To facilitate greater understanding, Heartland frequently shares information with lenders at staff and loan committee meetings about directional moves by the Fed, economic conditions and other happenings. This helps lenders provide value to clients about the timing of transactions and why certain loans may be more advisable than others. “We keep them up to date on developments so they understand and can talk to their clients intelligently about that,” he says.

Even banks with more seasoned lenders are shoring up their rising-rate environment savvy. Geauga Savings Bank, a $280 million-asset bank in Newbury, Ohio, provides its lenders—most of whom have 20-plus years of experience—some in-house credit training by the bank’s credit manager with occasional appearances by more senior officers. Discussions about the lending environment continue in weekly loan committee meetings and sales meetings, says James E. Kleinfelter, the bank’s president and chief executive. Management has also been stressing the need for lenders to encourage meaningful deposit relationships from borrowers.

Even though some bankers say they haven’t yet seen significant pushback among borrowers, it’s still important to arm loan officers with the proper tools to respond. To make things more streamlined, Clint G. Morton, senior lender at Farmers & Merchants Bank, a $150 million-asset bank in Miamisburg, Ohio, says his bank is discussing the possible creation of a commercial loan rate sheet similar to what exists on the residential mortgage side. With rising rates, his bank is a bit concerned about keeping a handle on the pricing and making sure lenders are raising their loan rates as the cost of funds increases. A rate sheet could play a role in how each commercial loan is priced.

“The bank could always make exceptions when justified and needed,” Morton says.

Rising rates: other considerations

When rates rise, community banks must reconsider their risk management policies and communicate, guide and direct loan officers as to which products are best suited for which customers, says Craig Focardi, senior analyst at Celent, a division of Oliver Wyman. You may also need to shift your product mix somewhat to adjust to higher rates. This could mean offering more variable loans, for instance, or fixed loans with shorter repricing windows than offered in the past, says Lori A. Maley, president and chief executive of Bank of Bird-in-Hand, a $256 million-asset bank in Bird-in-Hand, Pa.

“You have to figure out what you think rates are going to do, look at your existing portfolio and try to fill in the gaps,” she says.

Community banks should also calculate how rising rates could affect the cash flow of their borrowers. Because rates were flat for so long, some bankers may have become complacent about doing a sensitivity analysis as part of their underwriting process, says David L. Osburn, founder and managing member of Osburn & Associates LLC, a business training company in Las Vegas.

He recommends using a 2 percent annual rise in interest rates as a benchmark for your calculations. “Lenders have got to have some sort of a sensitivity analysis,” he says. “Back in the ’80s and ’90s, we were using this more often.”

Cheryl Winokur Munk is a writer in New Jersey.