Independent Banker - August 2018 - 30

PORTFOLIO
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
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. "
Federal funds rate: 62 years of ups and downs
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
1960
1970
1980
1990
2000
2010
today
Source: Macrotrends
30 Q ICBA Independent Banker Q August 2018
Independent Banker - August 2018

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