Historically low interest rates have sent borrowers racing to take advantage of the savings. Consumer mortgage departments, in particular, have been swamped with purchases and refinances -- with home loan rates dipping below 3% at times. Yet on the other side, such low rates have likely given more than one bank director heartburn as they look ahead toward overall bank performance for the year.
However, community banks still have opportunities to maintain profitability, even when they are not earning as much on the money they are lending.
Collect Additional Revenue from Fees
Fee income is a way to offset lower interest rates. Outside of the traditional origination fees or overdraft fees, banks should think outside of the box when it comes to fee income.
For example, the COVID-19 pandemic brought about new ways of lending to many community banks. They may have implemented electronic signatures as a way to better serve borrowers amid closed lobbies. Remote loan closings might also include online notaries for a completely contactless experience.
Both of these offerings provide an opportunity for banks to generate additional fee income. After all, borrowers are being provided with a new service. Electronic signatures justify a higher doc prep fee (even though this ends up being easier on the bank’s side), and some states allow fees to be charged for remote online notary services.
Focus on Short Term Loans
Originating a 30-year mortgage at 3% might be a borrower’s dream, but for banks, it ties up a portion of capital for an extended period of time.
And while community banks may not want to discourage such long-term loans among their borrowers, part of a strategy is to use excess liquidity for short-term loans by either promoting existing loan programs or exploring new ones.
Borrowers who were the beneficiaries of the SBA’s Paycheck Protection Program might be at a point in their own recovery where they are ready for working capital loans, lines of credit, or additional SBA loans. Such loans can be structured with shorter terms and — when appropriate — generate additional fee revenue.
Changing the Rate Spread
Of course, another option for increasing profitability is to charge a little more in interest. Borrowers seeking the savings of low interest rates may not complain (or even notice) the difference between 4% and 4.25%.
This strategy should be applied with care, particularly for community banks in highly competitive markets where borrowers are known to “rate shop.” If a bank still prefers the business of a 30-year mortgage over not originating the loan, then the interest rates need to be commensurate with other options the borrower may have.
However, in other cases where the bank offers unique lending programs that don’t have a lot of competition, there is an opportunity to examine how much interest is charged on a loan, even when borrowers know that interest rates are historically low.
Think Long Term: Customer Lifetime Profitability
Interest rates always fluctuate, and banks have weathered periods of low profitability before. For bank directors, boards, and decision-makers, it’s best to keep eyes on the horizon. Even though the net interest margin has hit a record low, banks should also consider the overall profitability of customer relationships, long-term.
By proving themselves as valued partners with their customers throughout the pandemic, community banks have positioned themselves for an overall customer lifetime profitability that is difficult to measure. Whether it was through PPP loans or accommodating social distancing measures, these customers return to their banks over and over — including when loan interest rates trend higher.
For more information about how Epic River can help your bank through SBA Loans, remote online notary, or patient lending, contact us today.