written by Josh Beaird

The latest comments by Janet Yellen at her September 17th press conference stated the following:

“Most (FOMC) participants continue to expect that economic conditions will make it appropriate to raise the target range for the federal funds rate later this year, although four participants now expect that such conditions will not be seen until next year or later. The median projection for the federal funds rate rises to about 1½ percent in late 2016, 2½ percent in late 2017, and 3½ percent in 2018.”

Many banks have prepared for the changing rate environment through interest rate risk management. However, customers might not be as prepared. In response to this, it is important for bankers to discuss the new rate environment with their customers and how their borrowing costs could rise over the next several years. For example, at the individual loan level, adding several hundred basis points to the interest rate of $500,000 note could add upwards of $15,000 in interest expense for a borrower. A proactive banker can benefit customers by helping them prepare for these changes and maintain their profitability. Community banks have always excelled at developing a relationship with their customers. The changing rate environment provides an opportunity to deepen those relationships and keep customers on the right business path.

Furthermore, there are opportunities for experienced bankers to develop younger staff as interest rates rise. Young bankers have never been through a rising rate environment, since we have seen an unprecedented low-rate environment over the last several years. This gives experienced bankers the opportunity to share their knowledge, about how to evaluate borrowers and the conversations that need to take place with borrowers, in a changing environment.

Although a changing rate environment presents risk to borrowers, open communication and preparation will allow banks and their customers to thrive as rates begin to rise.

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