Borrowing rates on the uptick

Just like consumers, banks scurry to adjust to changing rates

Sticker shock over higher borrowing rates isn’t limited to homebuyers and car shoppers. As rates rise, business executives wanting expansion loans may be in for a difficult conversation in those comfy leather chairs at the local bank.

As the cost to borrow goes up, businesses have to adapt quickly by recalculating expected payments.

But banks, too, have to be “nimble” when rates rise, as one banker says, to stay competitive and not price themselves out of the lending market or force borrowers online.

Taylor Franco, PNC senior vice president and business banking manager for Alabama.

Getting access to financing when you need it “is critical to the success of any business,” says Taylor Franco, PNC senior vice president and business banking manager for Alabama, Georgia and the Florida Panhandle.

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The rates banks charge business customers depend on a number of factors, including type, term and collateral, she explains. Unlike small business loans, working capital loans are generally not used for long-term investments like equipment or real estate, but rather short-term needs like rent, payroll or inventory expenses, she says.

River Bank & Trust CEO Jimmy Stubbs sees borrowing rates for all types of loans moving up in the near term.

Looking ahead 12 to 24 months, there are signs that “give us some concern,” says Stubbs. He noted inflation is at a 40-year high, supply chain issues are heightened because of China’s COVID policies, the war in Ukraine continues and the stock market is volatile.

Add to all that more expected increases this year from the Federal Reserve “that trickle down to the banking industry,” Stubbs says.

In pivoting to deal with changing rates, Stubbs says, “bankers live it every day” and stress their balance sheets to evaluate the impact of a hike of 50, 100 or even 150 basis points.

It’s a complex analysis done bank by bank.

Jimmy Stubbs, River Bank & Trust CEO.

“We don’t all get up and say today we’re going to move our rates to this point,” Stubbs says. “You’ve got to remain competitive while at the same time you’re trying to manage your balance sheet and create the most opportunity you can relative to earning dollars.

“When rates are moving you’ve got to be nimble and you’ve got to make the necessary adjustments to maintain, if you will, the opportunity to do what we’re doing as a business, which is maximizing our shareholders’ equity,” he says.

But they must stay competitive.

Steve Whatley, chairman and CEO of Southern States Bancshares Inc., says he doesn’t see many businesses turning to online lenders. Brick-and-mortar banks compete among themselves and emphasize service when rates are closely matched.

“We try to sell ourselves because of the reliability and response that we give our customers and prove to them that we’re worth more,” Whatley says. “In the end of the analysis, though, if it’s all about rates, we have to be competitive if it’s a piece of business we want to put on our books.”

Consumers can lock in mortgage rates in the short term, but Stubbs says that doesn’t happen much on the business side.

“The predicted path of what rates are going to do is calculated into” whatever they borrow, he says.

Bankers have to explain that renewing a line of credit simply costs more these days.

“All of a sudden the cost of that money has gone up because rates have gone up,” Stubbs says.

“Banking, or commercial banks in general, receive a significant source of funding off of the margin — the difference between what we can earn on our loans and bond portfolio versus our cost of funding, which is primarily what customers put in deposits,” Stubbs explains. “We have to make sure that we are very flexible and nimble in changing those rates as rates move.”

Complicating the banker/lender and business/borrower relationship during this rising rate environment is the fact that goods in general are more expensive than a couple of years ago. In 2020-21, the price of lumber alone shot up 37%, according to the National Association of Home Builders.

“At what point in time does the consumer or businessperson say that’s too much, I’ll just get by with what I have,” asks Stubbs. “So far we’re really not seeing that because we continue to have inflationary pressure. The business is still attempting to grow and meet the demand expectation that’s out there.”

Higher materials costs lead to a trickle-down effect — but not as the classic economic principle where the wealth of a few dribbles down to the masses. This trickle brings higher prices for all and possible cooling demand.

“What if the end purchaser should say, ‘You’ve raised my price and now it costs too much’ and it has a whole domino effect. It could send us into a recession at some point in time. Right now, that’s not the case,” says Stubbs.

Because of several years of growth, many businesses are in pretty good shape in terms of assets and cash on hand, one banker explains.

Steve Whatley, chairman and CEO of Southern States Bank.

“I think businesses are sound right now,” says Whatley of Southern States. “We’re seeing businesses with significantly more liquidity than they’ve had in the past.”

Higher rates, though, affect everything eventually.

“Generally, there could be some pressure and stress put on businesses by rising interest rates. Demand could be impacted for all goods and services,” Whatley says.

Many astute business borrowers are going with floating rate loans, he says, “because they don’t — and we don’t — expect rates to stay high for a long period of time.”

“A rising rate environment doesn’t necessarily lead to a lack of start-up or expansion opportunities,” says Franco. “It remains important to consult with a banking advisor to determine whether a fixed rate or variable rate is best during the current interest rate environment.”

The economy is already showing signs of slowdown, Whatley notes, so the central bank’s rate increases are doing their job. “I think the Fed is going to get the reaction they expected by raising Fed funds over the next several months.”

Still, rates probably won’t come back down in the next 12 months, he predicts. “I think they may plateau out in a year. I think it all depends on the response they get out of the economy.”

Banks, businesses and consumers all may have to accept an unpleasant new normal with regard to credit.

“When you look at rates historically, the rates are not high,” says Stubbs. “The rates just got real low and they stayed there for an extended period of time so we all got comfortable and we all got used to those rates,” he says.

As they “somewhat normalize,” Stubbs says, “it’s all a shock.”

Deborah Storey is a Huntsville-based freelancer for Business Alabama.

This article appeared in the July 2022 issue of Business Alabama.

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