The old “I’ve got good news and bad news” joke may be in play for community banks when it comes to the Federal Reserve’s decision last month to raise interest rates.
While bigger banks make money off trading and fees, net interest margins are critical for community banks and their shareholders. Net interest margins (NIMs) are the difference between the interest earned on loans minus the interest they pay on deposits. Community banks didn’t seem to benefit much from low interest rates because of low consumer confidence after the financial crisis. Even when the economy showed signs of rebounding, consumer confidence was still low.
Community banks’ NIM has risen slightly during the years of the recovery. For example, a 2012 Fortune article cited FDIC figures that showed a slight increase in the margin. Any time the net interest margin goes up, that’s good news for community banks, some bank analysts say.
Amid all this confusion, the best place to clear up these muddy waters is on Main Street. A recent article in the Rome (Ga.) News Tribune went to community bankers, car dealers and real estate professionals to explore the potential impact the higher rates would have in those sectors of the local economy.
What they had to say may mean great opportunities from a bank marketing perspective. The quarter-point hike could nudge some prospective borrowers off the fence, moving them toward a mortgage or car loan.
“Moderate as it was, it was a good thing to see,” Angie Lewis, president of Rome’s Citizens First Bank told the paper. “I think we’ll see a jump start in the economy from it.”
She added: “Now that the Fed has made a move, I think we’ll see some people who had been sitting on the sidelines make a decision – knowing that inevitably rates are going to continue to go up.”
Local car dealers in Rome echoed Lewis’s view. “While the small rate increase may not do much in the short term, it may prompt consumers to hit the dealerships to lock in low rates.”
“But what it ought to say to consumers is that interest rates are not going to stay at historically low levels forever,” Andy Welborn of Riverside Auto Group told the News Tribune. “If they want to take advantage of what I would call cheap money, really affordable money, they better get with the program.”
Higher rates could spark greater interest from prospective homebuyers.
“As rates start to increase, people get motivated to buy while they can afford more house for the money,” Jason Free of Keller-Williams Realty in Rome told the paper.
A short-term downside of the Fed’s December move is a possible slowing of growth in the construction and housing sectors of the economy. But bankers like Andy Harris, President and CEO of Coosa Valley Credit Union, are optimistic.
“My gut feeling is that it may slow down a little bit for a month or so – but I do think people will realize rates are at an all-time low and it may actually spur interest,” he said.
From a marketing perspective, the higher rates should spark banks and credit unions to gear their print, television and online advertising toward prospective homebuyers or those who want to refinance their present mortgage or get a home equity loan, as well as potential automobile buyers. Plus, this is a great time to dust off money market and other savings vehicles.
And as an aside, higher interest rates translate to a stronger dollar overseas, boosting exchange rates. That may make it a good time to market vacation loans.
Be optimistic. The higher rates likely will mean greater profitability for community banks and credit unions, good news for the institutions, their shareholders and by extension, their customers. Hometown banks matter. If they are financially healthy, it’s good news for the rest of the community.
In short, this is no time to panic, but to tailor your bank’s marketing strategy to nudge your customers off the fence, because the fact is, the interest rates of the last eight years may be riding off into history. Only time will tell.
