Essentially every loan the bank booked in the first few years of its five-year history has been refinanced, said Mark Augustyn, senior vice president.
“It has complicated things at our bank due to the fact that we’re growing so fast.”
As interest rates declined, Mercantile lenders kept extremely busy with the bank’s existing customer base, and the overall market opened up new opportunities with customers of other banks, as well, Augustyn said.
“All those things — and the fact that we’re 90-plus percent commercial — has really propelled the volume we’ve seen in the last two years.”
He said the majority of the bank’s business customers have refinanced their loans once and some more than once. And the majority of them have moved from fixed to variable interest rates, whereas consumers have generally been refinancing at fixed rates.
At June 30, variable rate loans totaled $590 million, or 68 percent of Mercantile’s total loan portfolio.
“Most of what I’ve seen in the last year or two is people taking a floating rate based on prime. Because prime has gone to a historical all-time low, a tremendous amount of customers have opted to go to either a pure floating rate — and take ultimate advantage of rates being where they are — or go to some kind of a floating rate with a floor and ceiling that gives them some upside protection.
“Obviously, a floating rate can go back up, but I think they’re feeling there’s no impetus to move those rates up rather quickly, so people are more comfortable right now on a commercial basis, I think, to float a little bit.”
Consumers taking out a mortgage loan can lock in the interest rate for 15 or 30 years. Commercially, those rates are typically available for five years.
“Your payments are set to pay it off in 15 to 20 years but the rate is typically only good for the five years,” Augustyn said. “So when you fix the rate, you’re usually only fixing it for about a five-year window, and fixed rates are always higher than floating rates.”
Interest rates for business loans don’t tend to be on par with rates for consumer mortgages, he said, but to the extent that consumer rates go down, commercial rates go down and to the extent that consumer rates go up, commercial rates go up.
Loan amounts vary widely because businesses have to finance everything from a $15,000 automobile to a $3 million commercial building and everything in between, he said.
“I think any fixed rate has been game to be refinanced, whether it was on your Hi-Lo, whether it was on your building or whether it was on your CNC machine.”
He believes refinancing activity on the business side has largely subsided.
“I would say upwards of 90 percent of the people that have the ability or need to refinance have probably already done it.”