On October 23, 2020, the International Swaps and Derivatives Association (ISDA) published the Fallback Protocol (Protocol) that allows firms that use LIBOR to transition to SOFR when LIBOR becomes unavailable. On November 30, 2020, ISDA and IBA announced that it will cease publication of the one-week and two-month US dollar LIBOR settings immediately following the LIBOR publication on December 31, 2021. ISDA and IBA further stated that the remaining US dollar LIBOR settings would cease immediately following the LIBOR publication on June 30, 2
On October 23, 2020, the International Swaps and Derivatives Association (ISDA) published the Fallback Protocol (Protocol) that allows firms that use LIBOR to transition to SOFR if LIBOR becomes unavailable in the future. CenterState Bank’s ARC program allows community banks to offer up to 20-year fixed-rate loans to customers, but retain an adjustable asset priced at 1-month LIBOR plus a credit spread, and CenterState (not the community bank) carries the derivative and converts the fixed rate that the borrower pays to the adjustable-rate that
On October 23, 2020, the International Swaps and Derivatives Association (ISDA) published the much anticipated IBOR Fallback Protocol (Protocol). Firms that sign up for the Protocol agree to the spread adjustment and the fallback rates if LIBOR becomes unavailable in the future. Most community banks have some loans or deposits tied to LIBOR, and many community banks have used LIBOR hedges to help borrowers manage interest rate risk.
Since March of this year, many community banks have been working to provide cash flow relief to customers who have sound business models but require some temporary payment restructuring caused by business disruption as a result of the Covid-19 pandemic. CenterState has been involved in those same restructurings both as a lender and as a hedge provider under the ARC program. We have learned some valuable lessons that we would like to share.
We have been writing on the various strategies available to community banks when structuring commercial loans in this current challenging business and credit environment. With the flat and low yield curve, we have discussed how banks may offer commercial loans through the ARC hedge program using two different strategies: 1) embedded floors, and 2) forward starting floaters.
We work on thousands of lending transactions every year with hundreds of community banks across the country. We participate and help structure financing on commercial real estate, C&I and Ag properties ranging in size from a few hundred thousand to over $100mm, and we collaborate with community bank lenders and underwriters that span the whole gamut of experience. We witness the good, the bad, the ugly, and occasionally the very bizarre in bank marketing, under
With a flat and low yield curve, borrowers’ demand for long-term fixed-rate loans is high. Furthermore, based on the forward market and most analysts’ predictions, the yield curve is expected to stay low and flat in 2020. The difference between five and ten-year loan rates is currently only nine basis points, and the difference between five and 20-year loan rates is 21 basis points.
You cannot read a financial paper, business feed, or watch financial television without someone mentioning yield curve flattening and inversion. Google searches for “yield curve inversion” are at their highest level ever. What is all the fuss about, and why should bankers care? We will explain an innovative way that bankers are using the current yield curve to protect existing relationships, increase yield and generate non-interest income, and we will use a recent case study to highlight the specifics loan terms and results.
Many community bankers are experiencing competitive pressures when competing for higher quality credit, relationship-driven accounts.