Between low-interest rates, the concerning rise in COVID-19 cases, and tough competition for quality commercial loans, community banking is a tough business. While there has been a nominal deterioration in credit quality thus far, a deterioration in the business environment related to the pandemic and lack of fiscal stimulus may change that. Net interest margins at community banks are declining, and the trend is likely to continue through 2021.
Rising rates, regulatory pressure on interest rate risk, competition and the best way to hedge long-term, fixed rate loans is causing a puzzle for many banks. Luckily, we love solving puzzles and take an interest in new and challenging conundrums especially related to banking. A client recently asked us to solve an oldie but a goodie: what is it that a man can do standing up, a women sitting down, and a dog on three legs? The answer is, shake hands.
Success in banking is simple. Offer the right product, to the right customers, at the right time. The timing now is perfect to accommodate borrowers who want long-term fixed-rate loans, and the timing is also perfect for banks to convert those fixed-rate loans to a floating rate asset to protect the bank. At CenterState we created a custom built loan product called ARC (Assumable Rate Conversion) program that is currently very popular with our own borrowers, and hundreds of banks across th
In one of our blogs last week we discussed why a flattening yield curve has real consequences for the performance of a community bank’s loan portfolio. The market expects a continued flattening of the yield curve through 2018 and community banks must develop loan products that perform well in such an interest rate environment. In today’s blog, we review the pressures that community banks will face in this competitive commercial loan environment and how banks can position their commercial loan offering to outperform their competition.
In a number of previous articles, we discussed important factors that community bankers should consider in analyzing hedging programs. We also listed the pros and cons of various hedge alternatives, and finally, we gave examples of some specific application of loan hedges currently used by community banks. In this post, we conclude our hedge series by highlighting borrowers’ common objections to using hedges and how community bankers that we work with deal with and overcome these objections.
Complexity
In a previous blog, we described what factors community bank managers might want to consider in analyzing a loan hedging program for their specific needs. In that blog, we listed the pros and cons of using a hedge to control risk and increase profitability. We then wrote a follow-on article that analyzed the various instruments and strategies common in the bank hedging market to include swaps and other interest rate derivative instruments. We provided an in-depth
