January is typically a slow month for loan production at community banks, and the pandemic-hampered economy made the month even more challenging for many banks. The data from the Federal Reserve’s H.8 report showed that all loans were essentially flat in January for banks. For January, for small domestically chartered commercial banks (defined as not the top 25 ranked by assets), total loans outstanding were flat, C&I loans grew by 1.2% despite substantial PPP production, all real estate loans declined 0.4%, and CRE loans declined 0.5%.
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
The economic consequences of Covid-19 have altered average credit quality and created a flat and shallow yield curve. Community banks are working diligently to support their local communities and survive in these challenging times. One tool that many community banks have utilized in this business environment is a loan-level hedging product.
Everyone agrees that using the correct tool for the job is an important rule for successfully completing a project. Using a sledgehammer on tacks will leave dents, and applying a screwdriver to move boulders will likewise be equally counterproductive. The same rule applies in banking, and most community bankers are well aware of this. Community bankers appreciate that their project is very different than the projects at national and regional banks. Community banks have different business models and different customers compared to the nation
When banks decide to adopt a loan hedging product the initial management strategy is to reserve it as a defensive tool only. Typically bankers decide to adopt a swap program because borrowers demand longer fixed rates, competition is willing to accommodate such structures (often with a swapped solution) and extending loan duration in a rising interest rate cycle does not make sense for prudent ALM purposes.
Most community banks are eagerly anticipating rising interest rates. The banking industry has historically fared well when interest rates rise, and banks’ cost of funding lags - net interest margin expands and banks’ profitability increases. However, in this particular rate cycle, there are a few unusual industry and market developments that community banks must consider. From analysis shown below, and anecdotal discussion with CFOs and CEOs, banks must be mindful of their strategic and balance sheet positioning for the next few years.
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
The Federal Reserve held off in raising rates at its November meeting, preferring to assess the results of the presidential election and allow time to make further progress on their twin goals of full employment and price stability. Since that November meeting, the results of the presidential elections have convinced markets of future expected inflationary pressures resulting from fiscal stimulus in the form of tax cuts and increased government spending. Furthermor
If banking had an Olympics, creating loan value would be an event. While many lenders and business development officers are good at gathering new business, they are often reactionary when it comes to structure not taking the time to find the best structure for the client. They may provide what the client wants, but not what the client needs.
The Bureau of Labor Statistics’ Nonfarm Payroll report for the month of May was weaker than most market participants predicted with just 38k jobs created. The unemployment rate, however, came in lower than expected at 4.7% and the average hourly earnings growth was reported at 2.5%. So how will the Fed interpret this data and how will the Fed’s actions affect your bank’s NIM and earnings? Between the two perceivable options of keeping interest rates at their curre