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.
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
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.
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
Commercial lending is currently very competitive with too many lenders suppressing margins and loosening credit standards. Community bankers need all of the help they can get, which is why CenterState Bank created the Knock Out Loan.
Until approximately ten years ago, interest rate loan hedging (using swaps) was prevalent for national and larger regional banks, but most community banks avoided loan hedging for various reasons. In the last ten years, more community banks have started to offer their borrowers some form of loan hedging option.