Lending

Banker's Loan Processing

Banker’s Loan Processing (“BLP”) is an outsourced hedging solution for community banks. Check out our video to learn how BLP can benefit you!

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Banker’s Loan Processing (“BLP”) is an outsourced hedging solution for community banks. BLP allows a borrower’s loan payments to remain fixed, while the originating bank (“Bank”) receives a floating rate. The originating bank provides servicing and remains the primary borrower contact point. In short, the Bank receives a floating rate loan while the borrower pays a fixed rate of interest. Pacific Coast Bankers’ Bank (“PCBB”) is responsible for all hedging activities and will do so through its own books.

BUSINESS CHALLENGE

Demand from our community bank clients pushed us to create an enhanced loan hedging program. The below information should help banks to understand the nuances of the BLP program.

• An expectation of rising future rates, coupled with intense competition for commercial loans, is pushing borrowers to demand long-term fixed-rate loans from community banks.

• Most community banks experience frequent price adjustments of their core deposits, consequentially increasing sensitivity to rising interest rates by compressing margins.

• Many community banks see hedging instruments as complex, creating an inherent problem in supporting borrowers who seek long-term fixed-rate loans. This can result in a loss of clients, increased loan prepayments, and lower profitability over time.

• Many community banks will originate long-term fixed-rate loans and sell them in the open market, or match-fund by borrowing long-term funds at the FHLB. This strategy can transfer the client relationship to another company in the former, while using up critical liquidity and decreasing profitability in the latter.

SOLUTION

BLP utilizes the Bank’s own loan origination and credit underwriting documents, keeping the process simple and consistent with current practices.

Structures acceptable under the program include fixed rate loans with a maturity of up to 20 years.

Individual loan amounts can be as large as $50mm or as small as $500k, LTVs can be up to 75% and debt coverage must be at least 100%. Loans must contain prepayment language.

Acceptable property types include CRE, multifamily, special use, hospitality, self storage, industrial or retail. All up-front fees that are collected are retained by the Bank.

BENEFITS

• Easy-to-understand structure

• Financing designed to meet borrower needs

• Floating rate loan coupon to the lender

• Broad structuring flexibility

• Reduced credit risk to the borrower and interest rate risk to the Bank

• Increased cross-sell opportunity due to a longer term relationship with the client

• Reduced credit risk (because debt service coverage is stabilized)

• Reduced likelihood of prepayment

• Eliminates the need to perform FAS133 hedge accounting

HOW IT WORKS

• Find a commercial borrower interested in a long-term, fixed rate loan

• Call for current hedging rates

• Bank reviews and signs the BLP loan servicing agreement

• Approve and book floating rate loan