LOOKING FOR LOANS WITH BEN FRANKLIN

You may not know it, but Ben Franklin loved the water. He grew up in Boston, was drawn to the sea and often dreamed of becoming a sailor. As Americans, we are all grateful that he changed his mind on going out to sea, but that background is what drove him to learn to swim. Further, because of his inventive mind, Franklin is credited with inventing swim paddles that fit onto ones hands. The paddles were shaped like lily pads and were roughly 10 inches long and 6 inches wide, according to Franklin's own writings. They not only helped him swim faster, but updated styles have been used for years by swimmers training for the Olympics and other big swim races. Sometimes you have to look far and wide for ingenuity and sometimes it is right in front of you. Long live inventors and their creativity. Given that Halloween is right around the corner, maybe it is time to break out the Ben Franklin mask at your party. Speaking of parties, have you ever shown up to one at the right time, but at the wrong venue? It is a disappointing feeling because you know there is a fantastic event somewhere nearby, but here you are all alone, wearing fancy jeans, a shiny shirt and you can't figure out how to get to the right location. We see this same occurrence in the community banking world related to lending activity. The common notion in the market today is that loan demand is soft. We sympathize with this, as loans are the only way for a bank to achieve meaningful performance, when considering the meager yield in securities. There is a massive lending party going on, however and all you have to do is figure out how to get there. Contrary to popular belief, loan demand is robust, as borrowers are looking to lock in term while rates are at historical lows. The yield curve is flat and presents attractive financing opportunities, as 20Y rates are only about 175bp greater than 5Y rates. Long-term fixed-rate lending is at fundamental odds though with a community bank's asset/liability structure. Those that add significant duration on the asset side of the balance sheet are setting themselves up for substantial pain as rates rise in the future and funding costs follow. So, how do we tap into this loan demand without taking undue risk? The short answer is to do so through interest rate swaps, since banks are compensated mostly for taking credit risk in the loan portfolio and not interest rate risk. An interest rate swap gives the borrower a fixed rate loan (stabilizing cash flow) while the bank enjoys a variable rate (better matching funding sources). While the underlying benefit of loan hedging lies in mitigating interest rate risk, the real victory comes in the form of increased loan demand. Banks can offer what business customers are specifically seeking, so instead of being absent from the party, you become the life of the party. Moreover, long-term fixed-rate structures are attractive to stronger credit profiles, such as professionals looking to finance the building in which they operate. As an example, we have assisted banks in offering borrowers 10Y fixed rates below 4.00%, while the bank enjoys a variable rate in the neighborhood of 1M Libor + 2.00%. Certainly, spreads are tight for strong credits, but once captured, they offer additional cross sell opportunities and can support loan growth. We work with banks across the country to offer a hedging solution that eliminates the derivative from your balance sheet. We have also seen clients develop campaigns around fixed-rate lending and win meaningful market share from big banks. So, the next time you go out in your local market looking for loans and wonder where everyone is, make sure you have the right tools to uncover the best opportunities. Contact us and we would be happy to not only help you find the party, but do so with or without your Ben Franklin mask or swim paddles.