Bankers Title CK Turns 20

Preparing For Growth, Increasing Competitiveness and Managing Interest Rate Risk

Bankers Title of Central Kentucky Marks Milestone

by Chad McKeithen, Managing Director of Strategies Duncan-Williams Inc/SSB

During the first quarter economic green shoots continued to emerge. Rates have started to rise and with it interest rate risk has started to push back up the worry index for many banks. While loan growth is still low it will pick up as asset quality is strong and liquidity is historically elevated. Many forecasters are already calling for increased loan growth later in 2021. Banks are beginning to set themselves up for that future loan growth while also keeping an eye on managing the risk. Many borrowers, especially commercial borrowers, are going to want to lock in long-term fixed rate financing. This will introduce interest rate risk. This demand is already surfacing and competition for commercial borrowers is going to be fierce.

A method that banks historically used to be competitive, generate fee income but also manage interest rate risk is using floating rate commercial loans partnered with interest rate swaps. The old version of this involved a bank issuing a floating rate loan to a borrower and then selling the borrower an interest rate swap. The bank would then execute a back-to-back swap with another counterparty. This fixed the borrowers rate for whatever period they chose but allowed the bank to have a floating rate (i.e. LIBOR +2.50%). This was called a back-to-back swap program and if it sounds complex it’s because it was. The borrower had to be involved in the swap and most of the time the borrower was not sophisticated enough to understand the intricacies of a derivative. It also introduced the dirty word of “hedge accounting” to banks. Back-to-back swap programs are still used at very large organizations and it does allow a bank to provide its clients with fixed rate financing, convert it to a floating rate and generate fees but there is a much more improved method for community banks to provide competitive fixed rate commercial financing to targeted commercial borrowers.

An adjustable-rate conversion program (ARC) provides the same fixed rate to the borrower and floating rate to the bank but without the borrower or the bank having to be involved in a derivative instrument or having to perform any hedge accounting. Neither the bank or the borrower is involved in the swap because the interest rate protection is embedded into the loan docs not sold as a stand-alone interest rate swap. The bank simply develops a desired borrower specific credit spread that is applied to an index (e.g. 1m LIBOR +2.50%). Then they apply that spread to the corresponding fixed rate and that is the borrowers fixed rate. For example, if a client wants a 5-year fixed rate and the bank wants 1m LIBOR + 2.50% the bank would look at the ARC 5-year fixed conversion rate of 1.06% (rate moves with market movement) and would apply the 2.50% to the 1.06%. The borrower would have 5-year fixed rate financing at 3.56% and the bank would have a 5-year floating rate of 1m LIBOR +2.50%.

ARC programs allow the bank to satisfy borrower needs, revenue needs and interest rate risk needs. It also is an improvement over the older back-to-back swap models of the past.

Bankers Title of Central Kentucky LLC recently announced that 2021 represents its twentieth year of providing valuable title insurance underwriting expertise and unmatched customer service to its customers. In recognition of this important milestone, the agency’s team members and owner banks will be presented with a commemorative award during an upcoming board meeting.

Bankers Title of Central Kentucky was founded to provide title insurance services to customers statewide on October 15, 2001, by Investors Title Insurance Company, eight community banks, and the Kentucky Bankers Association. The agency is currently owned by the six community banks noted below, which includes five original founders.

Bankers Title of Central Kentucky provides comprehensive title insurance and professional services for residential and commercial real estate transactions and prides itself in maintaining long-lasting relationships with customers. They are an agent of Investors Title Insurance Company, an underwriter that consistently achieves the highest financial stability ratings offered by industry rating firms. For more information, please visit btcentralky. com and invtitle.com.

Bankers Title of Central Kentucky Bank Owners: Citizens Guaranty Bank (Irvine), Commercial Bank (West Liberty), Community Trust Inc. (Pikeville), First State Bank of the Southeast Inc. (Middlesboro), Peoples Exchange Bank (Winchester), and The Farmers National Bank of Danville (Danville).