Regression analysis continues to tell us that rates have a higher probability of rising than falling.  If you believe regression analysis, then what are you doing now to help your balance sheet in the future?  We see the average 30-year mortgage under three percent to the borrower.  Can you afford to book many loans at this level?  How do you protect your earnings if rates begin to climb again?  Consumers want long-term fixed rates and banks want short-term or variable rate loans.

There are ways to protect the balance sheet from this happening, and more and more community banks are beginning to explore these options.  We are having more conversations with our clients about hedging strategies than ever before.  Additionally, most of these conversations have been initiated by our customers, indicating there is more of an awareness of these strategies in the market place.  Once the management team of a bank is open to learning about how hedging works, most find the concepts easy to understand.  Even though many community bank balance sheets provide a natural hedge with strong core deposit funding, this super low rate environment might disrupt that conventional position.

An important thing to know about entering into a hedging strategy is to understand the strategy and to have all the proper documentation in place prior to execution.  While examiners will ask questions about hedging strategies during an exam, this shouldn’t be a deterrent.  They just want to know that management understands the vehicle used and that there are policies and procedures in place to manage it.  Also, keeping your examiners in the loop prior to executing a strategy is highly recommended and will be helpful come exam time.

Here at the Asset Management Group, we help management with education, policy implementation, hedging execution, and hedging valuations.  Additionally, by partnering with us, you can be assured that we will work to help you get the best terms with the counterparties in your swaps.  If you are ready to implement a strategy or you are just wanting to start learning more about how you can protect your balance sheet, let us know and we can help.  Feel free to email us at amg@countryclubbank.com, or call (800)226-1923.