Community Banks: Diversify Your Loan Book With Variable-Rate Senior Secured Commercial and Industrial Loans

Banks have been resilient through the pandemic — until a few weren’t. Some institutions failed to incorporate fundamental economics and core asset/liability gap management banking principles, and the fallout may have far-reaching impact, including consequential new regulation. The collapse of these banks is grabbing global headlines and raising concerns about broader risk in the regional and community banking system.

Recent struggles in the banking industry are likely to accelerate consolidation, a trend that we have helped our community bank clients navigate in recent years. How does industry consolidation affect our bank clients? How can we help them compete? What are the consequences of a shrinking small community bank market within rural communities? And how can banks add loan growth efficiently, and with heightened risk awareness and stewardship?

While the ultimate fallout of recent bank collapses remains to be seen, two things are certain:

• Banks with more diversified loan books are in better shape to withstand this period of volatility. The banks that have come under the most pressure have concentrated positions in low-yielding (lower than current market rates), long-duration securities and loans with fixed rates. When interest rates rose sharply (raising and shifting the yield curve), assets subject to mark-to-market values plummeted — trouble escalated from there.
• Banks that managed their securities’ maturities to address potential interest rate movements mitigated their AOCI positions and the potential impact on available equity and liquidity.

Over the past several years, we have worked with many community banks to incorporate variable-rate C&I loans (otherwise known as senior loans) into their overall book of loans. Senior syndicated loans are an established asset class and represent a core capital market that is active and growing. In the current environment, we believe these loans are even more compelling for banks looking to diversify their portfolios and minimize exposure to interest rate risk.

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