LENDING SERVICES · LOAN LEVEL HEDGING
Loan Hedging Solutions for Community Financial Institutions
Borrower’s Loan Protection® (BLP®) is not your typical back-to-back interest rate swap hedging program. Traditional loan hedging can be challenging to implement without in-house derivatives expertise. BLP offers a simpler approach by keeping the derivative on PCBB’s balance sheet while giving your institution access to a team of hedging specialists who provide training, help loan structuring, support hedged transactions, and facilitate borrower discussions.
Executive Summary
Borrower’s Loan Protection (BLP) is PCBB’s commercial loan-level hedging solution that lets community financial institutions offer competitive fixed rates and fixed payments to borrowers while originating floating-rate loans, without introducing hedge accounting, complex ISDA agreements, or collateral posting. It helps mitigate interest rate risk and creates additional opportunities to generate non-interest fee income.
What Is Loan Hedging?
Loan hedging is a strategy that reduces a borrower’s exposure to changing interest rates on commercial loans by aligning an effective fixed rate with an expected holding period. It typically uses a derivative instrument, such as an interest rate swap, so the borrower pays a fixed rate, while the community financial institution continues to receive a floating rate.
Traditionally, lenders use a back-to-back interest rate swap program to manage interest rate risk. While this method works, it requires in-house derivatives expertise, sufficient volume to be cost-effective, and introduces operational costs, including funding, managing collateral positions, and processing more complex accounting.
Even with those challenges, loan hedging remains valuable. It helps community financial institutions:
White Paper
Deliver Fixed-Rate Loans Without Interest Rate Risk or Complexity
Win fixed-rate deals without the rate risk.
Learn how a loan-level hedging solution such as PCBB’s Borrower’s Loan Protection (BLP) helps community financial institutions compete by offering large-bank capabilities—without large-bank complexity.
Borrower’s Loan Protection is a Different Approach to Loan Hedging
BLP is different from a traditional back-to-back swap program. PCBB books the swaps on its own balance sheet, so the lending institution avoids the staffing costs, collateral posting, complexities, and hedge accounting associated with directly offering swaps to borrowers.
Borrower’s Loan Protection (BLP) makes this process feel and function like a conventional fixed-rate product for the borrower, while remaining straightforward for the lender to administer. It eliminates the need for hedge accounting, capital allocation, and collateral posting, while also creating opportunities to generate incremental fee income.
Benefits for Your Institution and Your Borrowers
BLP is designed to mitigate your institution’s interest rate risk by reducing the repricing gap between assets and liabilities. At the same time, BLP allows your borrowers to better match a fixed interest rate to their desired holding period, helping eliminate reset risk and lowering credit stress from an adverse repricing event.
For Your Institution
- Retain and deepen customer relationships by offering more lending solutions
- No hedge accounting requirements under ASC 815
- No ISDA documentation
- No collateral funding obligations
- No additional regulatory capital requirements
- Access to BLP hedging experts for lender training, borrower conversations, and operational support
- Additional noninterest fee income opportunities
- Improved interest rate risk management with floating-rate loans
- Forward starting swap rates for future loan funding
- Participation options for selling loan exposures
- No impact on FHLB Advances
For Your Borrowers
- Competitive fixed rates
- True fixed rates with terms that match holding periods
- Simple, streamlined agreement
- No out of pocket closing costs to PCBB
- One predictable monthly payment
- Assumable and assignable hedge agreements
- Applicable across a wide range of loan types
Why Choose PCBB as Your Lending Partner
I can’t emphasize enough how good the BLP desk staff is, far and above our experience with the previous swap provider, your staff is very on top of it, and it makes a massive difference in getting these doors closed.
That’s where you guys shine, is making it really easy and simple. Because I think it can be very complex for us, PCBB does a good job of simplifying it for the lender.
How BLP Works: Not Your Typical Interest Rate Swap
BLP is different from a traditional back-to-back swap program. PCBB books the swaps on its own balance sheet, so the lending institution avoids the costs, complexities, and requirements associated with directly offering swaps to borrowers.
The result is a simpler process that still delivers the core benefits of loan-level hedging.
You originate a floating rate loan
- Floating rate loan is all you have on your books.
- You keep the borrower relationship and credit risk.
Your borrower receives a fixed rate
- The borrower will sign a short legal document with PCBB.
- A fixed rate is provided which overlays the floating rate loan with you.
- This agreement is the only direct interaction PCBB has with your borrower.
PCBB hedges the interest rate risk and hosts a derivative on its balance sheet
- The borrower makes 1 monthly fixed payment to you.
- PCBB then settles net payments with you.
Dedicated Hedging Experts
Support is built into the program. The BLP team works directly with your lenders, closing team, and loan operations staff, helping you navigate the transaction lifecycle without having to build all the expertise internally. Compared with traditional back-to-back swap programs, the BLP model shifts a meaningful portion of that workload — and essentially all related costs — out of your institution.
Support includes:
- Hedging specialists who work with your lending teams to explain the program, recommend and structure solutions, provide rate quotes, and join calls with lenders and borrowers.
- BLP desk hedge-execution experts who help with loan and hedge documentation and lock the fixed rate for the borrower.
- Operational support to help your loan operations team understand BLP-hedged loan booking and payment settlement processes.
This level of support lightens your team’s workload and sets them up for success, even if your institution is new to loan hedging.
Highlights
- Support is built into the program
- Works directly with your lenders, closing team, and loan operations staff
- Helps you navigate the transaction lifecycle
- Reduces the need to build expertise internally
- Shifts a meaningful portion of the workload and related costs out of your institution
Watch Our Simple BLP Process
This two-minute video demonstrates the simple process of a typical BLP transaction and how easy it is to calculate the fixed rate for your borrower.
Example
Example Rate Calculation
Typical Structure
20-year amortization and 10-year term
Fixed rate for borrower
| 10Y swap rate: | 3.85% | |
| Credit spread: | + | 2.50% |
| 6.35% | ||
Initial floating rate for bank
| SOFR, 30 day compounded: | 4.31% | |
| Credit spread: | + | 2.50% |
| 6.81% | ||
BLP vs. Back-to-Back Swap Solutions
Most traditional loan-level hedging programs use back-to-back swaps, which add collateral funding costs, accounting complexity, extra administrative burden, and often require additional headcount to manage the hedging program in-house.
BLP avoids the pitfalls of a traditional back-to-back hedging program by booking the derivative on PCBB’s balance sheet. See all the benefits BLP offers compared with other approaches. When it comes to loan-level hedging, BLP is a powerful tool to help you meet both your borrower’s needs, and your own.
| Our BLP Solution | Back-to-Back Solutions | ||
|---|---|---|---|
| Hedging Arrangement | Borrower pays a fixed rate under Rate Protection Agreement with PCBB | Lender has a swap with the borrower, plus another offsetting swap with a broker-dealer | |
| Lender has a floating rate loan with no derivatives on its books | |||
| Hedging Loan Features | |||
| Eliminates ISDA documentation and derivative accounting | |||
| Ability to generate upfront fee income through swap | |||
| Forward rate lock capability | |||
| Hedge from 2 to 30 years without mutual credit puts | |||
| Eliminates posting of cash collateral for initial and ongoing variation margin | |||
| Eliminates cash collateral for forwards with a secured CRE lien | |||
| Single invoice and payment for hedged loans | |||
| Loan Types | |||
| CRE (including housing, office, shopping centers, self-storage, and more) | |||
| C&I (including transportation, heavy equipment, industrial storage, and more) | Varies | ||
| Borrower Items | |||
| Short and simple hedge agreement for borrower’s signature | |||
| Hedge is assumable and assignable | Varies | ||
| One fixed, monthly payment to your institution | Varies | ||
| Training and Support | |||
| Onboarding training geared for lenders | Varies | ||
| Team available for product education with lender and borrower | |||
| Hedge provider that does not compete with your institution | Varies | ||
| Hedge experts are available by phone or in-person | Varies | ||
| On-the-go pricing & rate scenario modeling with the mobile-optimized BLP portal | Varies | ||
| On-demand, customized marketing material for your borrowers with your institution’s logo | Varies | ||
How BLP Helped Prism Bank Compete in New Asset Category
Download case study to learn how Prism Bank won more deals against much larger competitors and met their borrowers’ needs with their partnership with PCBB and BLP, a loan hedging solution.
Download Case StudyChallenge
Prism Bank needed long-term fixed-rate options that would help them compete against larger institutions. They saw an opportunity for a new niche in the aircraft industry but needed the right hedging partner.
Results achieved
Prism Bank wanted a collaborative, knowledgeable and transparent hedging partner and found that with PCBB. It was able to expand its lending capabilities while managing interest rate risk and strengthening relationships with borrowers through more competitive offerings.
Loan Types That Work for BLP Hedging
BLP works with many of the loan types that community financial institutions commonly offer.
Commercial Real Estate (CRE):
- Multifamily
- Owner-occupied
- Medical and other specialty properties
- Hospitality and agriculture
- SBA and USDA loans
- Manufactured housing
Commercial & Industrial (C&I*):
- Construction and agricultural equipment
- Equipment financing
- Industrial storage (e.g., Beer vats, LP tanks and more)
- Transportation assets (e.g., aircraft, railcars, tugboats, and more)
*C&I asset classes are evaluated on a case-by-case basis.
The National Bank of Coxsackie: Competing on Commercial Loans with BLP
See how The National Bank of Coxsackie reshaped its commercial lending approach and began winning more deals without sacrificing efficiency.
Download Case StudyChallenge
The National Bank of Coxsackie was struggling to match competitors’ commercial loan rates on attractive deals and needed a solution that would not require additional staff or increase costs.
Results achieved
The bank successfully competed for high-quality commercial loans, generated upfront swap fee income, and offered attractive fixed rates while going head-to-head with larger institutions.
Index Rate Options
BLP supports multiple index rate options, so you have the flexibility to choose the rate that works best for your institution. PCBB specialists are available to help evaluate the alternatives and provide guidance.
Available Options
- U.S. Effective Federal Funds Rate (Fed Funds)
- SOFR Compounded
- 1-Month Term SOFR
Featured Platform
Online Platform Offers Useful Marketing Tools
BLP includes an online platform that helps lenders maximize the benefits of loan-level hedging and quickly address their borrowers’ needs.
These tools are designed to support your team at every step - from the initial borrower conversations through loan and hedge closing.
The platform gives your institution access to:
- Indicative swap rates
- Tools to calculate all-in fixed rates for specific terms, amortizations, and structures
- Calculators that incorporate your institution’s credit margin and fee income goals
- Customizable borrower presentations with your institution’s branding
- Training materials and sample documentation
Hear Why BLP is the Ideal Loan Hedging Solution
One of the things we found particularly challenging about other swap solutions was the back-end accounting. We just don’t have the staffing to go through the process.
BLP Helps Lea County State Bank Compete & Retain Customers
Download the case study and see how Lea County State Bank achieved a competitive offering while mitigating interest rate risk.
Download Case StudyChallenge
Lea County State Bank wanted to offer customers long-term fixed rates while the bank managed only floating-rate exposure.
Results achieved
The bank was able to offer long-term fixed-rate structures that deepened their customer relationships and helped them compete more effectively with larger banks without overextending interest rate risk.
Frequently Asked Questions
About Borrower’s Loan Protection
Borrower’s Loan Protection (BLP) is a commercial loan-level hedging solution from PCBB that allows community financial institutions to offer borrowers fixed-rate structures, while originating floating-rate loans. The derivative is held on PCBB’s balance sheet, removing the complexity and embedded costs typically associated with traditional back-to-back swap programs.
BLP enables your institution to offer fixed-rate structures without directly managing derivatives. It eliminates the need for hedge accounting, ISDA documentation, and collateral posting, while also creating fee income opportunities and reducing interest rate risk. You also gain access to a team of hedging experts for lender training and borrower discussions, pricing and structuring assistance, and ongoing operational support.
BLP allows your institution to offer your borrowers competitive fixed rate structures through a simplified hedging agreement. Borrowers benefit from a predictable monthly payment, no PCBB closing costs, and flexibility through assumable and assignable loan structures.
BLP can be used across a wide range of loan types, including commercial real estate (CRE) and commercial & industrial (C&I) loans. Eligibility is primarily based on the loan’s underlying collateral which is reviewed on a case-by-case basis.
How BLP Works
The floating rate in a BLP transaction is based on one of three primary benchmark indices:
- U.S. Effective Federal Funds Rate (Fed Funds)
- SOFR Compound
- Term CME SOFR
Yes. BLP supports loan participation agreements, and PCBB is often able to purchase a portion of the BLP hedged loan, allowing you to manage concentration or liquidity while retaining the benefits of the hedge.
Yes. BLP offers forward-starting hedges, allowing your borrower to lock a rate today for a loan starting on a future date. BLP supports forward-starting hedges from one week to 36 months out, which is particularly helpful with construction-to-permanent loan structures.
BLP is highly customizable and supports terms up to 30 years and a variety of structures, including P&I, interest-only and fully custom schedules. Lenders can work with PCBB specialists to determine the most appropriate structure for each transaction.
No. BLP does not require your institution to post cash collateral. The derivative is held on PCBB’s balance sheet, removing this requirement.
No. Since PCBB holds the derivative on its books, your institution will not have any hedge accounting responsibilities under ASC 815 (formerly FAS 133).
No. ISDA agreements are not required for BLP transactions. BLP utilizes a simplified hedging document, which reduces legal complexity and administrative burden.
Borrowers make a single fixed monthly payment to your institution. Settlement related to the hedge is managed by PCBB with your institution behind the scenes, keeping the process simple for the borrower.
PCBB supports the hedging process, but your institution maintains the primary relationship with the borrower. This allows your team to stay in control of the relationship. If requested, PCBB’s hedging experts can join calls with lenders and borrowers to answer questions, but your institution is the primary contact for your borrower.
Yes. BLP allows lenders to generate fee income by increasing the borrower’s fixed rate. This non-interest fee income is paid at closing and recognized in the same period it is received.
Yes. BLP structures are designed to allow flexibility, including the option to assume and assign among borrowers, loans, and properties, subject first to lender review and approval and then to PCBB’s approval.
Yes. Borrowers may prepay $100,000 or more, subject to the applicable yield maintenance provision.
BLP hedge approval and document review occur alongside the normal loan closing process. PCBB typically approves BLP transactions within two business days of receiving the hedge request, and final document review is usually complete within one business day. Because these steps run in parallel with the standard closing timeline, BLP does not add time to the closing cycle.
Learn More About Loan Hedging and BLP
When you have questions, we have answers. We will help you compete and guide you through every step to help you close more deals.
Related Lending Solutions
Diversify your loan portfolio and meet regulatory requirements by choosing a trusted, experienced lending partner like PCBB.
Measure bank profitability across customers, products, branches and more. Optimize loan and deposit pricing capabilities.