Meet William, a local farmer in Texas.
$4.5M | 15-Yr Term
Loan Size & Term
5.10%
Fixed Rate for William
$70,000
Fee Income to Bank
SOFR + 250 bps
Floating Rate to Bank
The Situation
William has been banking with a local Texas community bank for the past 15 years and currently has a $3,500,000 loan with a current fixed rate of 4.25%.
William’s Fear
“I’m concerned that this loan will re-price to a rate well above what I am comfortable with. I also need an additional loan for a new expansion project.” - William
William's current financing is set to mature in three years at a fixed rate of 4.25%. However, he requires an additional $1 million for his new expansion project and is worried about the possibility of rising interest rates in the future.
The Bank's Challenge
How to increase profitability while retaining a great client?
The bank did not want to risk losing a long-time customer like William when it came time to reprice the loan. At the same time, they were hoping to increase their yield on the loan as they were experiencing upward pressure on their funding costs, like all banks right now!
The Solution
Provide Creative Financing via The ARC Program The bank used The ARC Program to solve all 3 problems — William’s fear of rising rates, the need for an additional loan, and the bank’s desire to increase their yield.
Step by Step ARC Implementation
Use the ARC Program
Use the ARC Program’s “Blend & Extend” capabilities to create a win-win for both the borrower and the community bank.
Blend & Extend
Bank extends an additional $1M in financing through ARC, resulting in a new blended rate of 5.10% to the borrower. While this rate is slightly higher than their existing 4.25% fixed rate, the borrower is able to lock-in a new rate today with an additional $1M in financing and a new 15-year term.
Borrower Gets 5.10%; Then 6.30% Fixed Rate
The borrower will pay the fixed rate of 5.10% until current maturity in 3 years. Then, the borrower will step-up to a 6.30% fixed rate for the remaining term (12 years).
Bank Earns a Higher Initial Floating Rate
Meanwhile, the bank begins earning an initial floating rate of 5.31% at ARC closing, continuing until existing loan maturity in 3 years (1mo SOFR was 4% + 131 bps Spread).
3 Years Later, Bank Earns Even More
After the existing loan maturity in three years, the bank steps-up to 1mo SOFR + 2.50% Spread and the bank continues to earn a variable rate tied to 1mo SOFR until new maturity in 12 years.
