Faced with the prospect of rising interest rates, most lenders would generally prefer to make variable-rate loans. Borrowers, though, are partial to loans of the fixed-rate variety. (And who could blame them for wanting to lock in at rates that remain near historical lows?)
One way that lenders can help their customers protect themselves against variable-rate risk is with over-the-counter derivatives. But while big banks have easy access to the OTC derivatives market, smaller banks generally don't.
"It is an interesting problem," says Jefferson Harralson, managing director at Keefe Bruyette & Woods, "for which there isn't an economically efficient solution."
The $6.1 billion-asset Cadence Bank in Birmingham, Ala., has found a way around the problem, though. It outsources the creation of fixed-income derivatives for borrowers, employing B&F Capital Markets for the task.
Through B&F, Cadence has offered some borrowers OTC caps, which protect holders from rises in short-term interest rates. It also has provided a few collars (buying caps while also selling floors that hedge against falling rates) for customers who want protection on both fronts.
Founded in Cleveland a decade ago by Alistair Fyfe and Derek Beitzel, B&F now has four additional offices, in Birmingham, Philadelphia, San Francisco, and Austin, Texas. Fyfe formerly ran an interest rate swaps group at KeyBank; Beitzel went to Key after starting a derivatives group at Hibernia Bank in the early 1990s.
With more regional banks seeking derivatives capabilities in response to client demand, B&F recently brought in another bank industry veteran, Dolf Roell, who in July was named as the firm's executive director. He has spent 27 years in finance, most recently as group manager of derivatives and syndications at BB&T Capital Markets.
Larger banks tend to have their own derivatives groups, so B&F targets smaller institutions. Roell notes that the firm's 30 or so clients have no overhead associated with their derivatives offering and are not charged fees by B&F until they are earning fees on the business themselves. "They pay nothing to develop a business that ordinarily has very high entry costs, and in which few people are likely to have the years of in-depth experience our founders and staff have," he says.
Samuel Tortorici, the CEO at Cadence, has known Roell since 2000, when they both worked at the old AmSouth Bank. Tortorici did business with B&F there, and he reestablished a relationship with the firm after joining Cadence in 2011.
B&F's privately labeled services include marketing, sales and documentation, and customer billing. It also advises clients on compliance with Dodd-Frank Act rules on derivatives. (B&F already has seen its markets reshaped by the regulatory reform bill. In 2012, it took over five relationships from major U.S. banks that want to exit the outsourcing business.)
Roell says B&F may be the only firm of its kind with a client base strictly limited to banks. There are about 1,000 institutions in B&F's target market of banks with assets of $300 million to $30 billion. "We don't compete with them by offering any of our services to nonbank entities," he says.
Dave Antolik, chief lending officer at the $4.6 billion-asset S&T Bank in Indiana, Pa., says his team makes joint calls with B&F to show customers how the bank can help them convert variable-rate loans to a fixed rate. The relationship, he says, lets S&Twith business in Pennsylvania, Ohio, New York and West Virginiaoffer some of the same OTC hedging abilities as the country's largest banks.
Banks typically charge markups of 15 basis points to 40 basis points. How much of that goes to B&F depends on each transaction. "We did have some pretty stiff discussions about fees," Antolik laughs. "But this relationship is working well."