Correspondent Blog

Community bankers need to understand their competitive landscape.  Who the competition is, what the lending competition is offering, their delivery channels, and service levels can help community banks differentiate their services and enhance their competitive advantage.  Understanding the competitive banking landscape helps community banks set proper pricing, respond to rival marketing, and compete more effectively. …

After last week’s FOMC rate increase of 25 basis points, the yield curve is more inverted than at any time in the previous 30 years. The current yield curve presents various challenges for community bankers for revenue generation and risk management. In this article, we will outline the significance of the yield curve shape and…

Prepayment penalties on loans always drive value. However, in 2023, loan prepayment provisions will be essential tools for commercial banks.  Loan prepayment provisions lower prepayment speeds (especially in a stable or declining interest rate environment) and drive higher return on assets (ROA) for banks. In this article, while we have discussed how to sell prepayment…

At a cursory observation, one would conclude that the effects of inflation on a real estate project are neutral.  If owners can pass increased costs to tenants, they can keep inflation from decreasing NOI or cash-on-cash return.  However, closer analysis and lessons from history demonstrate that to counteract inflation’s free cash flow-destroying effects, revenue must…

It is counterintuitive that you might want to advise borrowers to do a loan refinancing at this stage of the interest rate cycle.  The FOMC has raised short-term interest rates by 3.75% in the eight months between March and November.  The market is now forecasting an additional 1.25% in hikes by early next year.  Borrowers…

In a previous article (HERE), we discussed the concept of Funds Transfer Pricing (FTP), why systemically important banks and large regional banks incorporate FTP, and why community banks should also consider implementing FTP.  We defined an FTP framework, the regulatory recommendation for FTP, and how FTP allows community banks to make better decisions about balance…

The Federal Reserve Open Market Committee (FOMC) has raised short-term interest rates by 3.00% in the six months between March and September.  The market is now forecasting an additional 1.25% in hikes by year’s end, with the next move coming on November 3rd.  Many borrowers and market participants have been surprised by the speed of…

For decades community banks have taken on fixed rate loan risk mostly through the offering of five-year, fixed-rate, commercial term loans. This is probably the most popular structure for real estate-secured term credit at community banks. Now may be the right time for community banks to abandon this strategy – both for the borrowers who…

Most financial institutions never see the actual cost of originating their products. To do so would require at least a rudimentary funds transfer pricing methodology, and many banks have not invested the time to derive a workable framework. Understanding a product’s cost structure is the first step towards accurate pricing and, more importantly, process improvement….

A common strategy for community banks, when faced with a borrower that wants a 10-year fixed rate loan, is to offer a five-year fixed rate that adjusts in five years. Historically, this has worked for some customers and banks because, over the last 40 years, five-year rates have generally fallen.  As interest rates fall, a…