Correspondent Blog

We recently reviewed a loan term sheet from a national bank for a $13mm commercial real estate (CRE) loan.  The bank offered a 25-year amortizing loan with a ten-year term and required the borrower to hedge its interest rate risk. The borrower was provided options on the type of hedge and when to execute.  The…

A forward rate lock allows lenders to deliver a known loan rate on future borrower financing.  This strategy is used for various reasons discussed further in this article.  Recently, larger lenders, including Bank of America, JPMorgan, Goldman Sachs, and Wells Fargo, have announced that they are seeing an elevated appetite for forward rate locks on…

There are many historical examples of some sophisticated and some less sophisticated entities imploding from the risk of derivatives.  Barings Bank, Orange County (CA), Enron, Long-Term Capital Management, and other entities misused derivatives or didn’t understand the difference between hedging and speculating.  Some bankers will soon hear about another example of banks using derivatives that,…

Community banks’ use of swaps (banks’ primary tool to hedge interest rate risk on loans) has increased substantially over the last ten years. The market expects the current inverted yield curve to remain through much of 2024 (based on long-term interest rates and the expected rate cuts in 2024).  Meanwhile, community banks face net interest…

We analyzed the loan performance (return on equity, loan yield, fee income, and loan size) of hedged borrowings in a large group of community banks and compared this to the community bank industry averages.  We conclude that loan-level hedging offers community banks a strong competitive advantage in the current interest rate and competitive commercial loan…

The bigger risk to community banks’ business model is not a moderate recession induced by aggressive interest rate increases by the Federal Reserve.  Instead, the more painful scenario for the banking industry is the following: no recession, short-term interest rates holding steady in anticipation of inflation reaching target rates, and a prolonged inverted yield curve….

Our previous article discussed how the banking industry is taking advantage of interest rate swaps to offer borrowers lower rates, allowing banks to earn higher yields, generate substantial fee income, and protect deposit relationships.  Of the largest 250 banks, 90% are using interest rate swaps, and because these largest 250 banks hold 83% of all…

With an inverted yield curve, borrowers have a pricing advantage to lock in long-term fixed-rate loans, while lenders strongly desire to limit loan duration.  One possible solution to this dichotomy is for banks to offer interest rate swaps to hedge individual loans.  This article will review domestic banks’ adoption of interest rate swaps.  Next week’s…

On our loan hedging desk, we work with hundreds of banks ranging in size from just over $100mm in assets to some national banks with over $1T in assets. Combined with our relationship profitability model, Loan Command, we see the pricing of thousands of commercial loans per month as small as $30k and as large…

Last week we spoke to a $1.2B community bank management team. The CLO was lamenting how he was losing quality loans and deposits to three aggressive national banks in the territory. An example was a $1.95mm owner-occupied CRE loan, where the borrower had multiple operating accounts totaling almost $500k. While this community bank is not…

Analysts, regulators, legislators, and bankers have been attributing the root cause of SVB’s failure in the past month.  Some blame the dilution of the Dodd-Frank provisions, others the lack of oversight by regulators, and others still blame social media for exacerbating the deposit run.  The root cause of Silicon Valley Bank’s (SVB) failure is poor…

Fair value accounting measures assets and liabilities at current market value instead of historical or amortized value.  Most agree that attempt to fair value certain financial instruments would still not approximate the settlement of that instrument between a motivated buyer and seller – for example, there are many unpredictable or unknown factors to be able…