Correspondent Blog
Loan Profitability
The Problem with Floating and Adjustable Rate Loans
A typical current strategy for community banks when originating commercial real estate loans is to offer floating-rate loans or shorter-term adjustable structures. Borrowers are waiting for the Fed to lower short-term interest rates, hopefully translating into a refinancing opportunity for the borrower at a lower loan rate. Unfortunately, this strategy has all the underpinnings of…
Should You Adjust Loan Pricing Due To Rising Funding Costs?
Rising funding costs and decreasing liquidity at community banks are causing managers to change pricing methodology for new credits. This makes some sense, as in other industries, if your input pricing goes up, you often adjust your end pricing. We estimate that 25% to 50% of community banks have a policy requiring minimum yield or…
4 Ways To Quantify Loan Prepayment Protection in 2023
In a previous article (here), we discussed why commercial loan prepayment protection would be a critical return on asset (ROA) driver for community banks in 2023. We outlined the four main reasons why prepayment provisions increase profitability for banks. We also discussed the four standard prepayment provisions for commercial loans (step-down, lock-out, defeasance, and symmetrical…
1Q 2023 Loan Pricing Update
2022 will go down as one of the worst years for community bank loan mispricing when viewed on a spread basis. Rapidly rising rates crushed performance as many banks held a fixed rate constant and/or booked a fixed rate loan at a misguided level. Even though many loans were booked at below-par value (more information…
Should You Be Marking Loans To Market?
Available-for-sale securities are reported at fair value, and any unrealized gains and losses are included in accumulated other comprehensive income (AOCI) in the equity section of the balance sheet. The AOCI is an accounting adjustment meant to reflect the economic value of assets and is the process of “marking loans to market.” That same adjustment…