Correspondent Blog

Many community banks today are willing to underwrite real estate secured loans on just two metrics: debt-service-coverage ratio (DSCR) and loan-to-appraised value (LTV). Banks typically approve credits above 1.20x DSCR and below 75% LTV – with many loan-specific factors that may skew these acceptable levels. For competitive reasons, we see banks dipping to 1.10X DSCR,…

You can always tell a good banker by the way they handle their deposits. With loans, it’s hard to discern expert-level skills unless you know the market and the credit. Deposits, however, are pure. When we analyze a bank, it is typically the first thing we look for, as deposit pricing and structure are the…

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. …

Last week we highlighted the lessons that machine learning taught us about the Unified Deposit Formula (HERE). Embodied in the Unified Deposit Formula is a marketing and amplification equation. In this article, we expand on the lessons we learned from artificial intelligence regarding raising deposits and explore how we can better use the Formula, and…

In a previous article, we discussed the three generic shapes of the yield curve:  normal, inverted, and flat. We also pointed out that the current inverted yield curve is unusual and is expected to last for the near term.  The average community bank’s cost of funding is highly correlated to Fed Funds and SOFR (for…

If you are looking for insight into how artificial intelligence can help in banking, we give you the Unified Deposit Formula that can be used for raising deposits. Before using machine learning, we, like most bankers, thought about deposit pricing along a single dimension – price and sensitivity. However, it turns out that price and…

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…

The art and science of optimized deposit gathering is a declining skill set among bankers. Banking schools don’t teach it, conferences don’t showcase it, and internal bank educators no longer train in the discipline. It is ironic as no other banking endeavor can build long-term franchise value like deposit gathering. Further, deposit gathering and its…

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…

No doubt you have heard other bankers talking about ChatGPT. This AI-powered digital assistant, technically called “generative AI,” has taken banking, and society, by storm. In three months, it has become the primary tool of many bankers, helping make banks more efficient across the organization. Our innovation working group, called Spark, has been playing with…

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…

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…