Correspondent Blog

By now your bank is likely convinced on the merits of generative AI. Microsoft’s Office 365 CoPilot, the integration of the Microsoft version of OpenAI’s Chat GPT into the Office suite, represents the fastest, and likely safest way, to integrate the latest technology within your bank. Earlier this year, Microsoft dropped the 300 licenses minimum…

Several measurable factors drive loan (and, by extension, bank) profitability, including loan size, credit quality, term, cross-sell, and upsell.  In this article, we will consider how and why loan size is one of the most significant drivers of profitability for community banks and what community banks can do to improve performance. Relationship Between Loan Size…

Since our last update on pricing and credit HERE, commercial loan pricing trends for the first quarter of 2024 continue to be driven by the perceived increase in credit risk, tighter credit supply and banks’ need for wider margins. This article provides an update on pricing trends driven by our Loan Command aggregated community bank data and…

Community bankers need to practice realistic loan pricing discipline. However, we need to understand the meaning of pricing discipline and its effect on community bank performance. In this article, we would like to define loan pricing discipline and cover bid, why it matters, and demonstrate how most community banks currently are not using loan pricing…

Banks consistently produce under their cost of capital. For example, at present, return on equity performance is about 12% for the average community bank. However, for the average bank, their cost of capital is between 9% and 14% depending on the bank’s equity liquidity with an average of 12.5%. Why is that? One answer is…

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…

Times are tough. Banks are under pressure to find ways to increase earnings against a backdrop of slower increases in earning assets and quickly rising deposit and credit costs. As such, bank budgets have come under scrutiny. We recently conducted a small sample poll, and out of 21 banks, budgets were down an average of…

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…

You engage an app and speak your mind about a financial task. You are agnostic about which one of your many relationships accomplishes the task, only that the task gets done. Where traditionally, you might use an interface such as Siri or Alexa to pay your Verizon bill on time, now you tell your virtual…

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…

In our last article (HERE), we highlighted the methodology around why banks should calculate and drive value through customer profitability and product profitability. We focused mainly on customer profitability and used risk-adjusted return on capital as a proxy for profitability. In this article, we wanted a different approach to arrive at the same conclusion but…

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,…