Correspondent Blog

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…

Banks have ceased using LIBOR to price assets and liabilities after 2021. The remaining LIBOR cash and derivative instruments will continue until June 30, 2023. At that point, all LIBOR settings are expected to be discontinued, and most legacy LIBOR contracts will be converted to a Fallback Rate (effectively, compounding daily SOFR plus a spread…

This week the FOMC increased the Fed Funds rate by 75 bps, as expected to the 3.75% to 4.00% target range. The Effective Fed Funds rate jumped up and should stabilize at 3.83%, as did the 1-month term SOFR, to 3.79%.  The futures market now expects close to average odds of a 75bps increase in…

Over the last 15 years, an ever greater percentage of community banks have embraced some form of interest rate hedging.  Approximately 1,000 banks in the country use some form of hedging products to manage risk, generate fee income, or provide product offerings demanded by their customers.  Most of the top 100 banks (by asset size)…

Last week we wrote about loan-level vs. balance sheet hedging for community banks and provided our loan proposal generator (HERE). We compared and contrasted the two strategies and sized the market for community banks. We also shared a table that summarized the two strategies. In this article, we will discuss what community banks should look…

Competition is intense, and every bank is looking for a competitive advantage. Better products, faster service, or insightful advice can translate into additional loans, better credit spreads, or extra fee income. Sometimes just a graphics tool can help a banker win more loan business. At SouthState, our commercial lending teams use an online proposal generator,…

A yield curve is a relationship between yield and different maturity dates. The yield curve’s slope can provide insight into future interest rate changes and economic activity. There is much discussion in the market about the current inverted yield curve between the two and ten-year Treasury yields. However, for bankers, the critical dates on the…