Correspondent Blog

Community banks are striving to increase loan yield and maintain their cost of funding (COF).  Unfortunately, pressure on COF is expected to remain, and loans will reprice slower than expected as borrowers with below-market rates will wait until the last maturity day to refinance their credits.  We have created and used a novel structure to…

Grid-based pricing is typically used to set the applicable margin of a loan based on specific performance measures, such as credit rating or cash flow coverage.  However, grid-based pricing can also be used to increase deposit balances.  The average borrower does not calculate their cost of borrowing and return on deposits on the economic value…

Many banks pride themselves on superior customer service, and approximately 90% of all community banks believe that they provide an above-average level of customer service (the math cannot work that way).  The reason bankers should want to provide an above-average level of service is to increase profitability, which translates to charging customers more in the…

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…

Funds transfer pricing (FTP) has been an essential tool for financial institutions for several decades.  FTP was introduced to banks in the early 1980s to help manage interest rate risk on a transactional basis.  FTP gained further focus after the 2007 financial crisis when financial firms failed partly because of the lack of funds transfer…

Many community banks are searching for ways to increase fee income, and many bank CEOs have concluded that fee income is a significant driver of revenue and profitability.  We argue that larger banks do not have an inherent advantage over community banks in generating fee income because of their scale.  Most fee income generated by…

Community banks pride themselves on superior customer service. Approximately 90% of all community banks believe that they provide an above-average level of customer service (of course, the math cannot work that way, as half of all banks should be providing a below-average level of customer service). Research by various consultants shows that 80% of companies…

Community banks have structured fixed-rate loans for many years with an adjustable repricing feature where a loan is fixed for a number of years and then resets based on a stated spread and an index. However, adjustable term loans have several drawbacks for banks, especially in a rising interest rate environment.  One of the most…

Most bankers and analysts believe that maintaining net interest margin (NIM) is crucial for bank profitability.  Many community banks are working hard to maintain NIM and thus profitability (ROA) – so the thinking goes.  However, the current focus on NIM may actually be hurting banks’ performance. The Dangers of Net Interest Margin We have tracked…

If you ever wanted to know the most popular strategic planning initiative for a bank over the last three years, it is this one – generate more non-interest income. An estimated 30% of banks have this as their focus. The funny part is that despite this being a major conversation and the source of many…

For decades, community banks have structured term loans as 5-year fixed-rate facilities.  In the last six months, the percentage of 5-year fixed-rate loans at community banks has increased by approximately 25%, but this same bucket has held steady at larger banks (those over $25B in assets).  We believe that now is the right time for…

Both the Federal National Mortgage Association (Fannie) and the Federal Home Loan Mortgage Corporation (Freddie) have aggressive multifamily lending programs and comprise the bulk of the market. Freddie’s total multifamily finance activity in Q1/21 was $14B, and Fannie Mae’s was $21.5B.  Some bankers complain that taxpayers’ dollars are creating an unfair playing field for financing…