Correspondent Blog

In this market, it is anyone’s guess as to where credit is heading. The recent volatility has dramatically increased credit, interest rate and liquidity risk. To mitigate this potential impact, banks should consider technology enabling the real-time financial monitoring of their customers. In this article, we will make a case for why your bank should…

During first-quarter updates, many US banks amended their expectations because of economic uncertainty and a possible business downturn. How should community banks interpret the current economic uncertainty, the possible reset to the business environment, and how should managers address risks? Economic Uncertainty We considered two bellwether indices that measure policy-related economic uncertainty.  The indices measure…

We compared community bank profitability on hedged commercial loans to those same banks’ reported return. The goal of our analysis was to investigate if community banks can improve their performance by utilizing a hedging program.  We want to caution readers that our analysis may not extend to all banks, borrowers, or regions, but the results…

When a bank makes a loan, it’s stepping onto a multidimensional terrain of risk. Credit, interest rate, liquidity, optionality, legal and operational risk all interplay with each other to expose the bank, and the borrower, to a set of risk that can be visualized as a three-dimensional area. Given the current state of the economy,…

Between now and the end of 2027, it is estimated that $2.2T of office loans is coming due. Much of this product lies on banks’ balance sheets. A high percentage of those office loans on banks’ balance sheet are balloon structures where the bulk of the loan’s principal is due. Equally worrisome is the large…

In last week’s article (here), we discussed why category and geographic diversification may be unfeasible for many community banks.  We concluded that after a community bank sets limits on loan categories, the added benefit of geographic or loan category diversification is nullified.  We discussed three main reasons why community bank diversification by geography and loan…

As the risk of a recession gets pushed out by the market, so does the risk of credit. This is not to say bank credit is without risk, as higher rates, inflation, and a slowing economy have taken their toll. Three essential credit metrics – probabilities of default (POD), POD rate of change, and POD…

Most bankers are familiar with the concept of risk-return tradeoff, which states that potential return rises with an increase in risk.  Low-risk assets pay lower potential returns, whereas high-risk assets pay higher potential returns.  Further, some bankers are taught early in their careers that they are in the business of taking risks, and banks would…

At this point in the business cycle, we believe that community banks should migrate to higher credit quality loans.  However, in response to our last few blogs, some community bankers told us they have few opportunities to originate loans at 1.75X debt service coverage ratio (DSCR) and sub 60% loan-to-value (LTV).   We believe that the…

We established that stagflation (defined as high inflation and likely accompanied by higher interest rates and stagnant or no growth) could be toxic for real estate projects.  Few bankers working today have any experience with how destructive stagflation can be since this environment last occurred in the 1970s.

Most banks are concerned with their credit portfolio. As credit risk increases with rising rates, the following question arises – is it better to diversify by geography, property type, or business type? Do you focus your marketing dollars and pricing on particular counties, commuter zones, types of commercial real estate loans, or specific C&I industries?…

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…