Correspondent Blog

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,…

We are staunch advocates that banks should avoid risks that they do not get compensated for.  One such risk that banks take without compensation (or revenue) is on-balance sheet, fixed-rate loans.  With the current flat or slightly inverted yield curve, plus the current volatility of the market, borrowers have a pricing advantage to lock in…

We work with hundreds of community banks across the country that utilize forward rate locks to decrease risk, increase fee income, and stave off competition from national and regional banks.  If your bank is not currently offering forward rate locks (in its various forms) to borrowers, you may be interested in how to incorporate such…

Most bankers would refuse to accept risk without reward (or revenue).  It would make no sense to risk the bank’s capital without adequate compensation. However, some banks are inadvertently taking risk without any additional revenue. The yield curve is currently flat, and the average community bank’s cost of funding is highly correlated to Fed Funds…

In our previous article (here), we made the argument that the next administration’s agenda is highly inflationary, will likely lead to higher interest rates and more volatility.  We estimate a high probability that after this current interest rate cutting cycle, which may end sometime in 2025, that higher inflation will result in the Federal Reserve…

On April 26, 2024, Republic First Bank (DBA Republic Bank) was seized by state regulators and the long running bank drama came to an end.  With the assistance of the FDIC, Fulton Financial acquired certain assets, debt and deposits of Republic Bank. This first bank failure in 2024 is reported to cost the Deposit Insurance…

The “Three-Body Problem,” currently made popular by our new favorite author, Cixin Liu, is the concept of instability when three similar-sized celestial objects interact. The problem is currently unsolvable. Banking has a similar physics problem when management juggles strategy, risk/profitability, and customer behavior. This article will discuss the challenge of managing three potentially opposing forces…

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…

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…

Community banks’ use of swaps (banks’ primary tool to hedge interest rate risk on loans) has increased substantially over the last ten years. The market expects the current inverted yield curve to remain through much of 2024 (based on long-term interest rates and the expected rate cuts in 2024).  Meanwhile, community banks face net interest…