Correspondent Blog

In the last 12 months, the Federal Reserve went from arguing that inflation was a transitory phenomenon to raising interest rates to fight runaway inflation by three percent in just six months.  The result is not only higher rates but the most severe interest rate hiking cycle in the past 35 years –  and it…

The Federal Reserve Open Market Committee (FOMC) has raised short-term interest rates by 3.00% in the six months between March and September.  The market is now forecasting an additional 1.25% in hikes by year’s end, with the next move coming on November 3rd.  Many borrowers and market participants have been surprised by the speed of…

Last week the Federal Reserve again raised the Fed Funds rate by another 75 basis points – and again, that was in line with the market’s expectation. The question is when will the Fed stop, and what will be the terminal Fed Funds rate? We do not believe that the Fed’s “dot plot” fully reflects…

For decades community banks have taken on fixed rate loan risk mostly through the offering of five-year, fixed-rate, commercial term loans. This is probably the most popular structure for real estate-secured term credit at community banks. Now may be the right time for community banks to abandon this strategy – both for the borrowers who…

The Federal Reserve is rapidly changing the interest rate environment to fight inflation.  The Fed’s actions are forcing lenders and borrowers to consider ways to protect cash flow, credit, liquidity, and interest rate risks.  Many borrowers ask lenders how they can use swaps, caps, floors, and collars to protect their businesses and lower borrowing costs. …

Your bank’s  deposit beta is going to rapidly change. In our previous article (HERE), we reviewed the banking industry’s cost of funding earning assets (COF), and we compared how community banks’ COF behaves relative to national banks in a rising interest rate cycle.  We showed that the average community bank’s COF is highly correlated to…

In a recent blog [Here], we argued that banks are almost always in an inferior position by not re-quoting the loan rate with market movement until the loan closes. We think that when banks book a fixed-rate loan, the fixed-rate must be finalized at the closing table; otherwise, banks give borrowers a free option that…

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…

We see three expected developments in 2022 that will make a loan hedging program an essential competitive advantage for community banks. Increasing short-term rates, higher expected inflation, and increased need for fee income will significantly benefit those community banks that can offer a seamless and document-friendly loan hedging program.  While we have our ARC Program…

The FOMC lowered the Federal Funds target range to 0.00%-to-0.25% in March of 2020, and it has remained there since.  But now, the market is convinced that the FOMC will raise rates in 2022 through 2024 to better align short-term interest rates with expected market conditions.  This pivot by the FOMC has bankers, and customers,…

Historically bankers used the Treasury, FHLB, or swap yield curve to discern the future path of interest rates. At the time of this writing, the three-month Treasury-Bill is yielding four basis points, the two-year note is 0.59%, and the 10-year note is yielding 1.33%. Historically, such a yield curve prognosticated minimal interest rate changes over…

The graph below demonstrates loan repricing changes quarter-over-quarter from June 2020 to June 2021 for banks in three asset bands (under $1B, $1-3B, and over $25B).  The top three stacks of the bars show fixed-rate loans that reprice 3-5 years, 5-15 years, and over 15 years.  The bottom three stacks show floating and adjustable-rate loans. …