Correspondent Blog

We have the privilege of using our risk-adjusted return on capital pricing (RAROC) model, and various other profitability tools, to analyze individual and multi-bank performance.  Our data and analysis strongly suggest that banks that can measure instrument and relationship-level performance for return on assets (ROA) and return on equity (ROE) can improve simply by reallocating…

Bankers agree that reward (revenue) is a prerequisite for accepting risk. It would make no sense to risk the bank’s capital without adequate compensation. However, to avoid commercial fixed rate loan risk, the first crucial step is to measure that risk. We will show how banks that start to accurately measure interest rate risk embedded…

As of May 2025, the Federal Open Market Committee (FOMC) maintained the federal funds rate at a target range of 4.25% to 4.5%.  This decision not to move reflects the Fed’s cautious approach amid rising risks of both inflation and unemployment, influenced by recent tariff policies.  Fed Chair Jerome Powell emphasized the heightened uncertainty, stating,…

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…

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…

The biggest surprise for bank managers using risk-adjusted return on capital (RAROC) loan pricing models is the low return on equity (ROE) on smaller, shorter, and lower-credit quality commercial loans.  Those ROEs tend to subtract substantial value from the bank and show negative returns – sometimes in the negative double digits.  However, one aspect that…

We conducted a loan performance analysis for over 5,000 individual hedged commercial loans originated by almost 400 community and regional banks across the country. We measured prepayment speeds, loan size, loan term, fee income, loan yield, credit performance, and return on equity (ROE) of hedged loans and compared this performance to community bank industry averages….

Optionality is defined as a state in which choice or discretion is allowed. In finance, optionality is an asset (has value) for the person who can exercise the option, while the person who gave the option has the liability.  Selling options for above their value can be a profitable business for banks and brokers, but…

Deposit costs and liquidity remain a challenge for some community banks as competition for core funding remains intense.  The graph below compares the liquidity ratio for community banks (under $10B in assets) and banks over $100B in assets.  The average difference in liquidity is stark, but for many community banks the issue is translating to…

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…