Correspondent Blog

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…

In a few short months, stronger economic data (higher GDP, stronger job market, and stubborn inflation) changed the market’s and the Fed’s view on the future path of interest rates. The market and the Fed are now aligning on only one rate cut in 2024 – obviously this will change over the course of the…

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…

On September 20, 2023, the Federal Open Market Committee (FOMC) left its benchmark rate unchanged, but it would be a mistake to conclude that the committee did not send a strong message about the projected path of future interest rates.  The FOMC revised its view on future projected interest rates – rates will be “higher…

On September 7, 2023, the FDIC released its banking profile.  This quarterly publication provides a comprehensive financial results summary for all FDIC-insured institutions (4,645 commercial banks and savings institutions insured by the FDIC).  While banks under $10B in assets comprise 97.8% of all banks by number, those same banks comprise only 14% of all banking…

Our previous article discussed how the banking industry is taking advantage of interest rate swaps to offer borrowers lower rates, allowing banks to earn higher yields, generate substantial fee income, and protect deposit relationships.  Of the largest 250 banks, 90% are using interest rate swaps, and because these largest 250 banks hold 83% of all…