Correspondent Blog

Should borrowers pay commercial loan points to lower future interest payments? Loan or mortgage points are upfront fees paid by the borrower to the lender to reduce the interest rate on a loan or mortgage.  For example, assume that a borrower is considering a loan, structured as a 25-year amortization, due in ten years, at…

In Q2/24 the average return of asset (ROA) for community banks (under $10B in assets) was 1.08%.  But within the community banking sector, performance varied among banks significantly and a large swath of banks need to improve ROA.  While the average ROA was 1.08%, approximately 5.7% of community banks reported negative ROA.  Another 16.2% of…

Commercial lending is more competitive than ever. To effectively differentiate their services, commercial lenders will need to be thought leaders, understand their market and industries, and provide more insightful advisory services.  Commercial lenders can differentiate themselves by running return on investment (ROI) scenarios for their borrowers to help them make better financing decisions – especially…

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…

In a previous article [here] we discussed why community banks need product managers to ensure that financial products and services are effectively developed, launched, and managed to meet customers’ evolving needs and the bank’s risk and profitability goals.  In this article, we provide a concrete example of how product management in lending might work. Our…

Community banks are striving to increase loan yield and maintain their cost of funding (COF).  Unfortunately, pressure on COF is expected to remain, and loans will reprice slower than expected as borrowers with below-market rates will wait until the last maturity day to refinance their credits.  We have created and used a novel structure to…

Our article last week (HERE) discussed the “power of three” marketing rule and how to use it for loan proposals.  The rule states that human brains make better decisions when given a small selection of appropriate options but not too many to become confused. One or two options are usually insufficient, and five or more…

We review hundreds of term sheets and proposals for commercial borrowers each month.  One successful loan proposal tactic for community banks to improve their acceptance rate is to embrace the old marketing rule of the “power of three.”  We often see banks proposing one or two options for a commercial borrower, and often, the options…

Grid-based pricing is typically used to set the applicable margin of a loan based on specific performance measures, such as credit rating or cash flow coverage.  However, grid-based pricing can also be used to increase deposit balances.  The average borrower does not calculate their cost of borrowing and return on deposits on the economic value…

In an article last week (HERE), we discussed why real estate loans underwritten at common debt service coverage ratio (DSCR) and loan-to-value (LTV) levels may quickly become substandard credits if capitalization (cap) rates normalize, as expected because interest rates are rising.  Credits will deteriorate much faster if an economic downturn stresses net operating income (NOI)….

In a previous article, we discussed the three generic shapes of the yield curve:  normal, inverted, and flat. We also pointed out that the current inverted yield curve is unusual and is expected to last for the near term.  The average community bank’s cost of funding is highly correlated to Fed Funds and SOFR (for…

2022 will go down as one of the worst years for community bank loan mispricing when viewed on a spread basis. Rapidly rising rates crushed performance as many banks held a fixed rate constant and/or booked a fixed rate loan at a misguided level. Even though many loans were booked at below-par value (more information…