Correspondent Blog

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…

In a competitive market for commercial clients, each loan feature can be valuable to a community bank. One such loan feature is a prepayment provision on fixed-rate loans.  Some community banks offer fixed-rate loans through a hedging program and utilize a symmetrical prepayment provision, others community banks will market their fixed rate loans based on…

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…

An inverted yield curve, continued bank failures, and the desire to manage risk and offer clients higher service are all factors that are driving more community banks to adopt a loan hedge program.  Community banks’ main goals are to diligently support their local communities and make an acceptable return on capital in these challenging times….

There are many historical examples of some sophisticated and some less sophisticated entities imploding from the risk of derivatives.  Barings Bank, Orange County (CA), Enron, Long-Term Capital Management, and other entities misused derivatives or didn’t understand the difference between hedging and speculating.  Some bankers will soon hear about another example of banks using derivatives that,…

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…

The bigger risk to community banks’ business model is not a moderate recession induced by aggressive interest rate increases by the Federal Reserve.  Instead, the more painful scenario for the banking industry is the following: no recession, short-term interest rates holding steady in anticipation of inflation reaching target rates, and a prolonged inverted yield curve….

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…

With an inverted yield curve, borrowers have a pricing advantage to lock in long-term fixed-rate loans, while lenders strongly desire to limit loan duration.  One possible solution to this dichotomy is for banks to offer interest rate swaps to hedge individual loans.  This article will review domestic banks’ adoption of interest rate swaps.  Next week’s…

On our loan hedging desk, we work with hundreds of banks ranging in size from just over $100mm in assets to some national banks with over $1T in assets. Combined with our relationship profitability model, Loan Command, we see the pricing of thousands of commercial loans per month as small as $30k and as large…

Last week we spoke to a $1.2B community bank management team. The CLO was lamenting how he was losing quality loans and deposits to three aggressive national banks in the territory. An example was a $1.95mm owner-occupied CRE loan, where the borrower had multiple operating accounts totaling almost $500k. While this community bank is not…