Correspondent Blog

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…

In a previous article, we discussed how a loan’s maturity and amortization impacts credit risk and profitability from the bank’s perspective (HERE). In that article, we pointed out that the average commercial loan term at community banks has been decreasing and is now between 3.5 and 4.5 years.  Much of the explanation for the decrease…

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….

The average return on equity (ROE) for the banking industry declined to 11.10% in Q1/24 (a 23 percent decline in the last year). For banks under $10B in assets, ROE declined to 10.53% in Q1/24 (an 11% decline in the last year). The typical published analysis considers the industry in aggregate which conflates the challenges…

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…

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…

We analyzed the loan performance (return on equity, loan yield, fee income, and loan size) of hedged borrowings in a large group of community banks and compared this to the community bank industry averages.  We conclude that loan-level hedging offers community banks a strong competitive advantage in the current interest rate and competitive commercial loan…

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…

As interest rates go back up and volatility continues to remain high, banks’ cost of capital has undergone a significant shift up. Your cost of capital is essential to know for several reasons. Mostly, it gives your board and shareholders a yardstick in which to gauge a bank’s return. Produce over your cost, and you…

Available-for-sale securities are reported at fair value, and any unrealized gains and losses are included in accumulated other comprehensive income (AOCI) in the equity section of the balance sheet.  The AOCI is an accounting adjustment meant to reflect the economic value of assets and is the process of “marking loans to market.”  That same adjustment…

A common strategy for community banks, when faced with a borrower that wants a 10-year fixed rate loan, is to offer a five-year fixed rate that adjusts in five years. Historically, this has worked for some customers and banks because, over the last 40 years, five-year rates have generally fallen.  As interest rates fall, a…

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…