Correspondent Blog

In recent articles (last one HERE) we discussed the importance of commercial loan prepayment speeds.  We explained the importance of keeping loans vs. making loans in driving bank profitability.  The key factor affecting a loan’s expected life, after contractual term of the loan, is the specific loan prepayment provision.  The most acceptable, marketable, and enforceable…

In recent articles (HERE) we discussed the importance of commercial loan prepayment speeds.  We explained why loan prepayment speed is a major factor influencing a bank’s profitability, and how national banks use historical analysis, quantitative modeling, and predictive analytics to structure loans to increase loan retention (decrease loan prepayments). We also outlined how various input…

In a recent article (HERE) we discussed the importance of loan prepay speeds.  We explained why loan prepayment speed is a major factor influencing a bank’s profitability, how national banks use historical analysis, quantitative modeling, and predictive analytics to structure loans to increase loan retention (decrease loan prepayments).  We introduced the crucial factors influencing commercial…

With regard to commercial real estate, an assumable commercial loan allows a buyer of the property to take over the seller’s existing mortgage, keeping the basic economics of the loan in place. The basic economics of the loan include rate, term, prepayment provisions, and other key features. However, the basic economics may be adjusted to…

We are strong proponents that bankers should be focused on keeping loans instead of making loans. While it is true that banks make loans, originating a loan is an unprofitable business. Banks earn an acceptable return on capital by keeping loans, not by making them. We recently worked with a bank that kept, and increased…

The Fed Funds futures market is currently pricing in a high probability of a September interest rate cut – although that is not a certainty.  Many clients with financing needs are looking to their commercial relationship managers for advice on how to structure and price their credit facilities.  We recently worked with a lender who…

We estimate that roughly 10% to 15% of community banks use a loan pricing model and fewer use a risk-adjusted return-on-capital (RAROC) loan pricing version. Most bankers are aware of loan pricing models but choose not to use them for the following reasons: 1) The cost of acquisition and implementation, 2) A lack of time…

In today’s competitive commercial lending environment, banks must continually balance the risks and rewards of different loan structures. Nowhere is this tension more visible than in the decision to offer a standalone construction loan versus a construction-through-permanent (construction-to-perm or “single close”) loan. Though construction lending inherently involves elevated risk and complexity, banks that opt for…

We are not big proponents of loan pricing grids. We find pricing grids to be rudimentary – lacking the myriad of inputs that distinguish risk-adjusted return on capital (RAROC), such as acquisition and maintenance costs, fees, interest rate, credit risk, and cross-sell opportunities (some of the most important drivers of banking profitability).  We believe that…

Community bankers need actionable recommendations.  For example, if your bank has a higher efficiency ratio, lower fee income, or higher loan prepayment speeds than its competitors, then advising management to decrease efficiency ratio, increase fee income, or reduce loan prepayment speeds is not actionable.  How does management achieve those recommendations?  We are big proponents of…

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…

In the 4th quarter of 2024, commercial loan pricing has materially changed. The new administration with its lighter regulatory stance, the potential for tax relief and threat of higher inflationary has generated new optimism for credit, and new risk of higher rates. In this article, we quantify commercial loan pricing trends from our Loan Command…