Correspondent Blog

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…

For a Boxing Day promotion, we are giving away 60 days of free usage for up to five bankers at each community bank for our Loan Command application. The objective is to allow you to see the latest profitability of your loans and deposits, on a forward looking basis. In addition, you can check out…

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…

How does a commercial loan’s maturity and amortization impact credit? Many credit officers would prefer to set shorter maturities for loan repayment terms.  The logic is that it is better for the bank to control the credit with a hard stop and revisit credit appetite at shorter intervals.  If credit conditions are appropriate, the bank…

It is rare that banking lends itself to a logic test, but we have been trying this loan risk and return riddle on hundreds of bankers across the country for years, and only a few bankers choose the correct answer.  The riddle goes like this: You are presented with two loans. Loan A is priced…