Correspondent Blog

Last week, we discussed how and why commercial lenders use a bank loan proposal letter (aka commitment letters) to their advantage (HERE).  We argued that a proper strategy and a well-crafted loan proposal letter could help lenders close loans quicker, eliminate more competitors, secure better pricing, and obtain the desired credit structure. In this article,…

Good commercial lenders use commitment letters and proposal letters to their advantage.  A proposal letter (or letter of intent) expresses interest from the lender before credit approval is obtained.  A commitment letter evidences the lender’s commitment to lend.  It is only furnished after preliminary credit approval and typically contains the following language: lender commits to…

In two articles in the past few weeks (here and here), we discussed how the “higher-for-longer” interest rate environment will affect the community bank sector – continued increase in the cost of funds (COF), steady yields on loans, and a decrease in net interest margin (NIM) will put severe pressure on ROE for new loan…

In an article last week (Here), we discussed how the higher-for-longer interest rate environment will affect the community bank sector. Stable short-term rates for the next year or longer will increase cost of funds (COF), hold yields on loans steady, decrease net interest margin (NIM), and pressure return on equity (ROE) for new credit assets. …

The banking industry’s average efficiency ratio worsened for the first time since 2021. The industry’s efficiency ratio increased to 54.30% in Q2/23 from 52.98% in Q1/23. This development is very important to community banks, as their efficiency ratio also increased, but to 61.63%. The national banks have already indicated how they plan to reverse the…

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…

In a previous article (here), we discussed why commercial loan prepayment protection would be a critical return on asset (ROA) driver for community banks in 2023. We outlined the four main reasons why prepayment provisions increase profitability for banks. We also discussed the four standard prepayment provisions for commercial loans (step-down, lock-out, defeasance, and symmetrical…

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…

This week the FOMC increased the Fed Funds rate by 75 bps, as expected to the 3.75% to 4.00% target range. The Effective Fed Funds rate jumped up and should stabilize at 3.83%, as did the 1-month term SOFR, to 3.79%.  The futures market now expects close to average odds of a 75bps increase in…

In a previous article (HERE), we discussed the concept of Funds Transfer Pricing (FTP), why systemically important banks and large regional banks incorporate FTP, and why community banks should also consider implementing FTP.  We defined an FTP framework, the regulatory recommendation for FTP, and how FTP allows community banks to make better decisions about balance…

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…

Customers and competitors are challenging community banks to extend loan duration – borrowers are eager to lock fixed rates before they rise further, and many competitors are happy to oblige.  But what are the optimal fixed terms for community banks given today’s interest rate, credit, and liquidity environment?  While every bank’s mix of deposits and…