Correspondent Blog

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…

We talk to many community bankers who are seeking ways to expand their commercial and industrial (C&I) loan portfolios. Yet, despite the strategic importance of this category, growth has remained elusive. The A and B cross-secured structure (“AB structure”) has recently been utilized by community banks as a practical, risk-managed method for increasing C&I lending…

If not properly structured, fixed-rate commercial loans can become one-way floaters. The term refers to a loan where the bank retains the fixed rate when interest rates rise, but the borrower refinances the loan when interest rates fall resulting in declining yield for the bank. In this article we explain why this reduces profitability for…

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…

When banks price loans, they stress the borrower’s ability to repay the loan under adverse credit conditions. For example, credit officers will underwrite to various interest rates, vacancy rates, revenue projections, EBITDA or NOI assumptions. However, most banks will not subject that same credit stress analysis to calculate that loan’s ROE. This is unfortunate because…

The Fed just finished their July meeting and there are many banker that will be further waiting for rates to drop. By the same token, many borrowers are grappling with the decision of when to lock their permanent financing. Some borrowers are choosing short-term financing in anticipation of the Federal Reserve embarking on an interest…

Bankers should consider the shape of the yield curve when structuring, marketing, and pricing loans to maximize return and reduce risk.  The shape of the yield curve can also help lenders understand borrowers’ needs and better position the bank against competitors. Definition of The Yield Curve A yield curve plots interest rates with different maturity…

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…

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 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…

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…