Correspondent Blog

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…

If your bank is interested in banking more profitable commercial relationships – those customers with multiple bank products, where the bank holds over 50% of bank wallet, provides long-term sticky banking services and recognizes over 20% return on equity (ROE) – then the case study described in this article will be of interest to you. …

Optionality is defined as a state in which choice or discretion is allowed. In finance, optionality is an asset (has value) for the person who can exercise the option, while the person who gave the option has the liability.  Selling options for above their value can be a profitable business for banks and brokers, but…

Most borrowers are implicitly expressing a view that interest rates will be lower in the future than the current market expectation. This view is reflected by a sharp decrease in the average contractual loan commitment term at community banks and an increase in floating vs. fixed rate structures. Borrowers are choosing short-term financing in anticipation…

We estimate that the average contractual loan commitment for term credit at community banks has decreased from just under five years in 2022 to just under three years currently. The primary reason for this shift is not a change in borrowers’ business models or banks’ preference for repricing term loans, but rather, borrowers’ decision to…

In a previous article (HERE), we discussed several factors that drive loan and bank profitability. We covered in detail how and why community banks can increase loan size to improve return on assets (ROA) /return on equity (ROE).  In this article, we will consider how and why loan term is a significant driver of profitability…

A typical current strategy for community banks when originating commercial real estate loans is to offer floating-rate loans or shorter-term adjustable structures.  Borrowers are waiting for the Fed to lower short-term interest rates, hopefully translating into a refinancing opportunity for the borrower at a lower loan rate.  Unfortunately, this strategy has all the underpinnings of…

Many economists and analysts predict that the Federal Reserve and other central banks will start easing monetary policy in 2024.  Many bankers and borrowers are convinced that a recession is imminent despite no clear evidence for such a conclusion.  How should lenders discuss interest rates in 2024, and what advice should relationship managers provide their…

Most borrowers have a rudimentary understanding of interest rates, the yield curve, forward rates, and forward premiums.  Commercial bankers are trusted advisors and have a unique opportunity to understand their client’s specific financial and personal situations, explain the basic concepts of capital markets, and offer prudent and objective advice to help customers reach their goals. …