Correspondent Blog
Tag: Loan Structuring
How To Let Borrowers Choose the Wrong Loan Structure
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…
How Loan Term Drives Profitability
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…
The Problem with Floating and Adjustable Rate Loans
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…
How to Better Advise Commercial Clients About Rates in 2024
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…
6 Concepts Borrowers Must Understand About The Lending Curve
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. …
Using A Commercial Step-Up Loan to Increase NIM and Fees
Community banks are striving to increase loan yield and maintain their cost of funding (COF). Unfortunately, pressure on COF is expected to remain, and loans will reprice slower than expected as borrowers with below-market rates will wait until the last maturity day to refinance their credits. We have created and used a novel structure to…
Bank Impact of “Higher For Longer” Interest Rate Environment
On September 20, 2023, the Federal Open Market Committee (FOMC) left its benchmark rate unchanged, but it would be a mistake to conclude that the committee did not send a strong message about the projected path of future interest rates. The FOMC revised its view on future projected interest rates – rates will be “higher…
The Term Structure of Rates and Its Impact on Commercial Borrowing
Bankers need to consider the term structure of rates, also known as the yield curve shape, when structuring and pricing commercial loans to maximize return and reduce risk. Many bankers and borrowers are convinced that a recession is imminent, but the current term structure of rates does not necessarily establish this conclusion. The yield curve’s…
10 Loan Pricing and Structuring Observations for 2023
On our loan hedging desk, we work with hundreds of banks ranging in size from just over $100mm in assets to some national banks with over $1T in assets. Combined with our relationship profitability model, Loan Command, we see the pricing of thousands of commercial loans per month as small as $30k and as large…
Loan Structuring with an Inverted Yield Curve
The yield curve is currently inverted, and the FOMC may take a pause at its next meeting in June. Uncertainty about the evolution of the economy and the path of future interest rates and the unusual inverted yield curve shape affords a prime opportunity for bankers to provide sound, trusted advice to clients. This is…
How a Loan Hedge Leverages The Yield Curve – Part II
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…
Understanding The Current Yield Curve Shape
After last week’s FOMC rate increase of 25 basis points, the yield curve is more inverted than at any time in the previous 30 years. The current yield curve presents various challenges for community bankers for revenue generation and risk management. In this article, we will outline the significance of the yield curve shape and…