On October 30, 2019, the FOMC decided to lower the target range for the Fed Funds rate to 1.5% to 1.75%. The decision was not unanimous, and two members voted not to lower the target range. In the FOMC statement and at the post-meeting news conference, the committee’s communication was clear in that the future path of Fed Fund rate will be data-dependent, and the indication is that the “mid-cycle adjustment” is done. The key takeaway is that rates may move up or rates may move down in the future depending on economic developments. The question for many bankers and borrowers is how to v
There is a correlation between the speed of commercial loan closing and bank profitability, and there are many reasons why banks that close loans faster can generate more profits. While banks should be focusing on closing loans faster, there are other techniques that banks can deploy to enhance customer experience while keeping loan closing speeds unchanged. Banks can leverage operational transparency to improve both perceived and objective service performance.
Today LIBOR is linked to over $250 Trillion (that is with a “T”) in financial instruments and has been used as a reference rate for more than 30 years. However, regulators, for various reasons, are driving a shift to an alternative reference rate. In 2017, ARRC (Alternative Reference Rate Committee) identified the alternative reference rate in the US as SOFR (Secured Overnight Financing Rate). Most community banks use LIBOR sparingly in their loan and deposit contracts. However, if a community bank has even one LIBOR contract, the issue of fallback language becomes essential.
The last quarter in the year is typically a suboptimal time to generate commercial loans. Most bankers have met their annual goals factoring the existing pipeline of credits. Furthermore, banks that have not met their goals for the year are likely to price and structure more aggressively, thereby depressing profitable opportunities for more disciplined lenders.
Many industry analysts are increasingly gloomy on the banking industry, trimming expectations for net interest margin, interest income, and total profits. With long-term interest rates declining within a whisker of the lowest level in history, many analysts are reducing their forecast of banking profits by up to 10% through 2020 or 2021. However, we would like to share a current proven strategy for community banks to make the best of the current interest rate environment, lock-in their best clients, increase cross-sell opportunities, and actually increase margins.
Community banks face intense competition from different institutions and various industries. There is currently a market phenomenon that is creating an unusually challenging environment for community banks that compete for real estate financing. This phenomenon is creating an advantage for some lenders in the amount of seven to 42bps, and community banks must be aware of this aberration if they want to win more quality borrowers.
We are not sure when the first signs of a credit shock will appear, but it is coming. When it does, it will be the presence of commercial loan covenants that give banks a competitive advantage of using covenant violations to pressure borrowers so that banks can improve their risk position.
It sometimes pays to be opportunistic in marketing your community bank’s products. There is currently an exceptional market opportunity for community banks to win profitable business from larger competitors. The recent decrease in interest rates presents an opening for smart bankers to poach good quality clients and lock them in as customers for a decade. Our bank recently did just that, and in this article, we would like to share this strategy through a case study.
Interest Rates Dip
In the last few months, more than a dozen bankers have reached out to us about the merits of a fixed-rate loan program. Up until a few months ago, we didn’t know that the industry had started coining the term “fixed-rate loan program.” We always assumed that banks made loans that borrowers needed, whether fixed-rate, adjustable-rate, or some form of hybrid. Now, this seems to be a thing and we, not surprisingly, have an opinion on the matter.
One battle currently waged in the banking industry is amortization terms and interest-only (IO) periods. Borrowers often have legitimate needs to extend the principal repayment on term loans to 30 years. Banks prefer 20-year amortization terms on real estate-secured loans, but most banks are willing to extend to 25-year amortization terms.