Net interest margin (NIM) is currently the most widely used performance measure for commercial loans and for community banks. Community banks are working very hard to maintain NIM and thus profitability (ROA) – or, so the thinking goes. However, the sole focus on NIM is actually not only hurting banks’ performances, but we contend that it is one of the major contributors to industry consolidation and bank failures.
Tag: Bank Performance
First, let’s stipulate that we really have no idea where we are in the real estate cycle. We recognize that this is less than stellar opening sentence and one that doesn’t inspire confidence, but we don’t want to mislead. That said, since we are forced for management and regulator purposes to monitor the real estate business cycle, we have a model that looks at each major commercial real estate sector and predicts where we are in the economic cycle. For ease of understanding, we have equated the real estate cycle with the proverbial baseball game.
Customer lifetime value (CLV) is defined as the total profit generated from a customer over the entire life of that relationship. In banking, CLV is a very important concept because of the high cost sourcing, underwriting and originating commercial loans. On the first day a commercial loan is booked, the return on equity (ROE) on that loan is negative. The bank’s profit is generated as the borrower pays interest over the life of the credit and, generally, the long
We will start right off with the bottom line – Return on equity (ROE) sharply increased for the industry from 7.90% to 8.32% for the first quarter of 2017. Community banks did better than most of their national brethren as ROE increased from 8.51% to 8.86% quarter-over-quarter.
Sun Tzu, the ancient Chinese strategist, and philosopher had it right – Every battle is won before it is fought. How you prepare for a conflict largely determines the outcome. In banking, this is never truer as the seeds of success or failure are likely already planted in your culture, your operations, and your balance sheet. Yesterday’s post generated a heavier than normal amount of questions around the dangers of loan growth.
Unlike fee income business and deposits, loans initially cost more money to originate than what they can generate. Put a loan on your bank’s books, and you need to pay for a whole litany of upfront costs such as sales expense, underwriting, and administration, plus allocate a certain amount of capital into a risk reserve. On the other side of the accounting equation, revenue comes in over the course of the year in the form of fees and interest payments.
Yesterday, JP Morgan Chase (the “Bank” or “JPM”) released their 100+ page 2016 shareholder letter, and as usual, it was chocked full of insight that every banker should understand. For example, we will cover how JPM has one of the most unique stock buyback programs in our industry. We will explain why it works, the intestinal fortitude this takes and why more bankers should take this risk.
We are at the ICBA 2017 Live convention in San Antonio, and there is nothing like a heated banking discussion over dinner with good bankers. We were comparing battle stories and the ever-important concept of loan pricing came up. Our banker friend lamented on the tight pricing in his territory and that his competition was pricing commercial loans 25 to 50bps below Prime.
We talk about becoming a top performing bank a fair amount, but what does that mean and, more importantly, how can banks achieve it? To answer these questions, we partnered with Joe Cady, Managing Partner of CS Consulting Group and will be answering these questions at the ICBA Live annual convention coming up this week in San Antonio. However, in this post, we highlight the findings of ten years of performance data and look at some key aspects of what it means to become a top performing bank.
Bring a non-banker into the bank and you will often hear shock about the cultural rigidity and lack of innovation. The blame game is rampant – regulators, customers, the CEO, expenses, and tradition all get the finger pointed at them in order to rationalize not trying new ideas. Anytime you hear that you are not going to do something that your customers are not asking for, that is called a “scotoma” or blind spot. By not being open to new ideas the mind looks for ways to be closed to new ideas.