There has been substantial research on how prepayment speeds of residential mortgages affect the profitability of individual loans and portfolios. Because of the homogenous nature of residential mortgages, many firms have developed highly predictive models to calculate prepayment speeds based on past behavior, portfolio makeup, and macroeconomic variables. However, very little research is available on prepayment speeds of commercial mortgages – this is understandable because of the uniqueness of each commercial loan. Even sophisticated loan risk-adjusted return on capital (RAROC) models
Tag: Bank Profitability
We are working with numerous community bankers to develop strategies for instituting floors on commercial loans. The idea of protecting floating or adjustable rate assets is not new to community bankers, but the current interest in this concept is spurred by specific and unusual communications and market developments that are worth analyzing.
Back in the 1980s, there were more banks, smaller banks, and little technology. We were still driving checks around, there was no online banking, and networked ATMs was the latest in bank technology. At the time, the rule of thumb for bankers was that each bank employee produced about $20,000 of operating profit per year. Since each bank had about 100 employees, operating profit was about $2mm per community bank. In this article, we look at how this equation has changed and what it means for the future.
Given that strategic planning season is upon us, one key affirmation is to verify if you are targeting not the customers that you have now but the customers that you want. Chances are, at least at some level, you are attracting the wrong customers that are not profitable, not engaged, not being a raving fan, causing some level of pain, or all four.
Sometimes in banking, the closing of a particular loan or deposit transaction drags on for no other reason than the customer is reluctant to agree to the terms either for spoken or unspoken reasons. At CenterState, we have learned some valuable lessons from other banks that have helped us close more transactions and can help every relationship manager gain more of an advantage to cut down closing times and increase their closing percentage. In this article, we break down these five lessons.
In a recent blog (HERE), we discussed why now may be an inopportune time for banks to rely on a pay-for-risk banking model. In a pay-for-risk model, banks emphasize generating revenue by charging for risks that they take.
Banks are famous for operating in “silos.” Loans in one department, deposits in another and mortgages somewhere else. In some banks, every department is left to fend for themselves and turf wars erupt as confusion reigns about who really “owns” the relationship. In most cases, banks often place the burden of selling different products and services on the relationship manager as they pick and choose from a laundry list of products and services in which to position to the client.
It is 1942, you are in Air Force command, and you want to keep our flyers safe. Our planes are being shot down at an alarming rate, and your solution is to install armor. But the armor makes the plane heavier, and heavier planes are slower, less maneuverable and use more fuel. Realizing you cannot armor plate the entire plane, the question arises what is the optimal amount of armor and where should it be placed to give our soldiers the best chance to complete their mission alive?
In a recent blog (HERE), we reviewed and analyzed commercial mortgage loans originated in 2017, and we identified some strategies that community banks could deploy immediately in 2018 to increase their return on assets (ROA).