Tag: CRE

Your Commercial Lenders Should Be Using These Tactics

Commercial Loan Hedging

Commercial banks grew loan balances by 2.11% in the second quarter of this year compared to the first. This growth belies that some banks increased their commercial loan portfolios more than the industry average and other banks experienced shrinking loan volumes. While the industry is experiencing much needed total growth, that growth is not evenly distributed among banks.

Bank Best Practices To Handle Real Estate Loan Concentrations

Managing CRE Concentrations

This past December, the regulatory community telegraphed their intentions of focusing bank examinations on commercial real estate (CRE) concentrations in 2016: “During 2016, supervisors from the banking agencies will continue to pay particular attention to potential risks associated with CRE lending” (SR 15 17, Dec 2015).

Your Bank’s CRE Loan Standards Are Slipping And You Might Not Even Know It

CRE Risk

If you think the economy is going to muddle along, then you should skip this post as our analysis isn’t going to make a difference in your future - 2021 will be much the same as 2016. However, if you think the economy is going to pick up steam, or if you think the economy will get weaker, then today’s data could make a difference over the next couple of years. As can be seen by the graph below, commercial real estate risk continues to increase and the risk on new community bank loan production is up 6.5% during the first half of this year compared to last year.

Community Bank Commercial Loan Default Rates – Current and Projections

Quantified Lending Risk

We analyzed default rates through 2015 for banks between $300mm and $3B in asset size.  Historical default rates were measured and analyzed for various loan categories for this bank set.  We also reviewed Moody’s Investor Services corporate default and recovery rates through 2015 and considered which industries may present opportunities for community banks from a yield/risk perspective and as a way to diversify from real estate concentrations. 

 

Revealing CRE Projections That Will Give Your Bank Comfort

Bank Underwriting Accuracy

We always like to look back and see where underwriting and credit accuracy can be improved. Recently, we looked at almost 5,000 commercial real estate (CRE) loans from across the country that was underwritten in 2012. We looked at the property level cash flow projections to include revenue, expenses and net operating income (NOI) and then compared that to what has actually happened over the last 3 years. Our findings should give you some comfort to the conservative nature of your average underwriter. 

 

The Latest Data On Commercial Lending Risk In Retail

Lending Risk On Retail CRE

Introduced in 1937 in an Oklahoma Humpty Dumpty supermarket, the shopping cart has proven to increase per person sales and extend shopping time. A boost to many retail establishments, it is often said to be a predictor of retail health. More shopping cart sales equals more store openings. The problem is that sales are slowing. This is germane to banks as commercial real estate exposure related to retail property financing composes an estimated 22% of community bank commercial real estate (to also include mixed use).

Banking Judo –Turning Size To Your Advantage With Credit

Community Bank Size As An Advantage

Having more bankers to throw at a borrower or more assets to flaunt does not make a bank more effective. Strategy beats size every time, but bankers need to be smart how to position themselves against large banks. When it comes to loan mix, community banks need to be careful to assemble their assets with enterprise risk in mind. In particular, the increase in commercial real estate (CRE) and specifically, High Volatility Commercial Real Estate (HVCRE) is starting to be a concern.

Taking Loans Away From The Competition – Tactic 1

Commercial Loan Growth

Last week, we broke down how a quantitative bank may look at credit in order to get more accurate on their credit grades. Most banks do this to make sure they have their loan loss reserve levels correct. However, the better reason to invest in your credit model is to win more loans from the competition, while not being adversely selected. Today, we look at one of those two strategies that a bank might employ to drive out their competition from the marketplace or at least protect themselves from being driven out of business.

 

What Is Your Bank’s Loan Portfolio Rated?

CRE Loan Valuations

One problem with commercial loan portfolio due diligence is that there is no common underwriting standard between community banks. Mortgages, autos, consumer and other retail-type of loans tend to be more standardized since liquidity is greater. However, when it comes to commercial lending, the difference between banks can be wide. One bank’s “3” rated credit can be another bank’s “6.” While this is understandable between banks, this credit gap can even be found within one bank as different regions, branches and even lenders can propagate these systemic differences.

Understanding A Bank Loan’s Debt Service And Probability Of Default (2015)

Commercial Loan Probability of Default

Few banking school classes teach the finer points of loan structuring these days. This is a mistake as loan production is so competitive and spreads so thin that inexperienced lenders are at a distinct disadvantage. Last week, for example, we were discussing a loan here at CenterState and we determined the downside (stressed) case in a particular commercial real estate loan’s cash flows was a 0.8x debt service coverage ratio (DSCR). The question came up how much risk is that compared to a loan that cash flows at 1.25x stressed case?

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