Tag: Lending

Does Greater Borrower Debt Mean Less Credit Risk?

Credit Underwriting

Sometimes, a company or real estate project with higher debt levels means less risk, not more. This concept is counterintuitive as credit underwriters have been historically taught that more debt means higher risk. However, the statistical evidence does not bear this out.

 

Are You Taking This Into Account For Your Floating Rate Loan Portfolio?

Loan Portfolio Management

Your floating rate loan portfolio may be ready to hurt you, and your bank might not be aware. Unlike fixed rate loans, floating rate loans tend not to have prepayment provisions. This part is well understood. What is far less understood is the fact that ANY material rate movement ends up hurting performance. While we have written about how interest rate risk and credit are interrelated, today we focus how rate movement causes unaware community banks to be adversely selected, thereby hurting performance.

 

Advanced Credit Underwriting: Determining Borrower Interest Rate Sensitivity

Underwriting borrower interest sensitivity

We monitor many banking schools and credit training programs and it is rare that we see anyone teach the analysis of a borrower’s interest rate risk position. For that matter, in hundreds of credit reviews that we see a year from a variety of banks, there is rarely a quantification of how rising or falling rates will impact credit risk.

How to Make A 15% ROE Making Loans at A 2% Spread (Or How To Get Out Of A Sinkhole)

Bank Lending

Listen, some bankers fear making loans below a 4% margin like I fear Florida sinkholes. To put that in context, I wear an avalanche transceiver whenever I am in the State. This makes bank meetings a little awkward, but gives me a fighting chance to be found when I get swallowed up. By the State’s own website, they refer to sinkholes as a “fact of life” which is why Florida is the only state where banks have to consult the “Sinkhole Clearinghouse” database before making a loan.

Crunch The Numbers: How To Offset The Credit Impact to CRE of Rising Rates

Interest Rate Risk to Commercial Real Estate Lending

Given that rates are poised to move up in 2014, this could negatively impact commercial real estate (“CRE”) loan quality. Fortunately, rising rates create some offsetting forces that could help or hurt underwritten CRE loans. The net impact of these multiple forces is why bankers get paid the big bucks to take the risk.  To better understand these forces, we break this down into a quick interest rate risk primer for commercial real estate that we believe every lender should know.

 

How Come No One Is Teaching This In Banking?

Teaching Better Banking

Part of the problem with banking education is that it is incomplete. Banking schools like Stonier and Pacific Coast Banking School are good but they just teach part of the picture. They can talk about how to underwrite a loan or understand risk, but they leave a chasm in understanding about the true risk of underwriting. Outside of banking schools, most loan officers these days are self-taught practitioners in the art of lending and have learned their knowledge through a series of trials by fire.

Lending To Contractors - Risk Update for 2014

Lending to Contractors

If you drive a fair bit, you probably agree with us that gridlock is bad, but it is starting to get better. It used to be we used to drive to work only to use the bathroom and then start to commute home. Now, with many of the major Stimulus Package projects coming to an end, we can make it to work and discuss the latest episode of Homeland before having to turn around - And this is a problem.

 

Renewed Loans Can Earn You More Income Than New Origination

Loan Renewals Are Often More Profitable Than New Originations

Many banks wait until the last possible period before renewing a loan. Waiting often invites competition, as other banks with loans out to that customer know exactly when other bank’s loans mature (hopefully you are capturing this information as well). To beat this problem, banks are smart to lock in renewals in advanced in order to minimize competition. Not only is a renewing loan likely a better credit risk (you have a payment history for starters), but banks can garner a larger spread making the risk-adjusted return more profitable. 

 

CRE Retail: Does This Tenant Make My Butt Look Fat?

Retail CRE Analysis

A couple years ago, I wanted to see what the “New JC Penney” looked like so we took a stroll through one at the local mall. While I was intrigued with the concept of doing away with sale prices, wider aisles and easier to read signs, the wife doubted if not having sales would work – “people love sales,” she said.

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