Tag: Lending

The Flat Yield Curve is Frustrating Bankers

Loan Structuring - A guy holding his head in frustration

A flat yield curve has us scratching our heads – should we be originating fixed or floating rate loans?  If bankers believe that the current shape of the yield curve is a harbinger of an impending recession, then booking fixed rate loans may be a winning strategy.  However, if you believe, as we do, that there simply isn’t enough data as yet to point with a moderate degree of confidence to an economic recession in 2019 or 2020 then booking floating rate loans may be a better strategy.  We have developed a technique and loan structure to assist bankers who espouse the former scenario and are

Loan Index Update – Libor, SOFR, and BYI

The Future of Libor

Earlier this month, The Federal Reserve released a framework that would allow the creation of a term SOFR market based on SOFR futures. One of our milestone steps that were required before CenterState switches over to the Secured Overnight Financing Rate (SOFR) was a robust term market and creating a framework was the first step. In this article, we give an update on that SOFR term market, discuss the latest with the BYI Index and provide banks with an updated timetable.

 

SOFR Term

How Top Banks Predict The Future With A Loan Scorecard Methodology

Commercial Loan Scoring - Retail Building

In addition to traditional underwriting, some banks utilize a scorecard to rank their commercial properties. Projects are run through a scorecard and then rated on a numerical value. For banks without a credit or pricing model that provides a probability of default and expected loss, the scorecard allows an intermediate way to compare loan quality. In this article, we take a look at a sample scorecard and give banks some examples of how to use the methodology for better commercial real estate (CRE) underwriting and pricing.

 

How To Upsell and Cross-sell Commercial Loans

Bank Sales - Picture of two businessmen shaking hands

Many community bankers are looking to increase profit growth, and management teams are focusing on cross-sell opportunities to accomplish this objective.  For the banking industry, unlike many other industries, upselling and cross-selling has a high and disproportional impact on profitability.  With proper tools and strategies, community bankers can upsell and cross-sell their products to maximize profitability.  In this article, we will consider the common features

Where to Set Minimum Debt Yield Ratio

Improving CRE Underwriting - picture of a office building

In one of our blogs last week we discussed why community banks should adopt minimum debt yield ratio for underwriting purposes.  We demonstrated how a debt yield ratio could help community banks properly measure the interplay between cap rates, interest rates, and cash flow.  We analyzed how real estate loans originated today at 1.20X debt service coverage ratio (DSCR) and 75% loan-to-value (LTV) may quickly become substandard credits if cap rates normalize, interest rates rise to long-term averages, or NOI is stressed in an economic downturn.

Why Community Banks Should Adopt A Minimum Debt Yield Ratio

Enhancing CRE Underwriting -Picture of a industrial building

In one of our blogs last week, we discussed why real estate loans originated today at 1.20X DSCR and 75% LTV may quickly become substandard credits if cap rates normalize, interest rates rise to long-term averages, or NOI is stressed in an economic downturn.  We argued that community banks should be favoring 1.50X DSCR credits, as that is the minimum cash flow required to withstand a standard recession.  We also stated that lenders must incorporate a minimum debt yie

The Current State of Commercial Real Estate Lending

More Profitable Commercial Real Estate Lending

Many banks today are satisfied to underwrite real estate secured loans on just two metrics: debt-service-coverage ratio (DSCR) and loan-to-appraised value (LTV).  Banks typically approve credits above 1.20X and below 75% LTV – with many loan-specific factors that may skew these acceptable levels either way.  For competitive reasons, we see some banks who are dipping to 1.10X DSCR, and some deals are approved at 85% or even higher LTVs.  However, in today’s business c

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