We have blogged about how low-interest rates, COVID-19 credit strain, and tough competition for quality commercial loans create a challenging environment for community banks.
Tag: Loan Growth
Uncertainty creates significant challenges for business managers, and while variability in outcomes is a business constant, the degree of uncertainty during a pandemic is extraordinary. Therefore, how do community banks distill today’s interest rate forecasts and position their loan portfolio for optimal performance? Choosing the duration of your loan portfolio isn’t a passive decision. Banks can play an active roll in structuring their loans to achieve both the optimal duration for the borrower as well as for the bank.
Covid-19 and the responses to the pandemic are exerting various pressures on community banks. How a community bank underwrites and books commercial credit through the end of 2020 will have a significant impact on the bank’s profits and credit quality through the entire next business cycle. In this article, we focus on four key steps of what banks can do to continue to add earning assets to their balance sheet.
Loan growth is slowing for community banks, and credit spreads are widening. As is typical in economic cycles, recessions present an opportunity for healthy banks to thrive and for weaker banks to be whittled. Despite the flat and low yield curve, the current banking environment is a perfect recipe for healthy banks to win new, strong credit relationships, and increase loan profitability. However, healthy banks need to act prudently today in choosing the correct type of credit, appropriate structure, enforceable prepayment provisions, and long-term relationship customers.
Many community bankers are experiencing competitive pressures when competing for higher quality credit, relationship-driven accounts.
Knowing who your competition is, what they are offering, their delivery channels and service levels can help community banks differentiate their services and enhance their competitive advantage. Understanding the competitive banking landscape helps community banks set proper pricing, effectively respond to rival marketing, and compete more effectively. Analyzing the competition can also help a bank be realistic about which products it can sell and at what price.
Many banks manage loan growth absent of other factors on the balance sheet. Historically, that has proven to be a mistake as strong loan growth often leads to a more rate sensitive bank. Many banks increase loan growth in a rising rate environment without regard to risk-adjusted loan return or deposit performance. While we often cover how to manage risk-adjusted loan return, in this article, we want to highlight the tradeoff between loan growth and deposit performance in hopes of giving bankers a better formula for high-performance.
According to the latest FDIC data, loan credit quality improved in the third quarter with many categories such as construction and multi-family hitting record lows. In general, non-current loans-to-total loans hit 1.20%, the lowest since the second quarter of 2006. Offsetting credit quality, loan growth is slowing which is starting to cause problems for many banks as growth solves many problems. In this article, we look at the current state of commercial credit and look at the how banks might position themselves to take advantage of the changes.
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.
Commercial loan competition is intense and we recently witnessed a long-term customer of a community bank refinance with a competitor bank for just a 15bps lower loan rate, zero closing costs and no loan fees. This is an extreme example, but the point is germane – competition is intense and community banks need to be creative to manage profitability. We would like to share one particular tactic that we use at CenterState Bank to increase commercial loan profitability. We are certain that your bank can benefit from this same approach and poss