Most banks are concerned with their credit portfolio. As credit risk increases, the following question comes up: is better to diversify by geography, by property type or by business type? This is to say that next year, do you focus your marketing dollars and pricing on particular counties, commuter zones, types of commercial real estate loans or certain C&I industries? The answers may not be so apparent and varies for each bank. In this article, we provide data and a framework for helping bank risk managers decide how to best deploy next year’s capital.
Tag: Loan Portfolio Management
We are in agreement with the ICBA that FASB’s proposed current expected credit loss (CECL) model would place tremendous costs and regulatory burdens on community banks. We also agree that CECL, as proposed, will increase reserves and negatively impact many community banks’ ability to lend and support economic growth through lending. However, it does not appear that the current proposal will be modified for banks under $10B in assets. We believe CECL will fundamentally change community banking, but some of those
When a bank forecloses on commercial property (or has the option to foreclose) there is always a question of do you spend energy working out the property in hopes that the value comes back or do you sell the property and take the capital charge? To answer the question, we looked at analysis on 150 loans whose underlying financed properties had payment problem and analyzed appraised values over a period of time to determine when a bank should either push the borrower to liquidate the property or foreclose and liquidate the property themselves.
For many community banks, a concentration in real estate lending may be an issue. This is especially concerning given the recent decrease in capitalization (cap) rates across many geographies and property classes. While community bankers have a difficult job trying to diversify their balance sheet away from real estate, we wanted to present a couple quantitative points that will make the job of risk management easier for banks.
There is a split between community bank managers on how to best manage loan portfolios in today’s environment. While some take a passive approach, others are attempting to rebalance the credit portfolio for today’s environment, while still others are attempting to rebalance the credit portfolio for tomorrow’s environment. Where your bank falls in this spectrum depends on your view on active bank 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.