Tag: Loan Pricing

Getting More Granular on Credit Risk in the Midst of the Pandemic

Commercial Lending in the COVID-19 age

Credit is always changing, and CenterState watches a variety of markers such as corporate bond credit spreads, vacancy rates, net effective rents and many others in order to help us understand credit. Three of those important credit metrics are the probability of default (POD) by industry, the rate of change of that POD, and the volatility of credit of each industry.

Why a 1.65% Credit Spread Makes Sense

Improving Relationship Profitability

We recently spoke to a frustrated banker who was amazed that a regional bank was trying to poach his existing customer by quoting the borrower a credit spread of 1.65%.

Current Commercial Loan Pricing, Opportunities, and Risks For Banks

Managing Risk and Loan Pricing

The Covid-19 pandemic has decimated the US economy, and the recovery may take longer than initially suspected.  However, currently, community banks have an opportunity to identify and win or retain longer-term, credit-worthy relationships at better credit spreads. There are also substantial challenges facing the entire banking industry.

Should You Have a Minimum Loan Spread for Pricing?

Based on our observations, we estimate that somewhere between 20% and 25% of community banks have adopted a policy requiring minimum yield or credit spreads for their newly originated commercial loans. The strategy requiring minimum commercial credit spreads may be well-intentioned, but the results for banks may be less than optimal.

How Optionality Impacts Your Net Interest Margin

IMPROVING NIM
IMPROVING NIM

For the majority of bankers, maintaining or increasing net interest margin (NIM) is the single most significant focus today. The shape of the yield curve and lower rates have caused NIM compression across the board and have hurt bank equity performance. While we are not big fans of managing bank performance using NIM as it doesn’t take into account risk and cost, it is one of the most common performance metrics used in banking.

The Data on The Term, DSCR and LTV Trade-off in Commercial Loan Pricing

Creating Greater Loan Profitability

At this juncture of the credit cycle, community banks must be judicious in the way they source, structure and book commercial loans.  Competition is stiff, and every banker is trying to outsmart and out-compete multiple lenders vying for the same customer.  Unfortunately, negotiating terms and pricing on a commercial loan feels a little like entering a bazaar wher

Another Problem With Using Net Interest Margin To Manage Your Bank

Metrics For Bank Performance

Net interest margin (NIM) is one of the most over-utilized metrics in banking. As we have pointed out in the past, if you include all the failed banks over the last ten years, the statistic is about 20% predictive of underperformance. Thus, if you manage your bank trying to get the largest NIM possible, you are likely to produce less profit, not more. Of course, all things being equal you want wider NIM loans than not, but all things are rarely equal.

Here Is A Simple Fund Transfer Pricing Method For Banks

FTP In Banking

Funds transfer pricing (FTP) has been an important tool for financial institutions for several decades. The methodology was introduced to banks in the early 1980s to help allocate corporate costs among business lines. Since then, the mechanism has been central to also helping allocate risk among business units. For instance, if your bank has interest rate sensitivity, what portion of the risk is driven by fee lines (f.e. mortgages), loans and deposits. In this article, we look at the concepts of FTP and detail how banks can use the methodology to better manage risk.

 

The $238k Wall Street Journal Prime Mistake

Last month, right after lunch, the borrower came into the bank to close his company’s owner-occupied commercial loan for $5mm – it happened to be March 21st. The borrower closed the loan, locked in a 4.50% rate for 10-years, shook hands, smiled and walked out the door. The Chief Lender and the CFO walked over to the business development officer and congratulated him on a job well done. High-fives ensued, and everyone was happy. Should they be? The Bank just lost $238k in one day, and the worst part is, no one knew the difference except the borrower.

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