We have often characterized banks as being “manufacturers of credit.” Like any manufacturing process, banks need to produce a product, in our case loans, to meet the customer’s demand. Loan production takes inputs such as capital, analysis, and documents and combines them in a standardized process to produce an end product. The Paycheck Protection Program (PPP) has presented a tremendous challenge for banks. After three days of manufacturing credit, we have honed ten essential concepts that may help your bank do more than its fair share of getting America going again.
Tag: Loan Production
Government-sponsored enterprises (GSEs) have been lending to borrowers for many decades. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have popular multifamily lending programs so much so that they now control the bulk of the market. For example, Freddie Mac’s total multifamily finance activity for 2018 was $77.5B, and Fannie Mae’s was $65.4B which means that if you have to compete, your bank needs to do so carefully as you have a high probability of getting adversely selected.
In the last few months, more than a dozen bankers have reached out to us about the merits of a fixed-rate loan program. Up until a few months ago, we didn’t know that the industry had started coining the term “fixed-rate loan program.” We always assumed that banks made loans that borrowers needed, whether fixed-rate, adjustable-rate, or some form of hybrid. Now, this seems to be a thing and we, not surprisingly, have an opinion on the matter.
The production of a typical community bank often resembles the chart below. There are discernable peaks and troughs. We know this as our pipeline functionality in our Loan Command pricing and management model helps banks track production and closing rates for loans. In this article, we explore what a typical closing percentage looks like for a community bank, how it changes month to month and provide some tips as to how to smooth the process out and get more efficient at loan production.
Earlier this week, we discussed why community banks need more granularity in their credit grades in order to compete with more sophisticated banks (HERE). Our example focused on just the credit and loan loss allowances between a set of loans that were all rated with a credit grade four by one bank as we showed what happens over the course of a quarter when they have to compete. We stopped short on pricing, which is our topic today.
While your bank’s main purpose is to help your customer achieve their dreams, one side business to that aspiration is that you manufacture credit. Credit does not magically appear, and like a manufacturer of widgets, a bank has a supply chain and process to put credit together. Luckily for us, it does not take tangible raw materials like steel and silicon chips, but it does take intangible raw materials in the form of intellectual property, hours of analysis, data and risk. That is a good thing as there is little friction in moving around intangible goods.
Most community banks are interested in booking local C&I loans but are unable to generate meaningful outstanding balances.
Commercial banks grew loan balances by 2.11% in the second quarter of this year compared to the first. This growth belies that some banks increased their commercial loan portfolios more than the industry average and other banks experienced shrinking loan volumes. While the industry is experiencing much needed total growth, that growth is not evenly distributed among banks.
Three weeks ago we gave bankers a quick way to translate commercial real estate portfolios into a common rating using simplified methodology (HERE) in order to quickly access their portfolio or a portfolio for purchase. We received many comments from bankers wanting to know more of a detailed approach to accessing credit by loan type and wanting to know how C&I fit into a ratings construct.