We were recently working to close a commercial loan when the lender officer paused the closing. He did not want his bank to spend legal fees to clarify some tax-transfer issues (costs which the borrower also refused to cover). The legal bill would be between $2 and $3k. We asked the lending officer to calculate the legal costs versus the loan’s net present value (NPV) of income – the lender gave us a puzzled look. We quickly calculated the lifetime income of the loan versus the legal fees for the lender, and the lender proceeded to close the loan within two days.
Tag: Loan Profitability
Many industry analysts are increasingly gloomy on the banking industry, trimming expectations for net interest margin, interest income, and total profits. With long-term interest rates declining within a whisker of the lowest level in history, many analysts are reducing their forecast of banking profits by up to 10% through 2020 or 2021. However, we would like to share a current proven strategy for community banks to make the best of the current interest rate environment, lock-in their best clients, increase cross-sell opportunities, and actually increase margins.
Data visualization is the presentation of data in a pictorial or graphical format. It enables decision-makers to see analytics more easily, grasp difficult concepts, identify new patterns, and explain outliers.
In an article two weeks ago, we discussed why community banks should desire prepayment provisions in their loans. We also acknowledged that in this very competitive banking market banks are unable to negotiate a meaningful prepayment provision. In this blog, we will identify techniques that some banks may use to obtain a meaningful prepayment provision, and we share a video explaining how CenterState Bank lenders use these techniques with commercial borrowers to negotiate a powerful prepayment provision.
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
One of the most common structures in commercial lending is that ten-year commercial loan that is structured as a five-year fixed rate loan with a rate reset at the end of five years. There are two main problems with this loan structure, one having to do with credit and the other having to do with interest rate risk that makes this one of the worst performing loan structures in a rising rate environment for community banks. In this article, we delve into the data to compare two popular loan structures.
Top performing banks use prepayment protection (PP) on commercial loans to deliver superior value and gain a competitive advantage against their competition. The connection between PP and bank value is not always apparent, but we can measure this relationship and quantify when it makes sense to remove or insist on PP. Some banks mistakenly avoid including PP in commercial loans as a competitive strategy. We feel that eliminating PP on commercial loans materially detracts from profitability, degrades credit quality and attracts the wrong commercial customers.
We believe that CECL will inadvertently force some community banks to make suboptimal lending decisions and accelerate community bank consolidation, while, at the same time, allow others to differentiate their business models. In this article, we consider some of the secondary effects of CECL on community bank CRE lending decisions and specifically the average life of newly originated loans.
One of the easiest ways for community banks to increase profitability is to stem commercial loans from refinancing to a competitor. Competition is intense, and community banks that develop a strategy to retain profitable clients can increase income substantially. While most banks devote resources to marketing, sourcing, and booking new business, much less emphasis is placed on maximizing profitability on the existing loan portfolio by identifying and controlling customer loss (or refinancing risk). We would like to share one specific strateg
The power of three suggests that things that come in threes seem wittier, more understandable, and more memorable than things that come in other numbers. This concept is utilized in comedy, academia, and banking. We identify the three most important concepts that high-performing community bankers are deploying today to drive profitability and decrease risk. We call it the “2018 Trinity” of community banking.