Tag: Loan Profitability

Before You Waive Prepayment Protection On A Loan, Consider This

Structuring Loan Value

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.

 

A Pitfall of CECL on Bank Performance

Bank Loan Structuring

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.

 

CECL Summarized

 

How To Facilitate The Tactical Refinance To Increase Retention

Increasing Loan Portfolio Return

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

3 Important Things For Banks To Improve Commercial Customer Profitability

Boosting Commercial Profitability

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.

 

Take Advantage of These Common Misconceptions For Lending Profit

Lending Profitability

Relationships between different variables can be very complex in the real world and banking is a perfect example of this complexity. The human mind, however, is skewed to perceive relationships in a linear fashion and this can lead bankers to make the wrong decisions.  With the odd shape of the yield curve, we are seeing smart bankers making very profitable lending decisions because they understand their business model, the shape of the yield curve and the nonlinearity of commercial loan pricing.

What is a Profitable Loan?

Loan Profitability

Profitability is the degree to which an activity yields profit or financial gain. While this concept is simple to understand, in reviewing a bank’s financial statements where profitability can be easily measured for past performance, bankers often don’t measure the profitability of a loan at inception and certainly not with the same level of certainty.

Creating Greater Lifetime Customer Value Through Loan Structuring

Increasing Lifetime Value in Lending

Customer lifetime value (CLV) is defined as the total profit generated from a customer over the entire life of that relationship.  In banking, CLV is a very important concept because of the high cost sourcing, underwriting and originating commercial loans.  On the first day a commercial loan is booked, the return on equity (ROE) on that loan is negative.  The bank’s profit is generated as the borrower pays interest over the life of the credit and, generally, the long

How To Get The Most Out Of Your Net Interest Margin

Boosting Interest Margin

Many bankers and investors think rising rates will automatically translate into larger net interest margins (NIM) and greater profits. While first quarter data will likely show the first increase in aggregate loan yield since 2007, it remains to be seen how much of that increase gets translated into wider NIM for community banks at the end of 2017.

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