Tag: Loan Profitability

The Balancing Act Of Maturity And Amortization

Bank Lending

When it comes to setting a commercial loan’s  maturity and amortization, banks tend to rely on tradition. Given tighter spreads and more competitive lending, it is more important than ever to have a working knowledge of how maturity, amortization, risk, loan structure and pricing interplay to produce the highest risk-adjusted return. As we have covered in the past balloon structures inject liquidity risk into the loan equation and often hurt profitability.

How Your Bank Can Make Construction Lending More Profitable

Construction Lending

Construction and Land Development loans (C&D loans) drove a substantial portion of the loan growth at community banks between 2000 and 2007, especially for banks under $2B in assets. While C&D loan volumes bolstered total loan growth, these same loans resulted in substantial detraction from risk-adjusted return on equity (ROE).  In fact, C&D loans were one of the major causes of bank failures from 2009 to 2011.  Compared to their peak in 2007, current C&D loan portfolios are relatively small.

Here Is Our Commercial Lender Cheat Sheet To Teach How Banks Stack Up Against Competitors

Bank Loan Competition

We often hear banking customers explain that competition is intense for quality (and sometimes even marginal) lending opportunities.  Some banks even make fatalistic arguments that community banks cannot compete against life insurance companies or conduit lenders because of price or structure.  We do not agree and attempt to prove it every day here at CenterState.

Creating Loan Value: The Construction Through Permanent Loan [Video]

Construction Loan Profitability

A flaw in many bank’s loan production process is calculating the profitability of a non-owner occupied construction loan that is for investment purposes. These are developer-led projects built for investment and thus subject to construction and market risk. Banks that measure the wrong metrics and don’t have a robust risk management process in place are doomed to create construction loans that detract from shareholder value. The problem is many banks and boards are not aware of this risk.

Why Smaller Loans Can Create More Risks For Banks

Loan Profitability

Most banks feel comfortable making smaller sized loans. The obvious reasoning is that a smaller loan will present less of a loss should it go into default - less of a loss means less risk, and, therefore, higher return.  That reasoning could be faulty and could end up getting your bank into trouble as often times it is the larger loan that presents less risk. There are three reasons for this. First, the acquisition cost of a larger loan is just slightly more from a dollar value perspective (and lower on a percentage basis) than that of a small loan.

Understand This So You Don’t Misprice Commercial Loan Risk At Your Bank

Commercial Loan Risk

Do you treat all cash flow the same? That is, does a property with a 1.25x debt service coverage get a “3” rating no matter what type of property it is? If so, your bank is most likely mispricing risk which will hurt performance over time. Every waking business day, bankers have to make decisions and the ones with the best information will have superior performance over time.

 

7 Reasons Why You May Want To Book That 2% Margin Loan

Loan Profitability

As loan pricing becomes more competitive, the opportunity to book high quality credits at thin margins presents itself more and more. A 2% margined loan represents about a 9% risk-adjusted return on equity (depending on your cost structure), which is below most bank’s cost of capital. As such, there is every reason to pass on the credit and let another bank book the loan. However, before you do, consider the following points:

 

EPS is increased

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