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.
Tag: Loan Value
In a competitive lending market, as the case today, banks are looking for an edge to win quality loans. For quality credits, many community lenders are eliminating loan origination fees and prepayment provisions to differentiate from the competition. Since it is easy for an institution to reduce fees and prepayment provisions, that competitive advantage quickly becomes commonplace, and no lender retains an advantage. In this article, we take a quantitative look at the benefits of loan prepayment provisions.
Four Reasons for Prepayment Provisions
Competition for quality (and sometimes not so quality) loans is intense and banks are looking for every possible advantage. One area where community banks can gain a competitive advantage is strategically setting amortization and call terms on loans. Specifically, there is much-heated discussion at loan committees on setting amortization periods and commitment terms on secured real estate loans. Increase amortization and you increase the principal at risk.
Yesterdays’ article on branding loans generated many comments. The most common question we received is to give finite examples of how to create a unique product in the marketplace to garner above average pricing.
Sometimes here at CenterState, we feel like hamsters - $25mm of loans go on our balance sheet in a month and $20mm runs off. Of course, most all of those loans don’t have prepayment protection so the result may be our own doing. When banks originate a loan without a prepayment penalty or yield maintenance provision they are giving away economic value to the borrower – on average 7.2% of total loan value to be exact. For a $1.5mm loan, that is like giving the borrower a new Tesla P85D complete with “Insane” mode.