Tag: Portfolio Management

Stress Testing The Severity of Coronavirus

The Corona Credit Shock

The Coronavirus is simultaneously disrupting supply and demand in the world economy.  The shock to the economy will have a profound effect on the US economy, and community banks will not be immune from this disruption.   It appears that a global recession is inevitable, but the full extent of damage to the banking industry is unclear.  However, there are some troubling signs that many banks may be unprepared for the severity and length of this recession and the exten

Restructuring Commercial Loans Amidst The Coronavirus

BETTER LOAN RESTRUCTURING

The economic implications of coronavirus are expected to be widespread and are already causing some borrowers to be concerned about their ability to make loan payments. Many of our bank customers have used the ARC program to fix rates for borrowers while retaining a variable rate. Some of these borrowers in profoundly affected sectors, such as restaurants, hotels, and theaters, are now approaching the lending banks to discuss loan payment relief.

Credit Risk in the Time of COVID-19 and the Fed

Pandemic Credit Management

The Fed did more than cut rates on Sunday; they pumped a massive amount of liquidity in the system, sending a signal to banks to level up. Far behind the health of employees and customers in the COVID-19 pandemic, comes the economic impact. Unlike the recession of 2008, where the economic impact came over many months, this pandemic impacted businesses in weeks providing much less time to prepare and adjust. The result is likely to be bad for the economy and bad for banks. If your bank is treating this as businesses as usual, then you are putting your survival at risk.

How Commercial Prepayment Speeds Are Making Your Margins Worse [Get Our Model]

LENDING PORTFOLIO MANAGEMENT
LENDING PORTFOLIO MANAGEMENT

There has been substantial research on how prepayment speeds of residential mortgages affect the profitability of individual loans and portfolios.  Because of the homogenous nature of residential mortgages, many firms have developed highly predictive models to calculate prepayment speeds based on past behavior, portfolio makeup, and macroeconomic variables.  However, very little research is available on prepayment speeds of commercial mortgages – this is understandable because of the uniqueness of each commercial loan.  Even sophisticated loan risk-adjusted return on capital (RAROC) models

A Loan Strategy Given Lower Rates

Increasing Lending Profitability
INCREASING LENDING 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. 

 

Managing Loans Towards The Business Cycle

Credit Management
CREDIT MANAGEMENT

In just a couple of months, the current economic expansion will be the longest in US history.  Since the mid-19th century, the country has experienced 33 business cycles in all, with the average economic expansion lasting a little over three years, and the average recession lasting just under 1.5 years.  The current expansion will, without a doubt, outlive the previous longest period of economic growth that occurred from 1991 to 2001.  However, no one has

Where to Set Minimum Debt Yield Ratio

Improving CRE Underwriting - picture of a office building

In one of our blogs last week we discussed why community banks should adopt minimum debt yield ratio for underwriting purposes.  We demonstrated how a debt yield ratio could help community banks properly measure the interplay between cap rates, interest rates, and cash flow.  We analyzed how real estate loans originated today at 1.20X debt service coverage ratio (DSCR) and 75% loan-to-value (LTV) may quickly become substandard credits if cap rates normalize, interest rates rise to long-term averages, or NOI is stressed in an economic downturn.

Why Community Banks Should Adopt A Minimum Debt Yield Ratio

Enhancing CRE Underwriting -Picture of a industrial building

In one of our blogs last week, we discussed why real estate loans originated today at 1.20X DSCR and 75% LTV may quickly become substandard credits if cap rates normalize, interest rates rise to long-term averages, or NOI is stressed in an economic downturn.  We argued that community banks should be favoring 1.50X DSCR credits, as that is the minimum cash flow required to withstand a standard recession.  We also stated that lenders must incorporate a minimum debt yie

Restaurant Lending Confidential: 10 Secrets

Restaurant Lending

We will miss Anthony Bourdain. As foodies, he captured our imagination not just with his food, his travelogue, and his attitude, but with his insider’s view of running restaurants. His book, Kitchen Confidential not only changed how we looked at restaurants as consumers, but it was the first time we started to apply some of his teachings to restaurant lending.

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