Yesterday, we had the opportunity to attend Finovate, the Super Bowl of financial technology held in San Jose, CA. We came away a little underwhelmed from the community bank perspective but were pleased that most of the technology was headed in the right direction. The venue and the show were up to its usual high standards and seeing 33 companies in one day was highly efficient. However, the discussions could have taken place three years ago.
We just released the first version of our loan pricing calculator and it is now available for free to financial institutions. If you say your bank is all about service, then you need your lenders to have this model because allows your lenders to move the conversation away from the price on the loan to what structure best matches your client’s profile. The calculator produces a matrix of prices for different amortizations and maturities and takes into account interest rate and a large part of liquidity risk.
Next to C&I, commercial real estate ("CRE") loans have been one of the best performing asset classes for banks in 2014. Spreads continue to tighten on CRE and are expected to suck in another 8bp by year end making the future look bright. With banks coming up on their mid-year asset allocation review, all looks stable for the majority of bank asset classes with the exception of the difference between commercial real estate and residential mortgage holdings on bank’s balance sheet.
We often compete for tax-exempt municipal credits through a bid process. Over the years, we have learned a few things that have improved our odds. We pass on our best secrets in hopes that we can increase your win percentage.
There is a simple mathematical concept known as the “maximum of sequence” that every banker should know in order to increase performance. The concept is derived from the "Marriage Problem" made popular in the 60’s that presents the following issue: Suppose you must choose a spouse out of 100 applicants. You may interview each one once and after each interview you must decide whether to marry that person or not. If you decline, you lose the opportunity forever. For the uninitiated, the odds of finding the best partner are about 1 in 100.
For a bank that is behind budget, has a real estate concentration, has too much asset duration or just wants exposure to certain industries, there is a program that should be met with open arms, as it is ideal to help strengthen your bank. Today, CenterState introduced its National-to-Local Loan Program to help community banks add C&I loan growth and diversify their balance sheet in a customized manner.
You can ignore data when underwriting, but that would be a mistake as sometimes the differences are stark. Our best example comes from fresh data from the office supply sector. Normally, industry probabilities of defaults (“POD”) move by about 7% per year. In 2014 certain industries, like banks and retail office supply stores, moved with large rates of change and even multiple rates of change. While banks are moving in a positive direction and risk is being reduced, retail office supplies are moving in the opposite direction.
What if there were a set of three easy to distinguish factors that, if all present, could predict the future performance of your customer and reduce the probability of default to half that of their respective industry? Would you do anything differently? Would you price lower? Would you extend more credit? Would you change your sales or marketing process at all to go after those accounts?
Ever think of designing your own customized app to solve a problem, create a new product or just generate fee income? Every banker understands banking is going mobile, but many assume it is the realm of big banks. Few banks understand what it takes to build an app from scratch, but it is not as hard as many believe. Maybe you won’t create the next Candy Crush or Uber, but there are dozens of ideas available that can set your bank apart, lower your operating cost and get you more engaged with the customer.
2013 property cash flows are starting to come in at many lenders and we have been taking a look at the data to see what insights can be gleaned that could give us an advantage. Combining bank data with data from the public markets, we can get a statistically valid sample size of over $130B worth of properties in almost all major metro and suburban markets (about 14% of the total CRE market). The below data may help banks when pricing and will give a clearer view of the risk profile when underwriting.
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