Readers of this blog know we often teach what we learn at our bank or at other banks throughout the U.S. However, this time we need more help. Specifically, for those banks that are trying to serve under banked or minority-owned commercial customer there is an inherit set of economics that are difficult to overcome. Very few banks in history have succeeded in this area and those who have did so prior to the 90’s. Given compliance costs and transactional friction, it is almost impossible to turn a profit.
If a loan is going to go bad when will it go bad? Understanding the answer to this question will not only make you a better banker, but will keep your bank out of trouble in the next five years. To answer this question, we downloaded a large time series of data from Trepp and Associates for all commercial real estate loans originated between 2001 and 2007. These loans were fixed and floating and had maturities from three years to ten years. What we found will enlighten you.
It is hard to find a better time not to be in mortgages. If you are a bank, you have some advantages given a lower cost of funds and the ability to cross-sell. However, if you are an independent lender, current signals mean you need to further take capacity out of your system to reduce costs. No matter what your organization, current mortgage economics are eye-opening. Recent data released by the Mortgage Bankers Association (MBA) showed that the average independent lender spent 8 cents for every $100 of principal originated - the worst performance quarter since 2008.
If you want to win more loan business here is a tactic that experienced bankers know that many loan officers don’t. This should be part of every loan officers training (we work it in) and is handy to have in your back pocket for those rate-focused borrowers.
The risk of being an officer or a director at a bank is huge compared to other industries. How well does your D&O (director and officer insurance) protect you against the FDIC? If there ever was a time to perform a risk check the time would be now, as case law and legal actions are now rich in current precedence. While insurance policies have improved, not all of them have and many banks are still exposed.
It is likely every quarter you look at a set of peer group metrics and compare your bank. “Bank ABC produced a 16% ROE. How are they doing it,” you ask. Your CFO responds that they are doing it by booking more C&I loans. You then commit the organization to booking more C&I loans. Do you see what happened there? Your strategy is to copy a competitor. It is done thousands of times per day by banks, as we tend to mimic deposit/loan pricing, branches, marketing and positioning.
Surpassing Commerce Bank (NJ) almost a decade ago, Umpqua is now recognized as a leader in providing one of the best branch banking experiences in the world. Customers and employees delight in delivering a superior financially-oriented experience that is unsurpassed by most retail outlets let alone banks. In fact, bankers come from all over (we recently met one from Russia that last time we stopped into a branch) just to see the experience firsthand.
Last week the RadioShack earnings announcement and restatement that it will close 1,100 locations sent bankers scrambling back to their credit files to see if the beleaguered electronics chain composed any part of their commercial real estate rent rolls. It turns out that that for about 100 loans, there is exposure with an estimate of 36 of these at community banks. Luckily, Radio Shack has been downsizing and has gone to smaller and smaller footprints so that on average, the stores now make up less than 10% of the rentable space at these retail centers.
This week’s SBA announcement that the Agency will make available borrower’s credit score that takes into account both personal and business attributes has sent shock waves through the industry. The funny part is that these shock waves were not the ones intended. The intention was to let the Nation know that Maria Contreras-Sweet, the new head of the SBA, is ready to help minority lending and that will further stimulate the economy.
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.
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