Tag: Credit Management

CRE Loan Delinquency Data

While it is too soon to get the data on bank commercial real estate (CRE) portfolio delinquencies and forbearances, we take our benchmarks from the commercial mortgage-backed securities market as of May 14th. As any commercial banker can tell you, hospitality and retail remain under the most pressure, jumping up more than 5x and 3x, respectively.  Office delinquencies are up 71%, month-over-month, industrial properties remain relatively unchanged while Other (self-storage, specialty, etc.) is up 3.5x.

Using The Forward Starting Floater For Loan Restructuring

Loan Restructuring Idea

The impact of coronavirus on community banks will be widespread, and, with some borrowers, the restructuring efforts may take a long time and will sap substantial bank resources. Even as bankers are exerting time and effort to help some borrowers stay in business and continue to service their bank debt, other borrowers are looking for new funding, and existing customers, who are creditworthy, are being solicited by competitors. The question for community bankers is how to retain existing strong customers and appropriate ways to structure new debt given the current challenges.

Restructuring Commercial Loans Amidst The Coronavirus


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.

Your Bank Probably Has Loan Size and Risk Wrong

Managing Credit Risk

If you are like most banks you have your credit approval and risk process based around loan size. The assumption is that the larger the loan the more risk the bank is taking on so a greater level of risk review is needed. But, suppose the data didn’t bear that assumption out? If that assumption is wrong, then that means that your bank is probably underpricing the smaller loans, overpricing the larger loans, applying the wrong cost structure to the larger loans and misaligning risk against your capital.

Understanding Survivorship Bias In Banking

A more profitable loan portfolio

It is 1942,  you are in Air Force command, and you want to keep our flyers safe. Our planes are being shot down at an alarming rate, and your solution is to install armor. But the armor makes the plane heavier, and heavier planes are slower, less maneuverable and use more fuel.  Realizing you cannot armor plate the entire plane, the question arises what is the optimal amount of armor and where should it be placed to give our soldiers the best chance to complete their mission alive?

Predicting Borrower Behavior For 2018

Loan Structures for 2018

In 2010, Paul the octopus was tasked with predicting the outcomes of the World Cup. At feeding time, Paul was presented with two different glass boxes that contained his food each representing one of the teams. To Paul’s credit, he was on a roll as he correctly predicted the outcome of all eight German soccer matches leading up to the final. However, instead of having abnormally strong psychic or predictive prowess, the little cephalopod was just lucky. There was a 1 in 256 chance that Paul would correctly divine the outcome of each German match, and he nailed it.

Is It Better For Banks To Diversify By Geography or Loan Type?

How to diversify credit

Most banks are concerned with their credit portfolio. As credit risk increases, the following question comes up:  is better to diversify by geography, by property type or by business type? This is to say that next year, do you focus your marketing dollars and pricing on particular counties, commuter zones, types of commercial real estate loans or certain C&I industries? The answers may not be so apparent and varies for each bank. In this article, we provide data and a framework for helping bank risk managers decide how to best deploy next year’s capital.

How To Set The Loan To Value

CRE Underwriting

When it comes to underwriting commercial property for a bank loan how do you determine the right loan-to-value (LTV) ratio? Many readers will look at that question an answer – “We set our LTV at the maximum of our policy,” or “We set LTV where the borrower wants to the maximum of our policy.” While not bad answers, that methodology does not optimize the risk/reward profile of a commercial real estate (CRE) loan for a bank. Quantitatively inclined banks can do a better job both in term of risk management and return by expanding their analysis.

The Best and Worst Industries for Banks to Lend to in 2017

More Efficient Loan Underwriting

When it comes to underwriting, it is not so much the risk that causes banks concern, but the volatility around the risk that is the problem. The major industry with the highest probability of default for banks is trucking at a 4.7% annual probability of default, but if you price and reserve for 1.4% of the loan, you have mitigated that risk.  That is, lending to a trucking company is no more risky as lending to a pig farmer, which incidentally has the lowest probability of default as of June of 2017 at 0.95% and would require pricing and a reserve of about 0.29%.


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