Tag: Loan Performance

The Status of Commercial Real Estate Values

Commercial Real Estate

Recent data, just released from Real Capital Analytics, shows that since the start of the year (month-end April), commercial real estate (CRE) has appreciated 2.6% in 2019. This is good news for banks as it shows that every significant loan sector likely has improvements in both debt service coverage and loan-to-value. In major markets, this appreciation has been closer to 4.9%, and in secondary markets, price appreciation has been 1.5%. In this article, we take a look at the details to help banks better manage their pricing and risk.


Choosing The Right Loan Index For Your Bank

Better Loan Pricing

Community bankers are currently paying close attention to commercial loan pricing given near-record tight credit spreads and increasing interest rate risk.  The vast majority of commercial loans in the market are priced to an index plus a credit spread.  Determining the appropriate credit spread that will win the business and provide sufficient return to the lender is a key element of RAROC (risk adjusted return on capital) analysis.  However, the underlying index to

Creating More Profitable Construction Loans

Creating Profitable Construction Loans

We recently received a call from a frustrated banker attempting to retain an existing borrower.  By way of background, the borrower approached our banker 11 months ago asking for a construction through perm loan. The proceeds were used to construct an owner-occupied industrial and distribution center.

Understanding The Three Dimensions of Borrower Credit Risk

Better Borrower Underwriting

The credit quality of a borrower moves in three dimensions. The obvious dimension is, of course, credit. However, a second dimension is credit volatility or how likely that credit is set to move over time. The third dimension is credit selection risk or the risk that your underwriting isn’t accurate. Selection risk can be thought of as underwriting error. Some industries and some borrowers are more complex than others, and the risk that your bank determines the loan as a low credit risk while it is high or vice versa can be quantified.

How a Flattening Yield Curve Exposes Your Borrowers

Protecting Your Borrowers

An East Coast bank booked a $600,000, owner-occupied CRE loan for a five-year term in 2015 at 4.75% fixed.  We know the borrower well, and last month another bank that we work with refinanced that loan on a 10-year term at a 4.61% rate. The borrower received more certainty and a better price.

Why Hospitality Lending Risk Is Increasing

Hospitality Lending Risk

We are not sure why the hotel staff can’t just put those small bottles of shampoo and conditioner inside the shower, so we don’t have to step out and get them all the time, but that is one of our few complaints when it comes to the state of hotel operations these days. Hotel lending continues to be one of the best performing loan sectors for banks, but our concern is that this run could be coming to an end.

One Of The Best Risk / Reward Lending Sectors In Banking

Lending Sector Profitability

A couple weeks ago we ran an article on how to price loans for default volatility (HERE). In it, we discussed how to price in the variability around default risk and showed multifamily and owner occupied commercial real estate examples. Many banks saw our data on ten-year loss rates and volatility around credit cards, commercial and residential constructions and patted themselves on the back that they have no or limited exposure to each of those sectors.

Community Bank Commercial Loan Default Rates – Current and Projections

Quantified Lending Risk

We analyzed default rates through 2015 for banks between $300mm and $3B in asset size.  Historical default rates were measured and analyzed for various loan categories for this bank set.  We also reviewed Moody’s Investor Services corporate default and recovery rates through 2015 and considered which industries may present opportunities for community banks from a yield/risk perspective and as a way to diversify from real estate concentrations. 



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