Correspondent Blog

Ask most banks how they construct their lending portfolio, and they say that “it is what the market gives them.” That is not a great answer. That level of passivity will likely cause us to lose 75+ banks during the next downturn. Loan portfolio asset allocation should be active. Credit risks are increasing, and a…

We estimate that approximately 50% of the community banks in the industry have a credit department that exerts influence or sets standards on loan pricing.  While this process appears appropriate and benign, it increases credit risk, decreases bank profitability, and undermines the proper function of bank credit/yield tradeoff.  Many bankers feel that since credit officers…

Lending is getting riskier. Due to higher rates, inflation, and a slowing economy, the three essential credit metrics – probabilities of default (POD), POD rate of change, and POD volatility- have all materially increased from 2022. In this article, we look at what is happening at the state level, look at 30 common industries where…

The current banking crisis has put a magnifying lens on all non-Too-Big-Too-Fail banks. While the market focuses on deposits and liquidity, media pundits and analysts are waiting for credit problems to appear. Of all the credit risks within banks, one of the largest is in commercial real estate exposure. When CRE credit risk arises, it…

Most bankers are familiar with the concept of risk-return tradeoff, which states that potential return rises with an increase in risk.  Low-risk assets pay lower potential returns, whereas high-risk assets pay higher potential returns.  Further, some bankers are taught early in their careers that they are in the business of taking risks, and banks would…

In an article last week (HERE), we discussed why real estate loans underwritten at common debt service coverage ratio (DSCR) and loan-to-value (LTV) levels may quickly become substandard credits if capitalization (cap) rates normalize, as expected because interest rates are rising.  Credits will deteriorate much faster if an economic downturn stresses net operating income (NOI)….

Many community banks today are willing to underwrite real estate secured loans on just two metrics: debt-service-coverage ratio (DSCR) and loan-to-appraised value (LTV). Banks typically approve credits above 1.20x DSCR and below 75% LTV – with many loan-specific factors that may skew these acceptable levels. For competitive reasons, we see banks dipping to 1.10X DSCR,…