Correspondent Blog

Between now and the end of 2027, it is estimated that $2.2T of office loans is coming due. Much of this product lies on banks’ balance sheets. A high percentage of those office loans on banks’ balance sheet are balloon structures where the bulk of the loan’s principal is due. Equally worrisome is the large…

In last week’s article (here), we discussed why category and geographic diversification may be unfeasible for many community banks.  We concluded that after a community bank sets limits on loan categories, the added benefit of geographic or loan category diversification is nullified.  We discussed three main reasons why community bank diversification by geography and loan…

As the risk of a recession gets pushed out by the market, so does the risk of credit. This is not to say bank credit is without risk, as higher rates, inflation, and a slowing economy have taken their toll. Three essential credit metrics – probabilities of default (POD), POD rate of change, and POD…

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…

At this point in the business cycle, we believe that community banks should migrate to higher credit quality loans.  However, in response to our last few blogs, some community bankers told us they have few opportunities to originate loans at 1.75X debt service coverage ratio (DSCR) and sub 60% loan-to-value (LTV).   We believe that the…

We established that stagflation (defined as high inflation and likely accompanied by higher interest rates and stagnant or no growth) could be toxic for real estate projects.  Few bankers working today have any experience with how destructive stagflation can be since this environment last occurred in the 1970s.

Most banks are concerned with their credit portfolio. As credit risk increases with rising rates, the following question arises – is it better to diversify by geography, property type, or business type? Do you focus your marketing dollars and pricing on particular counties, commuter zones, types of commercial real estate loans, or specific C&I industries?…

Community banks have structured fixed-rate loans for many years with an adjustable repricing feature where a loan is fixed for a number of years and then resets based on a stated spread and an index. However, adjustable term loans have several drawbacks for banks, especially in a rising interest rate environment.  One of the most…

If your bank is like most of its peers, your credit policy permits loan to value (LTV) ratios somewhere between 65% and 85% depending on the category, business cycle, and other forms of support.  In today’s competitive lending market, many banks are pushing boundaries, and loan to values are creeping higher.  We argue that banks…

Competition for quality commercial loans is intense, and currently, the majority of borrowers favor fixed-rate loans for as long as possible.  We cannot blame borrowers for wanting to lock in financing costs at historically low index rates and low credit margins.  After all, the real economic carrying cost for these loans after tax and after…

Once a loan is booked, it needs to be reviewed over time for changes in credit. The problem is that many banks have only one type of commercial loan review.  This standard review usually requires approximately eight hours of work from credit, loan administration, and management. When this effort is combined with data expense, the…

Every community bank has a set of financial statement reports and ratio analyses to assess underwriting and credit risk.  The advent of credit spreading software such as CreditQuest has made this job very easy.   However, few banks take the extra step of modifying their reports and analysis based on the current economic cycle and market…