4 Winning Loan Tactics to Improve ROA

In Q2/24 the average return of asset (ROA) for community banks (under $10B in assets) was 1.08%.  But within the community banking sector, performance varied among banks significantly and a large swath of banks need to improve ROA.  While the average ROA was 1.08%, approximately 5.7% of community banks reported negative ROA.  Another 16.2% of…

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How a Loan’s Maturity and Amortization Impact Credit

How does a commercial loan’s maturity and amortization impact credit? Many credit officers would prefer to set shorter maturities for loan repayment terms.  The logic is that it is better for the bank to control the credit with a hard stop and revisit credit appetite at shorter intervals.  If credit conditions are appropriate, the bank…

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Loan Risk and Return – The Two Loan Riddle

It is rare that banking lends itself to a logic test, but we have been trying this loan risk and return riddle on hundreds of bankers across the country for years, and only a few bankers choose the correct answer.  The riddle goes like this: You are presented with two loans. Loan A is priced…

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A Case Study for Building Commercial Relationships

If your bank is interested in banking more profitable commercial relationships – those customers with multiple bank products, where the bank holds over 50% of bank wallet, provides long-term sticky banking services and recognizes over 20% return on equity (ROE) – then the case study described in this article will be of interest to you. …

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Why Commercial Loan Prepayment Speeds Matter

The biggest surprise for bank managers using risk-adjusted return on capital (RAROC) loan pricing models is the low return on equity (ROE) on smaller, shorter, and lower-credit quality commercial loans.  Those ROEs tend to subtract substantial value from the bank and show negative returns – sometimes in the negative double digits.  However, one aspect that…

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Community Bank Loan Performance Analysis

We conducted a loan performance analysis for over 5,000 individual hedged commercial loans originated by almost 400 community and regional banks across the country. We measured prepayment speeds, loan size, loan term, fee income, loan yield, credit performance, and return on equity (ROE) of hedged loans and compared this performance to community bank industry averages….

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Here is the Cost and Risk of Lending Optionality

Optionality is defined as a state in which choice or discretion is allowed. In finance, optionality is an asset (has value) for the person who can exercise the option, while the person who gave the option has the liability.  Selling options for above their value can be a profitable business for banks and brokers, but…

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Here is the Future of Bank ROE and What to Do About It

The average return on equity (ROE) for the banking industry declined to 11.10% in Q1/24 (a 23 percent decline in the last year). For banks under $10B in assets, ROE declined to 10.53% in Q1/24 (an 11% decline in the last year). The typical published analysis considers the industry in aggregate which conflates the challenges…

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Get This Fixed vs. Floating Loan Calculator to Help Borrowers

Most borrowers are implicitly expressing a view that interest rates will be lower in the future than the current market expectation. This view is reflected by a sharp decrease in the average contractual loan commitment term at community banks and an increase in floating vs. fixed rate structures. Borrowers are choosing short-term financing in anticipation…

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If You Are Tired of Being Transactional, You Need A Hedge Program

An inverted yield curve, continued bank failures, and the desire to manage risk and offer clients higher service are all factors that are driving more community banks to adopt a loan hedge program.  Community banks’ main goals are to diligently support their local communities and make an acceptable return on capital in these challenging times….

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How Loan Term Drives Profitability

In a previous article (HERE), we discussed several factors that drive loan and bank profitability. We covered in detail how and why community banks can increase loan size to improve return on assets (ROA) /return on equity (ROE).  In this article, we will consider how and why loan term is a significant driver of profitability…

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How Loan Size Impacts Commercial Loan Profitability

Several measurable factors drive loan (and, by extension, bank) profitability, including loan size, credit quality, term, cross-sell, and upsell.  In this article, we will consider how and why loan size is one of the most significant drivers of profitability for community banks and what community banks can do to improve performance. Relationship Between Loan Size…

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