Bank Mgt. 5th Ed, Commercial Lending

Bank Mgt. 5th Ed, Commercial Lending - Commercial Lending 1...

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Unformatted text preview: Commercial Lending 1 Enter Search TextSubmitSearch Advanced Search FDIC - Quarterly Banking Profile TABLE I-A. Selected Indicators, FDIC-Insured Commercial Banks 2006* 2005* 2005 2004 2003 2002 Return on assets (%) 1.37 1.36 1.33 1.30 1.40 1.32 Return on equity (%) 13.36 13.66 13.26 13.72 15.33 14.43 Core capital (leverage) ratio (%) 8.06 7.93 7.91 7.82 7.85 7.83 Noncurrent assets & ORE(%) 0.48 0.49 0.48 0.55 0.77 0.94 Net charge-offs to loans (%) .39 0.54 0.56 0.63 0.89 1.12 Asset growth rate (%) 9.68 7.99 7.43 10.69 7.41 8.00 Net interest margin (%) 3.52 3.64 3.61 3.61 3.83 4.08 Number of institutions reporting 7,450 7,541 7,526 7,631 7,770 7,888 Unprofitable institutions (%) 6.59 5.87 6.31 5.87 6.02 6.64 Number of problem institutions 42 60 44 72 106 119 Assets of problem institutions (bil) $4 $19 $5 $27 $29 $36 Failed/assisted institutions (#) 0 0 0 3 3 10 * Through September 30, ratios annualized where appropriate. Asset growth rates are for 12 months ending September 30 2 Commercial Bank Loan Composition September 30, 2006 All Other Lns 18% 11% 17% 13% 10% 25% 6% 14% 2% 0% 0% 3% 8% 6% 31% 27% 6% 0% 10% 20% 30% Banks > $ bil Banks < $ bil Com. & Ind. Loans Com. Real Estate Construction Leases Agriculture Other Consumer Residential Mortage Credit Cards 0% Source: FDIC Quarterly Banking Profile 3 N et L o a ns & L ea ses T o D epo sits D ecem b er 1 9 9 7 to A u g ust 2 0 0 6 10 0% 95% B a n ks O v er B illion In A ssets 90 % 85% 80 % B a nk s U n der B illio n In A ssets 70 % 1 2 -9 7 1 2 -9 8 1 2 -9 9 1 2 -0 0 1 2 -0 1 1 2 -0 2 1 2 -0 3 1 2 -0 4 1 2 -0 5 9 -0 6 S o ur ce: F D IC Q u a rtery R ep o rts 4 Business Uses Of Bank Credit Seasonal working capital Long-term working capital New fixed assets Replacement of fixed assets Changes in payment patterns Unexpected one-time expenses Refinance of old debt * 5 Are Bank Loans Competitive? Significant competition for business loans. Commercial paper is stiffest market through Commercial intermediation of credit. intermediation Difficult for banks to compete. Some say banking is archaic in the way Some they make decisions, price loans, etc. they Some feel investment banking through an Some open market system is more efficient. * open 6 Banks’ Advantages As Credit Banks’ Intermediaries vs. Open Markets Intermediaries Banks have special credit skills. Screening undeserving loan applicants. Ensuring that credit is available impartially & Ensuring objectively. objectively. Seeing to it that credit agreements are Seeing monitored & enforced. monitored Banks fund loans at lower costs. Some feel banks are losing advantages. * 7 Types of Loans Short-term loans(Lines of Credit): Used for inventory & receivable loans. Repaid by selling inventory & collecting Repaid receivables. receivables. Analysis thru working capital cycle. Facility(terms & structure). Line of credit. Draw down as needed. Rest line at least annually. Collateral of inventory, accounts receivable & Collateral fixed assets. * fixed 8 Continued Types of Loans (Continued) Bridge Loans Use as project type loan for interim time. Repaid when interim event is funded. Analysis based on likelihood of bridge event Analysis happening or not happening. happening Facility has maturities tied to bridge. Collateral could be security interest in assets. * 9 Continued Revolving Credit Loan (Asset-based lending) Use to expand current assets/reduce current Use liabilities. liabilities. Source of repayment from collections. Analysis by examining operating capabilities of Analysis borrower & long-term earning power. borrower Facility is revocable, formula based, set credit Facility limits, & advances against collateral. limits, Collateral is eligible receivables or inventories. * 10 Continued Types of Loans (Continued) Term Loans Types of Loans (Continued) Used to purchase fixed assets. Repayment through stable, long-term sources Repayment of cash. of Analysis thru long-term earnings. Facility often monthly payment, for specified Facility time with a loan agreement. time Collateral would be fixed assets (such as Collateral mortgages or equipment). * mortgages 11 Taking A Security Interest Importance of perfecting collateral. Real property-mortgage Title search Proper recording Personal property Physical possession Pledge agreement for authority to take Pledge possession * possession Continued 12 Taking A Security Interest Taking (Continued) (Continued) Inventory financing Trust receipt or floor plan financing Borrower provided funds to buy inventory Borrower holds goods in trust Borrower sells inventory & forwards proceeds Bank releases claim against asset * 13 Continued Inventory financing (Continued) Warehouse financing Public warehouse Third party owned Separate location Taking A Security Interest Taking (Continued) (Continued) Field warehouse Third party operated Borrower’s location Participation agreement-pro rata or LIFO * 14 Objectives Loan Covenants Cash flow control Trigger call/restructuring Balance sheet control Two types Affirmative-Specific requirements for actions Negative-Prohibit or restrain * 15 Price vs. base rate Pricing Concepts Maybe better prime vs. base rate Problems with prime rate Floating rate concepts Pricing classifications Prime customers Largest & most creditworthy Shop each financial need * Continued 16 Pricing classifications (Continued) Perceived-value customers Pricing Concepts (Continued) Value of service to customer Marginal cost below marginal benefit from customer’s Marginal viewpoint viewpoint Relationship customers Strong relationship between bank & borrower Bank concerned about total yield * 17 ...
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This note was uploaded on 09/30/2010 for the course FIN 468 taught by Professor Bexley during the Fall '10 term at Sam Houston State University.

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