Loan pricing for bank portfolio management

Libby Sharman
August 20, 2013
Read Time: min

In a webinar hosted by Sageworks, Jon Winick of Clark Street Capital explained how an institution can “rebalance” its loan portfolio if, after reviewing stress test results, bank management finds that risk levels aren’t where they need to be or that the portfolio is too heavily concentrated in certain segments.

For an institution trying to manage loan portfolio concentrations, secondary market whole loan sales are a viable option. And in the webinar, Jon explained why loan sale activity is at a high.

Recently the biggest impediment to more secondary market activity for distressed loans has been the discrepancy between the value at which banks are carrying assets and what the market will pay for them.

But the discrepancy is narrowing—there have been material increases to the prices of non-performing loans (NPL). In the past year, Jon noted that prices have increased 500-1,000 basis points on average for non-performing commercial loans. Similarly, residential mortgages NPL have seen significant gains.

With performing legacy loans, prices are most likely better than the rate at which bankers can originate at today. The current market’s low interest rates have made seasoned, performing loans very attractive in the secondary market. In fact, with performing CRE legacy portfolios, the coupon is not often a problem hindering a sale; rather, collateral and debt-service are typically the causes of discounts, according to Jon.

Even with the positive news in pricing, it is average for institutions to incur losses of 20 percent or greater on book values when there are material reductions in distressed assets. Jon noted that he has not seen a significant, distressed portfolio change hands that resulted in a gain on sale unless it was acquired by someone else.

Pricing, for both performing and non-performing loans, is optimistic; investors in some cases are even building in appreciation, according to Jon.

In the remainder of the webinar, Jon covers other options that financial institutions have for disposing of assets and talks about some of the considerations bankers should have when making those decisions. Access a recording of the webinar.

To learn more about how stress testing can lead to better capital adequacy evaluations and risk-mitigating credit policies and procedures, download this whitepaper: Actionable Stress Test Results for Community Banks.

About Clark Street Capital and Jon Winick

Clark Street Capital is a full-service bank advisory firm, specializing in the review, management and disposition of complex loan portfolios. Their areas of focus include banking, CRE, whole loans, loan sales and workouts. Jon Winck is president of Clark Street Capital. Prior to founding Clark Street Capital, John was National Marketing Director for Zions Bank, a $53 billion bank headquartered in Salt Lake City.

About the Author

Libby Sharman

Libby Sharman is a Vice President of Marketing at Abrigo.

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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