Defining efficient commercial loan portfolios for regional and multi-regional lenders

Abstract

During the 1980's many areas of the United States experienced financial stress which affected lending practices and portfolios. Some local borrowers were faced with closed or taken-over banks. Lenders were also faced with tradeoffs between various kinds of loans according to risk-return measures. The problems faced by the lenders became the focus of this study. To accomplish this study a methodology incorporating a mean variance (EV) model was used. Both a historical portfolio covering 1984-1990, and a projected portfolio covering 1991-1995 were estimated. These portfolios were estimated in each time period for three separate regions in Texas: Region 1 - Northern Plains of the Texas Panhandle; Region 2 - Southern Plains of the Texas Panhandle; Region 3 - Rolling Plains of Northwest Texas. A survey was also sent to lenders in the three regions of Texas to validate the projected portfolio findings. Results of the study indicate that the projected portfolio favors increased agricultural lending in the three regions of Texas, compared to the historical time period. The multiregional portfolio showed increased returns and decreased variances for Regions 1 and 2. For Region 3, returns in the multi-regional portfolio were similar, but Region 3's variances were lower. Survey results indicate a willingness of lenders in Regions 2 and 3 to change their agricultural portfolios.