May 2017

Changing Pricing To Manage Loan Average Life

Loan Structuring Tactics

One trick every bank lender should have up their sleeve is the ability to meet a client’s maturity and amortization targets but limit risk of the bank by adjusting the rate on a loan. This tactic is especially germane in today’s market as certain sectors, in certain cities, are likely reaching the end of their safety zone. In this article, we will take a quantitative look at this tactic and cover some case studies on how and when to apply this with the goal of making sure the customer gets what they want while the bank has a profitable loan on a risk-adjusted basis. 

Learning From The Last Rate Cycle - How Your Bank May Change

Deposit Rate Sensitivities - Cost of Funds

We are in a period of rising rates. Since December of 2015, the Fed Funds Target has increased 75 basis points (bps). This is similar to the first set of rate increases that started back in early 2004 and ended in the third quarter of 2004 where the Fed Funds Target Rate also went up 75 bps. Back then, banks increased their cost of funds a scant four basis points.

Creating Greater Lifetime Customer Value Through Loan Structuring

Increasing Lifetime Value in Lending

Customer lifetime value (CLV) is defined as the total profit generated from a customer over the entire life of that relationship.  In banking, CLV is a very important concept because of the high cost sourcing, underwriting and originating commercial loans.  On the first day a commercial loan is booked, the return on equity (ROE) on that loan is negative.  The bank’s profit is generated as the borrower pays interest over the life of the credit and, generally, the long

Using The Cost Per Day For Banking Services

Increasing Bank Product Sales - Pricing Tactics

We have discussed in the past how banks can increase sales in some regions and to some customer segments by moving to an annual membership fee (HERE). In this article, we look at the opposite and how banks can leverage the “daily incremental cost principle” to help spur sales of fee and deposit product. Customers evaluate bank products based on the logic of perceived value, but they purchase bank products largely based on emotion.

The Art and Science of a Bank Commitment Letter

More efficient loan closings

In our quest for a more streamlined loan process, one point of friction was the lack commitment letter presentation or understanding. The commercial loan commitment letter bridges the time between loan approval and loan closing. Bankers do a good job at using the commitment letter for its primary purpose, namely to contractually obligate the borrower. According to our Loan Command Pipeline Management statistics, bankers use a commitment letter about 85% of the time.

The Art and Science of a Bank Commitment Letter

In our quest for a more streamlined loan process, one point of friction was the lack commitment letter presentation or understanding. The commercial loan commitment letter bridges the time between loan approval and loan closing. Bankers do a good job at using the commitment letter for its primary purpose, namely to contractually obligate the borrower. According to our Loan Command Pipeline Management statistics, bankers use a commitment letter about 85% of the time.

How To Better Optimize The Credit Review Process

Designing a Better Credit Process

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 report is produced at a cost of just over $1,000 per credit. If you are one of these banks that only have one type of review, then the good news is that you can save a material cost anytime you want AND have better risk management.

What Happens When A Bank Has A “No Haggle” Loan Pricing Policy

Bank Loan Pricing

Many small and mid-sized businesses hate negotiating with bankers. They find it laborious and often intimidating. This was the thesis when one bank thought they would change the paradigm and offer a “no negotiation, lowest price loan.” The theory was that this bank would produce a term sheet with their lowest price and the customer could either accept it or not. No matter what the case, it was implied that the bank had the incentive to put the lowest price in the market and the customer would not have to be bothered going back and forth in price and term negotiations.