Banker To Banker

Managing the Loan Mix

There is a classic debate in banking of whether it is better to diversify your loan portfolio or to “stick to what you know.” The logic of the stick-to-what-you-know camp is that since you understand  X (insert your specialty – real estate, doctors, residential, etc.) your return will offset any gains in diversification.

 

Bank Service and Revenue Heat Map

Yesterday’s blog on how little branch hours are correlated to revenue and customer satisfaction elicited a healthy dose of responses. If branch hours nutted some bankers up, just wait for the rest of today’s post, as this might really short circuit some guarded beliefs. The picture below is from our data and research and is a heat map of some selected factors and how revenue and satisfaction are dependent on those factors.

Figuring out what customers really want

At a recent financial conference, after we presented on the bank customer experience, an attendee joked that she wished her bank was more customer friendly and had longer branch hours including be open on Saturdays. The funny part is that customers don’t want longer branch hours.

 

Bank Marketing

While much has been written about Quicken Loans and Warren Buffet’s billion dollar NCAA men’s college basketball bracket challenge, there are important lesson in both marketing, customer acquisition and data collection for bankers that we will get to in a moment. By way of a quick recap, you go to Yahoo, enter for free, pick all 63 games correctly (you don’t have to pick the winners from the play-in round!) and you get $1 billion dollars paid in 40 annual installments of $25 million each or choose the lump sum for $500 million.

Working with prepayment protection

If you are feeling unlucky every time a loan prepays early then this will help. When banks originate a loan without a prepayment penalty or yield maintenance provision they are  giving away economic value to the borrower – on average 7.2% of total loan value to be exact. While banks don’t take a principal hit, the impact is the same because the bank could be as much as 7.2% more profitable if they were to utilize a reasonable prepayment provisions.

Bank Credit Planning

Knowing where we are in the business cycle is a key input into looking at projected probabilities of default for loan credit underwriting as well as future loan prepayment speeds. If done correctly, banks want to tighten underwriting standards as the economy inflates and loosens them during the troughs of the cycle. Unfortunately, most banks do it the complete opposite loosening standards due to competition when things are overheated and tightening them at the trough.

Bank Account

After four years of testing, Bank of America introduced its “Safe Balance” account last week that is targeted at low-income customers and is set to compete against accounts at competitors that are based on a prepaid card. The account is designed to target those that cannot meet minimum balance requirements, carries a $4.95 monthly fee that cannot be waived and gives customers the ability to utilize online banking, mobile and bill pay.

 

Credit Underwriting

Sometimes, a company or real estate project with higher debt levels means less risk, not more. This concept is counterintuitive as credit underwriters have been historically taught that more debt means higher risk. However, the statistical evidence does not bear this out.

 

Bank Direct Marketing

While we are big fans of digital and email marketing, traditional advertising in banking still has its place. Being quantitatively inclined, one of the easiest traditional advertising methods to track is direct mail. Next to email marketing, direct mail also has one of the best returns – better than digital, social media, print, radio and TV. Today, we present our data on our direct mail efforts with the goal of helping all community banks improve their marketing effectiveness.

 

Using ARC For Profitability

What is your bank’s strategy for keeping good loan customers? If you are like many banks, you may not have a formal strategy and with prepayment speeds averaging 24% for fixed rate loans. That is a tremendous amount of value running out the door.

 

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