Commercial Loan Pricing StrategiesSeptember 30, 2014Webinar.
PRESENTERSJeff Morris- joined Austin Associates' FinancialManagement Division in 1998. He is responsible forprofitability analysis services and works with clients whoutilize the firm's innovative software products, includingits proprietary organization/product/customer profitabilitysoftware and its loan and deposit pricing software, withover 35 years experience in various financialmanagement roles.Andy Morgan- joined the firm in 2001. He is responsiblefor development and support of the firm's proprietarysoftware offered through the Financial ManagementDivision. He has designed software applications for loanpricing, deposit pricing, customer information systems,organization/ customer/product profitability, and otherfinancial reporting systems designed exclusively for thecommunity banking industry.Jeff MorrisManaging Director & PrincipalFinancial Management & Andy MorganManaging Director & PrincipalFinancial Management & 2
AUSTIN ASSOCIATES, LLCFinancial Management Consultants for Community Bankers Community bank advisors for more than 40 years Specialized consulting and advisory serviceso Asset / Liability Managemento Profitability Analysis & Improvemento Loan & Relationship Pricing Systemso Balance Sheet Structuringo Regulatory Compliance Current owners are consultants/managers Over 200 bank/thrift clients in 2013 in 26 states3
AGENDALoan Pricing WebinarSeptember 30, 2014 Trends Community Banks( 3B) vs. Regionals( 20B- 100B) Loan Yields vs. Market Rates Attendee Submitted Loan Pricing Case Studies Community Bank ROE and Loan ROE Trends Loan Pricing in a Rising Rate Environment4
TRENDSLoan YieldsReturn on EquityCommunity Bank ROECommunity Bank Loan YieldsRegional Bank ROE6.7512.0010.005.756.004.000.004.75Yield/Cost SpreadCommunity Bank ROE3.753.503.253.002.755.09 5.115.252.004.006.446.258.004.25Regional Bank Loan YieldsEfficiency RatioRegional Bank ROECommunity Bank ROERegional Bank ROE75.0070.0065.0060.0055.0050.0045.0040.005
YIELD TRENDSLoan YieldsCommunity Bank Loan Yields5 YR FHLB1 YR 02008Q42009Q42010Q42011Q42012Q12012Q26
CASE STUDIES – SUMMARY OF LOANS SUBMITTEDFOR IN 775 M 3.0 M120 Mo. 4.5% 30 KNone9.43%9.43%1aIL 250 M 1.5 M120 Mo. 4.5% 3,000None8.38%8.38%2IN 300 M 100 K60 Mo. 6.00% -0-None13.90%13.90%3FL 350 M 250 K60 Mo. 5.50% -0-None20.00%20.00%4MN 240 M 2.4 M60 Mo. 4.45% 12 K24.00%29.35%5NY 465 M 1.1 M60 Mo. 4.75% 6,000 None16.50%16.50%6IN 330 M 500 K12 Mo. 3.75% 1,000 200 K19.00%23.00%6aTX 900 M 1.2 M12 Mo. 6.65% 12 K57.00%57.00%RateFeesOtherAccounts 1 M DDA 150KLoan RelationshipROEROE7
CASE STUDY #1RELATIONSHIP SUMMARYPRICING CONSIDERATIONSBank 10 year fixed rate carries high cost offunding, thus hurting ROE (9.43%) Increases bank’s interest rate risk New loan needs to be priced at 5.25% inorder to return 15% Loan Target New loan needs to be priced at 4.75% inorder to return 11% ROE (bank’s currentROE level) 775 M Asset Savings Bank in INCurrently earning 11% ROE (E/A 9.31%)Loan / Asset Ratio 63%New Loan 3.0 M 10 year fixed @ 4.5% w/ 30,000 feeExisting RelationshipCustomer has:–No deposits – loan only relationshipExisting Relationship None (new request)StrategyNegotiate rate up or term down. If either is notpossible due to competitive influences, it mightbe best to walk away unless there is potential toadd significant ( 1M ) compensating depositbalances8
CASE STUDY #19
CASE STUDY #1aRELATIONSHIP SUMMARYPRICING CONSIDERATIONS 10 year fixed rate carries high cost offunding, thus hurting ROE (8.38%) Increases bank’s interest rate risk New loan needs to be priced at 5.50% inorder to return 15% Loan Target 1.5M Loan @ 4.5% w/ 3,000 fees – requestedfor 120 Months New loan needs to be priced at 5.00% inorder to return 12% ROE (bank’s currentROE level)Existing RelationshipStrategyNegotiate rate up or term down. If either is notpossible due to competitive influences, it mightbe best to walk away unless there is potential toadd significant ( 700k)compensating depositbalancesBank 250M Asset Commercial Bank in ILCurrently earning 12.20% ROE (E/A 10%)Loan / Asset Ratio 72%New LoanProspective New Customer (none)10
CASE STUDY #1a11
CASE STUDY #2RELATIONSHIP SUMMARYPRICING CONSIDERATIONSBank Represents opportunity for new business /customer relationship Loan as specified is approximately equal to13.9% ROE Given current low Loan/Asset ratio, workwith customer to bring new business to bank 300 M Asset Commercial Bank in INCurrently earning 12.50% ROE (E/A 9.90%)Loan / Asset Ratio 53%New Loan 100 K Loan @ 6.00% FR – 60 MonthsNo FeesCredit Grade 4Existing RelationshipProspective New Customer (none)StrategyNegotiate rate with customer as follows:If loan only relationship, rate 6.25%With operating checking account (estimatedaverage balances at 30,000), rate 6.00%Inquire about other profitable new relationshipaccounts available to be added? Rate could beeven lower with these.12
CASE STUDY #213
CASE STUDY #3RELATIONSHIP SUMMARYPRICING CONSIDERATIONSBank Represents opportunity for new business /customer relationship Loan as specified is approximately equal to20% ROE Given current low Bank-wide ROE, it makessense to do this deal as quoted 350M Asset Commercial Bank in FLCurrently earning 5.5% ROE (E/A 7.4%)Loan / Asset Ratio 74%New Loan 250 k CRE Loan @ 5.5% w/ no fees –requested for 60 MonthsStrategyExisting RelationshipIf this is a competitive situation, the rate couldgo as low as 4.90% and still maintain a 15%ROE.Prospective New Customer (none)With operating checking account (estimatedaverage balances at 30,000), rate could go to4.75%14
CASE STUDY #315
CASE STUDY #4RELATIONSHIP SUMMARYPRICING CONSIDERATIONSBank This customer is highly self-funding 240M Asset Commercial Bank in MN Hi reported ROE (29%) is partly due tolow capital level of bank Defensive pricing will apply due to selffunding (no rate is too low) and existingcustomer profitability levelCurrently earning 8.0% ROE (E/A 6.2%)Loan / Asset Ratio 71%New Loan 2.4M Loan @ 4.45% w 12,000 fees –requested for 60 MonthsExisting RelationshipStrategyRate could be lowered significantly to keepcustomer in the bank, as long as checkingaccount stays 1M non-interest bearing checking account16
CASE STUDY #417
CASE STUDY #5RELATIONSHIP SUMMARYBankPRICING CONSIDERATIONS At these terms, loan is highly desirable(16% ROE) 465M Asset Commercial Bank in NYCurrently earning 11% ROE (E/A 9.8%)Loan / Asset Ratio 54%New Loan 1.1M Loan @ 4.75% w/ 6,000 fees –requested for 60 MonthsExisting RelationshipProspective New Customer (none) New loan could be priced as low as 4.0%and still exceed bank wide average ROE Given low Loan/Asset ratio, remain verycompetitive in order to win this dealStrategyNegotiate for rate at or near 4.75%If client seeks rate concession,prospect for operating checkingaccount, cash management, or otherinvestment accounts18
CASE STUDY #519
CASE STUDY #6RELATIONSHIP SUMMARYBank 330M Asset Commercial Bank in INCurrently earning 11.5% ROE (E/A 9.3%)Loan / Asset Ratio 70%New Loan 500k Loan @ prime 50 w/ 1,000 fees –requested for 12 monthsDeposit Balances 200 K DDA balancesPRICING CONSIDERATIONS Floating rate loans carry a lower cost offunds than term loans (short end of thecurve) Full usage ROE is 19% while 50% usageyields 17.8% ROE With 200 K deposit balance, the ROE ofthe customer is 24%StrategyGiven bank’s current ROE, target forthis customer should be around an18% ROE. Pricing is adequate toachieve this return level20
CASE STUDY #621
CASE STUDY #6aRELATIONSHIP SUMMARYPRICING CONSIDERATIONSBank This is a slam dunk, no brainer! 900M Asset Commercial Bank in TX ROE is above 50%Currently earning 11.0% ROE (E/A 9.3%)Loan / Asset Ratio 46%New Loan 1.2M RLOC @ 6.65% w/ 12,000 fees –requested for 12 monthsExisting Relationship 150k Deposit RelationshipCredit Grade 2 With a Loan/Asset Ratio 50%, this is adeal the bank needs. 1 Point fee also has a huge impact on ROEStrategyIf this becomes a competitivenegotiation, there is a lot of room onpricing. ROE target can be met atevery pricing level.22
CASE STUDY #6a23
Community Bank ROE by ProductPre-recession (2008) versus Current (2013)40.0%30.0%20.0%14.5%8.9%10.0%0.0%MORTGAGE LOANSCOMMERCIAL LOANSTREASURYPRODUCTSDEPOSIT 2.6%8.8%1.3%8.9%24
Community Bank ROE by ProductCommercial Loans versus Bank-wide ROE25.0%Prior Historical CLIENT ACLIENT BCLIENT CCLIENT DCLIENT ECLIENT FCLIENT GCLIENT HCOMMERCIAL LOANS17.3%14.9%23.1%13.9%12.0%5.7%7.5%7.2%BANK AS WHOLE11.8%10.4%9.5%8.6%7.7%6.1%6.0%2.7%25
CONSIDERATIONS WHEN SETTINGPRICING TARGETS Avoid Single Numeric Targets Current Bank-wide ROE ROE of Existing Commercial Loan Portfolios Make Apples to Apples Comparisons Appetite for New Loan Balances What is the competition doing? Capital Availability The ROE of the Customer’s Existing Relationship Incremental Improvement26
KEY STRATEGIES FOR 2014 - 2015 Prepare for rising interest rate environment Raise ROE targets going forward New loans must cover future cost of funding Focus sales strategy on relationship instead of loan price Always give the customer alternatives and options – avoidever saying “NO” Avoid pricing down to the competition, or to as low as thepricing model says you can go Be disciplined and objective – walk away from deals if thebank’s objectives are not being met27
CONTACTSWe appreciate hearing from you.If you have questions or comments,regarding today’s Webinar, or if youwould like to see any of your bank’scurrent loan or customerrelationships modeled, please feelfree to contact us at any time.We would also be pleased toprovide your lending team with acustomized demonstration of theAustin Associates CommercialLoan Pricing System - simplycontact Andy or Jeff to arrange adate and time for your demo.Jeff MorrisManaging Director & PrincipalFinancial Management & Andy MorganManaging Director & PrincipalFinancial Management & 28
Commercial Loan Pricing StrategiesSeptember 30, 2014Webinar.
Community Banks( 3B) vs. Regionals( 20B- 100B) Loan Yields vs. Market Rates Attendee Submitted Loan Pricing Case Studies Community Bank ROE and Loan ROE Trends Loan Pricing in a Rising Rate Environment . 5 TRENDS 6.44 5.09 5.11 4.75 5.25 5.75 6.25 6.75 Loan Yields Community Bank Loan Yields Regional Bank Loan Yields
6. Loan geography 8. 7. Contractual cash flows for each loan or pool of loans Risk System Data: 1. Loan classes and grades 2. Modification history by loan class 3. Loan renewal and funding history by loan class 4. Loan prepayments history by loan class 5. Loan cash flows not collected 6. Loan grade LGD and PD rates 7. Loan grade charge-off history
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PWC mentions \As companies realize the ine ciency and unreliability of the traditional loan pricing strategies, we believe a trend toward a pricing optimization" in loan pricing. Until the early 1990s, banks simply posted one price (\house rate") for each loan type and rejected most high-risk borrowers (Johnson1992).
last loan of a loan sequence. For more than 80% of the loan sequences that last for more than one loan, the last loan is the same size as or larger than the first loan in the sequence. Loan size is more likely to go up in longer loan sequences, and prin
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Loan Estimate and Closing Disclosure Time Chart 1 TILA RESPA Time Chart 3 Loan Estimate Rounding Chart 5 Closing Disclosure Rounding Chart 9. LOAN ESTIMATE . CFR Reference Loan Estimate Disclosure Annotated 15 H-24(A) Mortgage Loan Transaction Loan Estimate 19 H-24(B) Fixed Rate Loan 31 H-24(C) Interest Only Adjustable Rate Loan 35 H-24(D .
5 Pricing Strategies Everyday Low Pricing High/Low Pricing Odd Pricing Leader Pricing Multiple Unit Pricing/Price Bundling Price Lining One-Price Policy Markdowns Reduction in the initial retail price Markdown as % of net sales amount of markdown net sales X 100 Ex. You bought 100 sweaters and 80% sell at 50 each while
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