Should Lenders Price Their Own Loans?

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Bankers should consider several factors when pricing loans that meet the bank’s profitability target and also win the deal. Often times when asked what the rate is for commercial loan, a banker will give the same rate regardless if the loan is for $2M or for $250K. In other words many banks price their loans based on the type of loan and not the size. This is a mistake.

Size matters. So does the term, fees, risk, return to the bank and cost of funds. Does the customer have other loans or deposits with the bank and are they profitable? Do your lenders know what the cost to originate or service the loan is? How can they price the loan if they don’t know these things?

Competition is fierce especially for the A rated borrowers. Community banks saw finance companies and car dealerships steal installment lending from them in the 1990’s. Farm Credit is a huge competitor for Ag real estate loans. How can a bank possibly compete with rates they offer your customers? The short answer is you can.

With net interest margins narrowing, now is the time to look at a loan pricing solution that takes all of these factors into consideration. Don’t lose another deal due to price before you look at how you can compete and meet your profitability goals.

Contact Strunk at 800-728-3116 or email at info@strunkaccess.com to learn about how our loan pricing tool will increase net interest income by at least 25 bp.

Why Vendor Monitoring is Important to the Vendor Management Process

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What is vendor monitoring, and why is it important to the vendor management process? Vendor monitoring, also known as ongoing monitoring, involves overseeing the vendor’s performance to determine if the vendor is performing as required by the service levels and contract terms.

The Third Party Risk Management Guidance states that ongoing monitoring enables a banking organization to:

  1. Confirm the quality and sustainability of a vendor’s controls and ability to meet contractual obligations.
  2. Escalate significant issues or concerns, such as material or repeat audit findings, deterioration in financial condition, security breaches, data loss, service interruptions, compliance lapses, or other indicators of increased risk.
  3. Respond to such significant issues or concerns when identified.

Strunk’s Vendor Manager software enables you to continuously monitor and manage your vendor relationships. The software allows you to configure ongoing monitoring activities based on the risk profile of each vendor. You can set reminders for when the ongoing monitoring item needs to take place.

Within the monitoring section of Vendor Manager, financial institutions can establish categories and metrics to document vendor performance findings and any necessary remediation measures. Strunk’s Vendor Manager’s monitoring section generates reports that highlight potential risks or significant issues requiring attention from senior management and the board of directors. This framework also provides feedback to your organization and ensures compliance with all regulatory expectations.

Bankers: You Have to Spend Money to Make Money

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Strunk, LLC was the pioneer in helping banks make more money without raising prices when they started their overdraft privilege program in 1993. Although most bankers hate to spend money when it comes to technology or new products, Strunk came up with a novel idea. We worked on a contingency fee basis so if our strategies made the bank more money than we succeeded as well. If they didn’t then the program didn’t cost the bank anything.

Net interest margin in community banks was down 26 basis points in the first quarter of 2024. For a bank with a $100M loan portfolio that equates to $260K in lost income; for a $500M loan portfolio it is $1.3M. Where does a bank make this up…in more volume OR by cutting overhead such as staff?

Strunk’s simple to use loan pricing tool will help banks increase net interest income by at least 25 bp. For a small fee of less than $10K a $500M bank will substantially increase income ($1.3M or more) for a small annual fee. In the old days Strunk would have participated in the lift in income for about 25% of the increase. That would equate to a fee of $325K for two years or $650K fee to Strunk. We did that with over 1,800 banks and no one hesitated.

Why wouldn’t a bank pay $10K to make $1.3M per year? You have to spend money to make money.

Contact Strunk at 800.728.3116 or email at info@strunkaccess.com to learn about how our loan pricing tool will increase net interest income by at least 25 bp.

 

The importance of focusing on capital and ROE when pricing commercial loans

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Mega banks and major regional banks all have very advanced loan pricing solutions. Not only that, but they are also getting more and more sophisticated.

The complexity found within “big bank” pricing tools underscores the reason why community banks need to act and make progress toward adopting a more empirically based, formal pricing solution or they will ultimately risk getting relegated to the low end of the market. Just like the large consumer lenders ultimately pushed community banks out of the consumer lending business, large banks will do the same with commercial lending.

What does that mean?  Banks using pricing solutions are varying capital assumptions based on risk grade, and a variety of other considerations.  On top of this, they are also lowering ROE targets on the best credit grades. The ultimate result of that is the customers with the best risk characteristics are being offered more and more aggressive rates on commercial loans by these big lenders.

Why does that matter for the typical community bank?  The typical community bank is going to become less and less competitive in terms of the rates offered to their biggest and most profitable clients and prospects. Over time, the vast majority of these prime borrowers will migrate to the best offer.  The notion that service will make up the difference is a complete fallacy. We tell ourselves that is true, so we don’t lose as much sleep worrying about losing all of our prime business!  The reality is – of course service matters – but it isn’t going to offset 50, 100 or 200 basis points in price. This is particularly the case on larger loans because those basis points add up to a lot of dollars the bigger the loan gets.  We see this on the vast majority of demos we do at Strunk. Bankers are quoting rates today in the 8% range on loans larger banks are doing for 100 or more basis points less.

The math behind this notion is pretty simple, these large banks are allocating less capital to the best credits, which means the rate required to achieve their target ROE is lowered – i.e. if I lower my capital (the ‘E’) I don’t need as much return (the ‘R’) to achieve my target ROE percentage.  Then, if we lower the target ROE to boot, that’s kind of a double whammy for the community banks to be competitive.

Since the advent of credit cards and the expansion of large auto lenders, consumer lending has gradually declined to next to nothing for community banks. These big lenders found far more efficient ways to service consumer loans and to offer the most competitive risk-based rates to the consumer. As a result, community banks have been left with dribs and drabs of consumer loans – and for the most part they are sub-prime consumers. If community FIs allow the large banks to continue to get more and more technical with their approach to commercial lending without an appropriate response, the same thing will happen to their commercial business.

Pricing should be the number one priority over anything else, including exams and systems conversions. This is the portion of a community bank’s business that essentially generates all of their profit.  The time to implement a sophisticated pricing tool like Strunk’s Pricing Manager, is now!

A Loan Pricing Solution that will help banks make more money

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Loan pricing solutions were popular twenty years ago but they were too expensive for a lot of community banks. With banks looking for ways to make more money now might be the time to look at an affordable, easy to implement loan, relationship and deposit pricing tool.

Many banks don’t take the size of the loan into consideration when pricing commercial or commercial real estate loans. Size of the loan is one of the biggest contributing factors to the profitability to the bank. Most banks over price their biggest most profitable customers and under price their smallest least profitable customers.

Do you know which customers are the most profitable and which ones your lenders think are most profitable? A pricing tool that takes the loan and deposit relationship into consideration will give you a precise look at customer profitability. It will also tell you when to price up and when you can provide a better deal for the borrower…to win or keep the deal.

Some loan customers are fee averse. Although we never recommend not charging a fee for a loan, what rate provides the same return to the bank if there was no fee? Fees on all loans matter, but they really don’t contribute to the overall profitability of a customer on larger loans with a longer expected life of the loan.

Do you factor in deposits when pricing commercial loans? Are the deposits in interest bearing accounts or non–interest bearing? Does a large depositor necessarily warrant giving a lower rate on a commercial loan? The short answer is “no” but a pricing tool will help your lenders with that decision.

Do you price consumer loans based on the term of the loan? Do you consider the size of the loan when determining the rate? Do you collect fees on consumer loans and is it a driving factor to overall profitability?

Contact Strunk at 800.728.3116 or email at info@strunkaccess.com to learn about how our loan pricing tool will increase net interest income by at least 25bp. For a $200M loan portfolio that is $500K per year.

 

Strunk’s Issue Manager software simplifies issue resolution & improves risk management

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Managing issues can be a cumbersome task for financial institutions, whether it’s tracking incidents, customer complaints, or audit and exam findings. The issue management process involves maintaining an issue log with action items, due dates, and responsible team members, often blurring the lines between issue management and project management. Standardizing your financial institution’s issue management program can improve efficiency and strengthen your Enterprise Risk Management program. Strunk’s Issue Manager software can quickly and efficiently identify and resolve issues for financial institutions.

Strunk’s Issue Manager Software:

• Define the issue, the source it came from, and who reported it.
• Details of the issue and attach any supporting document that you would like to support your issue (ex: audit findings, issue report, incident report or customer compliant report).
• Ability to prioritize issues to address the highest priorities first, moving down the line to the less urgent ones.
• Create a corrective action plan to develop the action items management will take to correct the issue, along with due dates and responsible team members.
• Track the issue’s progress as it moves toward resolution while creating a due date for it.
• Receive notification as the progress in correcting the issue within the agreed-upon timeframe.
• Create reports for internal use, auditors, and external use to help ease the remediation process.

Strunk’s Issue Manager software simplifies issue resolution, improves risk management, and enhances business operations.

Banking: Thinking Outside the Box?

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Consumers pay for almost everything they do in their daily lives but historically banks have been afraid to charge a monthly fee for their checking accounts. In 2011 we developed a strategy called Secure Checking to help banks charge fees while softening the fee with products and services consumers want and use. After 13 years and 900 financial institutions later here are the results:

Bank’s customers are used to paying for things like cell phone protection for as much as $15 per month per phone. They are used to paying that much or more for Identity Theft Protection. How about roadside assistance? Consumers use a variety of services and they pay $5 per month or more. Telehealth services is a relatively new service that allows someone to call a doctor, get diagnosed over the phone and receive prescription drugs. Consumers pay $25+ per month for that now. Why not bundle up several of these sought after services and make them part of your checking account…and of course charge a small fee so you can make some money.

On average our clients 1) generate $50 per checking account per year in net fee income; 2) they strengthen the relationship with their customers; 3) they provide services that consumers want and are willing to pay for and 4) in many cases they save their customers a lot of money for services they are paying for elsewhere today.

Secure Checking is not the old Club Account that started 50 years ago and it is something all financial institutions should consider. It is easy to implement and your customers will like the new services.

Contact Strunk at 800.728.3116 or email at info@strunkaccess.com to learn more about fee income programs offered by Strunk.

 

Strunk at ICBA LIVE 2024

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This year’s ICBA LIVE, hosted by the Independent Community Bankers Association, was held in sunny Orlando, Florida from March 14-17 at the Orlando World Center Marriott. In addition to various roundtable discussions, ThinkTECH presentations, and Learning Labs attendees enjoyed visiting with vendors in the Marketplace.

Strunk was excited to meet with so many bankers, discussing a variety of topics important to them today. Many banks are taking advantage of Strunk’s Pricing Manager solution, a full-featured loan and deposit pricing application. Banks are able to deploy a tool to all lenders to ensure they are armed to price loans profitably and consistently based on each bank’s target profitability objectives. It also provides the ability to understand the details of relationship profitability so that better pricing decisions can be made. Pricing Manager is affordable, easy to implement and use, and it will increase the bank’s net interest income by 25-50 basis points.

Many banks are understandably concerned about lost fee income, so another hot topic of conversation was Secure Checking. The program will allow banks to implement a monthly maintenance fee on each checking account and not worry about consumer backlash. It’s a tried and true program that works every time – at literally hundreds and hundreds of FIs across the country. Through the program, fee income increases at least $50 per account, per year. These consumer demanded features are supported by a company that has been in this business for 50 years and Strunk has been working with them for a decade.

Strunk continues to provide value-added SaaS solutions that help community banks increase profitability, while controlling operating expense. In addition to these offerings, Strunk discussed their overdraft service and best-in-class governance, risk and compliance solution, Risk Manager.

For more information on Pricing Manager, Secure Checking or Strunk’s other solutions, visit  https://strunkaccess.com/ or contact Strunk at info@strunkaccess.com.

Is it Time to Rethink Free Checking?

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The banking industry has lost nearly $20B in service charge income over the past 15 years and it has affected banks across the country regardless of size. Free Checking was offered by most every bank between 1990 and 2020 but now fewer banks give away anything for free. Why should they? What other service provider gives anything away for free?

In the early 1990s banks offered overdraft payment programs that provided a much needed customer service while increasing the bottom line at the same time. When checks were the primary source of payment no one wanted their overdrawn check sent back to the merchant. Free Checking flourished and banks still made a profit.

Then came debit cards. The regulators jumped (for a good reason) and protected consumers from overdraft fees unless the consumer consented to the debit card caused overdraft. Some people opted in and others just had their debit card denied at the point of sale to avoid overdrawing their account.

Now the CFPB wants to curtail what a bank can charge for an overdraft…equal to what it costs a bank to process the item. President Biden refers to these as “junk fees” and wants the regulators to significantly reduce them. So, why would a bank continue to offer Free Checking now as new government proposed regulations will curtail service charge income even more? Banking has changed and we need to change our product offerings as well.

Strunk’s Secure Checking program will generate significant amounts of service charge income while keeping free checking for those customers who want it. Since 2011, over 1,200 banks have offered the benefits added checking account to their offerings. You can expect income to go up by at least $50 per checking account per year. The program is easy to implement and easy to manage.

Contact Strunk at 800.728.3116 or email at info@strunkaccess.com to learn more about fee income programs offered by Strunk. You will be glad you did.

 

Over Pricing Your Largest Most Profitable Customers

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One of the biggest mistakes many FIs make when setting pricing strategy is to establish a ‘base lending rate’. Often this ‘base rate’ is applied regardless of the type, size, or term of the loan, and worse, is often set to Prime. For example, when considering a five-year fixed rate on a commercial real estate loan, from time to time we come across a client or prospect that applies their ‘base rate’ of Prime which today would be 8.5%. The problem with that approach is we are ignoring a fundamental principle of finance – we’re ignoring interest rate risk and the term structure of rates.

The Prime lending rate is an overnight rate – technically Prime can change any day. Obviously a 5-year rate is a much longer-term rate. Comparing Prime to a five-year fixed rate is really comparing apples and oranges. Let’s dig into this a little further. Today, Prime is 8.5% and a five-year fixed rate advance from the FHLB is 4.25% – a difference of 4.25%. In February of 2022 Prime was 3.25% and a five-year FHLB advance was 2.25% – a difference of only 1.00%. In February of 2020 Prime was 4.75% and a five-year FHLB advance was 1.50% – a difference of 3.25%. And in February of 2018 Prime was 4.50% and a five-year FHLB advance was 3.00% – a difference of only 1.50%. As you can see, the relationship between five-year rates and Prime is highly inconsistent. Over the past 6 years Prime has been as much as 4.25% and as little as 1.00% above a five-year rate. So, we have to ask ourselves, why would I tie the rate on a five-year fixed rate loan to Prime?

The other challenge this practice can lead to in the current environment is over-pricing some of our largest, most profitable customers or prospects – which could lead to losing existing relationships or get in the way of winning new relationships. We model loan scenarios for FIs all across the country many times each day so we see a large number of loan opportunities and how they are being priced in the market. Particularly on larger deals – say $1,500,000 and above – we often see rates in the mid to low 7% range. However, we also see rates as high as 8.5% on the exact same scenarios – particularly when the FI currently follows the ‘base lending rate’ philosophy. One of the ways Pricing Manager can help your FI earn more net interest income is by helping win more larger, profitable deals by pricing more competitively.

If you would like to learn more about Pricing Manager, please contact Strunk at info@strunkaccess.com or 800-728-3116.

An independent certified public accountant has examined Strunk’s operations and found them to be in compliance with the AICPA’s Trust Service Principles. It was determined that Strunk meets the Security, Availability, Processing Integrity, Confidentiality, and Privacy criteria for SOC 2 established by the AICPA.