Sometimes we hear bankers say in desperation, "You just can't win in this market!" Well folks, we are here to tell you that you can. Our loan pricing model is immensely beneficial for community bank loan performance. How beneficial you might ask? We have updated our client performance statistics and are happy to report some very compelling numbers.
We took a look at customers that were actively utilizing the Loan Pricing Model for more than a year and had included results in their loan review processes. Given industry stresses, it is no surprise that all of these clients experienced an increase in noncurrent loans over this period, but here are some surprises:
- 67% increased ROE over the past year
- Average ROE improvement was 113%
- 75% improved their ROA
- Average ROA improvement was 119%
- 75% of these clients increased assets
By comparison, community bank peer group non-users experienced an ROE and ROA decrease of approximately 85%!
We readily admit there are millions of other factors going on when it comes to bank performance, but we found these numbers so compelling, we became intrigued with the customers who did not improve performance. Here were some other findings: All of these underperforming banks had a much higher than peer group exposure to construction lending and all had been significantly reducing their exposure to construction lending over the past year. In addition, 30% had significant concentration issues and 50% had significant funding challenges (higher than peer group average, with a higher than average percentage of funding coming from higher yielding CD's.
Our key takeaways are despite an increase in non-performing loans, most clients who used a sound risk-adjusted loan pricing discipline, closely monitored funding costs and were not concentrated were able to generate acceptable returns (It would be unrealistic in today's market to expect no losses). For the clients that did not improve performance, given their reduction to higher risk areas, we could make the case that the decline in their performance was mitigated by an appropriate reallocation of risk in their portfolio.
For those of you who still do not believe in the value of an unemotional risk-adjusted model for valuing loans to augment the experience of a strong lending team, we hope the success of these peers may serve to change your mind. Moving to a risk-adjusted loan pricing model not only helps banks target a desired return and manage risk, but it also helps improve portfolio management, training and client negotiations. Our Loan Pricing Model is updated monthly on multiple factors, so bankers stay on top of fast-developing trends and can more accurately monitor performance. This is important now more than ever, because lending risk can deteriorate as much as 20% over a quarter (such as the lending risk on industrial properties for 2Q). To find out how our Loan Pricing Model can help your bank achieve its loan profitability and risk goals, contact us and we show you how we can tilt the probability of winning in your favor.