how to successfully compete with regional banks for small business … · 2014. 2. 11. · oh $98 m...

How to successfully compete with regional banksfor small business relationships

February 11, 2014Webinar

.

2

PRESENTERS

Jeff Morris- joined Austin Associates' Financial Management Division in 1998. He is responsible for profitability analysis services and works with clients who utilize the firm's innovative software products, including its proprietary organization/product/customer profitability software and its loan and deposit pricing software, with over 30 years experience in various financial management roles.

Andy Morgan- joined the firm in 2001. He is responsible for development and support of the firm's proprietary software offered through the Financial Management Division. He has designed software applications for loan pricing, deposit pricing, customer information systems, organization/ customer/product profitability, and other financial reporting systems designed exclusively for the community banking industry.

Jeff MorrisManaging Director & PrincipalFinancial Management & Consulting

[email protected]

Andy MorganManaging Director & PrincipalFinancial Management & Consulting

[email protected]

3

AUSTIN ASSOCIATES, LLCFinancial Management Consultants for Community Bankers

§ Community bank advisors for more than 40 years

§ Specialized consulting and advisory services

o Asset / Liability Management

o Profitability Analysis & Improvement

o Loan & Relationship Pricing Systems

o Balance Sheet Structuring

o Regulatory Compliance

§ Current owners are consultants/managers

§ Over 200 bank/thrift clients in 2013 in 26 states

4

AGENDALoan Pricing WebinarFebruary 11, 2014

§ Competitive Issues vs Regional Banks

§ Attendee Submitted Loan Pricing Case Studies

§ Community Bank ROE and Loan Yield Trends

§ Key Drivers of Commercial Loan Pricing in 2014

§ Recommendations for 2014

5

TRENDS

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Return on EquityCommunity Bank ROE Regional Bank ROE

5.005.205.405.605.806.006.206.406.60

Loan YieldsCommunity Bank Loan Yields Regional Bank Loan Yields

3.203.303.403.503.603.703.803.904.00

Yield/Cost SpreadCommunity Bank ROE Regional Bank ROE

source:

40.0045.0050.0055.0060.0065.0070.0075.00

Efficiency RatioCommunity Bank ROE Regional Bank ROE

Regional Banks versus Community BanksDavid vs. Goliath ?

$146

3.06% 2.69%

73.90%

12.11% 11.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

$0

$20

$40

$60

$80

$100

$120

$140

$160Regional Banks

6

$363

3.94% 3.43%

59.92%

10.46% 9.46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

$0

$50

$100

$150

$200

$250

$300

$350

$400Community Banks

COF = 0.51%

Billions Millions

COF = 0.37%

Comprised of Fifth Third, KeyCorp, PNC, Synovus, SunTrust, Regions,BB&T, Washington Federal, Huntington, and US Bancorp

Comprised of Six Webinar Attendee Community Banks submittingloan examples for modeling.

7

CASE STUDIES – SUMMARY OF LOANS SUBMITTED FOR EVALUATIONBank Bank Loan Other Loan Relationship State Size Request Term Rate Fees Accounts ROE ROE

MI $200 M $600K 12 Mos. 5.00% $500 CRE-$200K 24.63%NIB-$300K 30.10%

PA $1.4 B $2.5 M 60 Mos. 4.5% 1/8pt. n/a 12.87%

GA $118 M $600 K 35 Mos. 3.75% $3K CRE-$802K 17.77%MM-$492K 12.09%

AL $246 M $1.0 M 84 Mos. 3.75% n/a n/a 4.73%

OH $98 M $1.4 M 60 Mos. 5.30% $3K IB-$100K 23.02% 24.10%

NM $155 M $828K 60 Mos. 7.5% 1/2pt. $31K CL 29.05% 27.97%

RELATIONSHIP SUMMARY

Bank

$200 M Asset State Chartered Bank in MICurrently earning 12.03% ROE (E/A = 10.4%)Loan / Asset Ratio = 57%

New Loan

$600 K Line of Credit @ 5.0% w/ $500 fee

Existing Relationship

Customer has:– $220 K CRE Loan @ 5.0% - ROE = 9%– $300 K NIB – DDA (CFF = 3.25%) – ROE = 103%

Existing Relationship = ROE of 30%

PRICING CONSIDERATIONS

ü Existing highly profitable customer (30% ROE)

ü Loan as specified is above target (24% ROE)

ü New loan could be priced as low as 3.95% and still return 18% Loan Target

ü New loan could be priced as low as 3.00% and still return 18% Relationship Target

StrategyNegotiate rate down to highest rate attainable -keep existing relationship in the bank, yet satisfy customer’s desire for a lower rate - (Range -between 3.95% - 5.0%)(Estimate – 4.25% = ROE of 23%)

8

CASE STUDY #1

9

CASE STUDY #1


Bank

$1.4 B Asset Savings Bank in PACurrently earning 5.07% ROE (E/A = 12.0%)Loan / Asset Ratio = 69%

New Loan

$2.5 M CRE Loan @ 4.5% FR – 60 MonthsFees of 1/8th point


Prospective New Customer (none)


ü Represents opportunity for new business / customer relationship

ü Loan as specified is approximately equal to 13% ROE

ü Given current low bankwide ROE (5%) revise target to 13.5%

StrategyNegotiate rate with customer as follows:If loan only relationship, rate = 4.625%

With operating checking account (estimated average balances at $100,000), rate = 4.50%

Inquire about other profitable new relationship accounts available to be added? Rate could be even lower with these.

10

CASE STUDY #2

CASE STUDY #2

11


Bank

$118 M Asset Commercial Bank in GACurrently earning 16.41% ROE – E/A = 10.8%Loan / Asset Ratio = 71%

New Loan

$600 K CRE Loan @ 3.75% for 35 MonthsFee of $3,000 (1/2 point)


Customer has:– $802 K CRE Loan @ 3.75% - ROE = 8%– $492 K NIB – DDA (CFF = 0.80%, paying 0.50%) –

ROE = 10%

Existing Relationship = ROE of 8.6%


ü Existing relationship is below average, at roughly ½ the level of bank-wide ROE

ü New loan at same rate meets target due to shorter term

ü New loan is acceptable as requested – will improve relationship ROE from 9% to 12%

StrategyIf customer will accept loan at any rate higher

than 3.75%, this is fine…if not…Accept / Approve loan as requested.

Note: While relationship remains below general pricing target of 18% - 20% range, the level of incremental improvement in a single transaction is acceptable.

12

CASE STUDY #3

13

CASE STUDY #3


Bank

$246 M Asset Commercial Bank in ALCurrently earning 5.6% ROE (E/A = 9.1%)Loan / Asset Ratio = 62%

New Loan

$1.0 M CRE Loan @ 3.75% w/ no fees –requested for 84 Months


Prospective New Customer (none)


ü Loan as requested has an unacceptably low ROE in 4% range

ü To achieve target ROE of 18% requires:ü Yield of 5.55%ü Fees of > $100,000 (NOT)ü NIB–DDA with $ 581 K in Average Balances, (NOT), orü Shorten term to approximately 3 years

StrategySince bank is loan starved, and currently earning a

very low bank-wide ROE, an 18% target is unreasonably high for this situation. Negotiate with client towards a 10% ROE, adjusting rate up and term down.

Examples: - 3.75% for 60 Months = 10.74% ROE, or - 4.50% for 84 Months = 10.25% ROE.

- Addition of $50,000 NIB-DDA provides the bank with a higher ROE, or the customer with a lower rate / longer term

14

CASE STUDY #4

15

CASE STUDY #4


Bank

$98 M Asset Commercial Bank in OHCurrently earning 10.84% ROE (E/A = 8.63%)Loan / Asset Ratio is 57%

New Loan

$1.4 M CRE Loan @ 5.3% w/ $3 K fee, for 60 Months - Credit Grade is 1 - Excellent


Customer has:– $100 K IB – DDA (CFF = 2.75%) – ROE = 91%







StrategyNegotiate rate with customer to highest rate necessary to keep existing relationship in the bank, yet satisfy customer’s desire for a lower rate - (Range - between 4.5% - 5.0%)(Estimate – 4.75% = ROE of 20%)

16

CASE STUDY #5

17

CASE STUDY #5


Bank

$155 M Asset Commercial Bank in NMCurrently earning 6.78% ROE (E/A = 11.8%)Loan / Asset Ratio is 45%

New Loan

$828K CRE Loan @ 7.5% w/ ½ pt. fee, for 60 Months - Credit Grade is 2 – Above Average


Customer has:– Other small loan and deposit balances







StrategyDo the deal at 7.5%! If it ends up being a competitive pricing situation, you have plenty of room to negotiate and still meet a very nice return level.

18

CASE STUDY #6

19

CASE STUDY #6

Community Bank ROE by Product

20

MORTGAGE LOANS COMMERCIAL LOANS TREASURYPRODUCTS DEPOSIT PRODUCTS BANK

2008 32.5% 19.2% 20.4% 6.5% 14.5%2013 31.9% 12.6% 8.8% 1.3% 8.9%

0.0%

10.0%

20.0%

30.0%

40.0%

Pre-recession (2008) versus Current (2013)

14.5%

8.9%

21

RELATIONSHIP OF COMMERCIAL LOAN ROETO BANK ROE

1

1.25

1.5

1.75

2

2.25

2008 2009 2010 2011 2012 2013

Austin Loan Pricing Banks Average Multiple

1.6X

Bankwide ROE CL ROE Target

5.00 8.00

6.00 9.60

7.00 11.20

8.00 12.80

9.00 14.40

10.00 16.00

11.00 17.60

12.00 19.20

22

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2007 2009 2011 2013 2014

CL ROE Avg CL Yld

TRENDS – PRICING TARGETS

23

CONSIDERATIONS WHEN SETTING PRICING TARGETS§ Avoid Single Numeric Targets

§ Current Bankwide 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 Improvement

24

KEY STRATEGIES FOR 2014

§ 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 – avoid ever saying “NO”

§ Avoid pricing down to the competition, or to as low as the pricing model says you can go

§ Be disciplined and objective – walk away from deals if the bank’s objectives are not being met

25

CONTACTSWe appreciate hearing from you.

If you have questions or comments, regarding today’s Webinar, or if you would like to see any of your bank’s current loan or customer relationships modeled, please feel free to contact us at any time.

We would also be pleased to provide your lending team with a customized demonstration of the Austin Associates Commercial Loan Pricing System - simply contact Andy or Jeff to arrange a date and time for your demo.

Jeff MorrisManaging Director & PrincipalFinancial Management & Consulting

[email protected]

Andy MorganManaging Director & PrincipalFinancial Management & Consulting

[email protected]

How to successfully compete with regional banksfor small business relationships

February 11, 2014Webinar

.

how to successfully compete with regional banks for small business … · 2014. 2. 11. · oh $98 m...

Documents