Banker To Banker

COMMERCIAL SEGMENTATION
COMMERCIAL SEGMENTATION

Much has been written about the merits of community banks developing banking expertise around specific verticals.  We recently worked with a bank that won the banking mandate for a family-run funeral home.  At first we were surprised that the term loan was 93% LTV.  But when we looked at the entire underwriting package and the borrower’s financials (showing 3.2X DSCR) we recognized the importance of understanding industry specifics and how the funeral industry might be a perfect fit for many community banks.

 

The Merits of Specializing

 

Money 20 20 Recap

Last week’s Money 20/20 conference in Las Vegas proved that it remains one of the best conferences for banks that are serious about innovation, particularly as it revolves around payments. The conference is big, the hallways are endless, everybody and their granddaughter is a speaker, the expo hall is ginormous, and the whole conference is almost unwieldy. However, despite these flaws, Money 20/20 is still a gathering that shapes our financial future. While the Libra folks were noticeably quiet and the regulators seemed less involved, there was still lots of action.

Commercial Lending Strategies
COMMERCIAL LENDING STRATEGIES

On October 30, 2019, the FOMC decided to lower the target range for the Fed Funds rate to 1.5% to 1.75%.  The decision was not unanimous, and two members voted not to lower the target range.   In the FOMC statement and at the post-meeting news conference, the committee’s communication was clear in that the future path of Fed Fund rate will be data-dependent, and the indication is that the “mid-cycle adjustment” is done.  The key takeaway is that rates may move up or rates may move down in the future depending on economic developments.  The question for many bankers and borrowers is how to v

GAINING STRATEGIC VISION
GAINING STRATEGIC VISION

Strategic planning means a lot of things to a lot of different people. One problem that exists in banking is that the act of strategic planning is undefined and so management teams feel that if they can just get to an offsite, sit around a table, work on some budget plans and have an investment banker speak, then they have done their strategic planning. While all of that may help, true strategic planning comes down to essentially meeting two tests.

BETTER LOAN CLOSINGS
BETTER LOAN CLOSINGS

There is a correlation between the speed of commercial loan closing and bank profitability, and there are many reasons why banks that close loans faster can generate more profits.  While banks should be focusing on closing loans faster, there are other techniques that banks can deploy to enhance customer experience while keeping loan closing speeds unchanged.  Banks can leverage operational transparency to improve both perceived and objective service performance.

IMPROVING NIM
IMPROVING NIM

For the majority of bankers, maintaining or increasing net interest margin (NIM) is the single most significant focus today. The shape of the yield curve and lower rates have caused NIM compression across the board and have hurt bank equity performance. While we are not big fans of managing bank performance using NIM as it doesn’t take into account risk and cost, it is one of the most common performance metrics used in banking.

BANK MARKETING
BANK MARKETING

Few bankers doubt the power of great storytelling. Instead of advertising, many banks have evolved into showcasing a customer, employee, or creative narrative that walks the reader to some point of conflict and then tells of a resolution. A story gets the reader or listener emotionally connected to the bank in ways that traditional, single message advertising can’t. Over the past three years, banks have learned that it is not just about telling a story but how to construct marketing around the story that makes a difference.

Libor To SOFR transition

Today LIBOR is linked to over $250 Trillion (that is with a “T”) in financial instruments and has been used as a reference rate for more than 30 years.  However, regulators, for various reasons, are driving a shift to an alternative reference rate.  In 2017, ARRC (Alternative Reference Rate Committee) identified the alternative reference rate in the US as SOFR (Secured Overnight Financing Rate).  Most community banks use LIBOR sparingly in their loan and deposit contracts.  However, if a community bank has even one LIBOR contract, the issue of fallback language becomes essential.

STRATEGIC PLANNING AND INNOVATION
Strategic Planning and Innovation

If you look at the sensitivity in a bank’s budget, $1 of investment in a new line of business usually doesn’t break even for two to three years. $1 invested in finding a new customer usually returns about 9%, while $1 invested in a new product is usually above 20%. This all compares to about a 40%+ return invested in improving processes (loan, branch, cash management, etc.) and about an 80% plus return spent on reducing customer churn, increasing lifetime value and/or helping cross-sell.

Managing Loan Growth

The last quarter in the year is typically a suboptimal time to generate commercial loans.  Most bankers have met their annual goals factoring the existing pipeline of credits. Furthermore, banks that have not met their goals for the year are likely to price and structure more aggressively, thereby depressing profitable opportunities for more disciplined lenders.

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