any community bankers “look down the street” when pricing commercial loans to see what the competition is doing. Ironically, those bankers are looking at your bank as well to see what rate to offer! What if neither bank knows how to ensure the loan or the borrower’s relationship is profitable? In the mid-2000s, large and regional banks used pricing tools to help them win more deals and to ensure the loan/relationship met their profitability target. Community bankers were left out due to the complexity and cost of the pricing solutions. Then from late 2008 until March 2022, rates were so low that almost any loan a bank could make to a credit-worthy borrower was better than investing in Fed Funds. Therefore, loan pricing wasn’t much of a science for many banks. However, in the past two years, rates have gone up dramatically, and liquidity has diminished to a great degree — so once again, precision in loan pricing has become a major consideration. There are many factors that go into a pricing decision. Size, term, fees, fixed or floating rate, balloon, collateral and, of course, the borrower’s creditworthiness are all important factors. 2024 is the year to look at giving your loan officers the tools they need to win more deals while meeting your profitability goals. Just like loans, size matters when it comes to deposits as well. Let’s look at several of these considerations. What About the Competition? Pricing commercial loans for community banks can be daunting, especially in areas where competition is fierce. Often, we have a customer — particularly when the customer is one of our most credit-worthy customers — that indicates they can get a better deal from another bank. What do we do? Blindly match the rate? Let the customer take the competitor’s M Increase Net Interest Income and Win More Deals! By Strunk 33
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