Is Profitability Modeling the Secret to Smarter Deposit Pricing?

Written by

For banks competing with an increasing number of fintechs and nontraditional lenders for depositors, offering attractive deposit pricing is crucial.

As deposit rates have risen rapidly, customers are increasingly cognizant of where they’re putting their money. “Higher interest rates, as well as the banking crisis in March, led to an awakening of customers’ realizations of higher-yielding alternatives for deposits that may have been parked in non-interest bearing or low-yielding transaction accounts,” noted recent bank analysis from Morningstar. Banks are inching up deposit rates to try to hold onto existing customers and attract new ones — making it crucial that they do so strategically.

The Competition for Deposits
Failing to offer competitive deposit rates could erode existing deposit bases as customers seeking higher rates route their money to other institutions. However, banks engaging in deposit rate increases should take care with their strategy. Many banks have taken a “new money only approach” that reserves higher deposit rates solely for new customers, but this approach could leave longtime customers feeling slighted and result in moving their business elsewhere.

Another way that banks have dealt with deposit rate competition is by taking a passive approach. They hope the number of customers who depart looking for higher rates is minimal, and only make exceptions under pressure from customers who are looking to leave. Exception pricing for customers can save the relationship, but it can also end up costing your bank more in the long run if the decisions to grant higher rates aren’t made discerningly and according to the right data.

Pricing Based on Relationship
Information is power. Setting optimal deposit pricing requires both knowing competitors’ deposit rates and having a firm grasp on how rate increases can impact your bank’s overall customer relationship profitability. Simply increasing deposit rates to match those of competitors is a risky move that can result in a compressed net interest margin, or NIM.

Instead, banks should employ profitability models that calculate exactly how various deposit rate increases could impact the profitability of specific customer relationships — both existing and prospective customers — and what the potential impact would mean for their bottom line. Robust customer profitability platforms allow banks to analyze and determine the value of both their comprehensive customer portfolios and their individual relationships. Such analysis can pinpoint the most profitable accounts and relationships, assess a customer’s potential for additional value and weigh the impact of deposit pricing changes against the overall profitability of the customer relationships.

Not only should the institution model the impact of a deposit rate increase on customer relationship profitability, but they should also determine the impact of the potential loss of that customer’s deposit accounts if they take their deposits elsewhere to take advantage of higher rates.

Modeling allows banks to project the lifetime value of individual customer relationships. It can be extremely difficult to determine what customer relationships are truly profitable without a comprehensive tool that incorporates the associated costs, credit risk, interest rate risk and capital required into relationship profitability results. Determining which profitable customer relationships may warrant exception pricing with a customer profitability analysis tool can provide a valuable advantage for community banks in this competitive deposit rate environment, especially for the institution’s NIM. As always, banks should consider fair and reasonable deposit pricing practices when making these decisions.

Holding onto existing customer deposits and attracting new ones requires competitive deposit rates in this current rate environment. Banks should employ profitability models to help identify when and where higher deposit pricing will pay off for their institutions. Making such decisions without comprehensive information could prove harmful to a bank’s NIM, while making informed decisions about exception pricing based on a particular customer’s potential with your bank can help grow the relationship while maintaining profitability. In prioritizing your most valuable clients, you’ll avoid adding unnecessary strain to your institution’s liquidity and NIM.

How Settlement Service Providers Help Banks with Surging Refinance Demand

Written by

Real estate lenders are racing against the clock to process the deluge of refinancing demand, driven by record-low interest rates and intense online competition.

Susan Falsetti, managing director of origination title and close at ServiceLink, discusses the challenges that real estate lenders are facing — and how they can address them.

What particular stressors are real estate lenders facing?
We’ve seen volume surge this year, but heavy volume is only part of the equation. Market volatility, job loss and forbearance are adding even more pressure. Meanwhile, the origination process is increasingly complicated, with the regulatory environment remaining an important factor. Amid all of this, many lenders have shifted to a remote work business model, forcing team members to grapple with additional caregiving and family complications.

How have market conditions affected lenders’ abilities to meet consumer expectations for closing timelines?
Some of our clients working with other providers have reported processes as simple as obtaining payoff demands and subordinations are causing delays. They’re telling us that, in some cases, these requests have gone from 24-hour turn times to 10-day turn times. Working with an efficient settlement service provider is essential, given that 75% of recent homebuyers in a Fannie Mae survey expect that it should take a month or less to get a mortgage.

What can lenders do to immediately reduce their timelines?
One way is by selecting the right settlement service partner, which can help them get to the closing table faster without making major changes to their process or tech investment. Settlement service providers should provide a runway to close, not contribute to a bottleneck. Examining or revisiting settlement service providers is low-hanging fruit for lenders looking to immediately deduct days from closing timelines.

What characteristics should lenders look for when making a settlement service provider selection?
Communication: Lenders should examine how they’re communicating with their settlement service provider. Is their provider integrated into their loan origination system or point-of-sale platform? Can they submit orders through a secure, auditable platform, or is email the only option? Regardless of how orders are submitted, lenders should also consider whether their provider has the resources to dedicate to communication and customer service, even in a high-volume environment.

Automation and digitization: Selecting a title provider with automation and digitization built into its processes can help lenders thrive, even as their volume fluctuates. The mortgage industry is cyclical; it’s essential that settlement service providers have the capacity to scale with their client banks and grow with their business. They should help banks manage their volume, without having to make dramatic process or technology changes.

Some providers can provide almost-instantaneous insight into the complexity of particular title orders through an automatic title search. This type of workflow helps both the lender and the provider. They both can quickly funnel the simplest orders through to the closing table while employing more-experienced team members to work on more-complicated loans.

Transparency: That kind of insight gives lenders extra transparency into their customers. When originators are aware of the complexity of a title early in the process, they can let their borrower know that the title is clear. If that’s the case, the consumer can stop shopping and leave the market.

Access to virtual closing solutions: Of course, the origination process doesn’t stop once a loan is clear to close. A survey recently conducted by Javelin Strategy & Research at the request of ServiceLink found that one of consumers’ chief complaints about the mortgage process was the number of physical forms that must be signed at closing. The survey also found that 79% expressed interest in using e-signatures specifically for mortgage applications. This interest in e-signings has evolved into genuine demand for virtual closings.

The right settlement service provider should help lenders to operate more efficiently and profitably. The key is identifying a partner with solutions to help banks thrive in today’s high-volume environment.

Four Traits That Will Define Successful Lenders in the Future

Written by

Covid-19 and the Paycheck Protection Program have fundamentally changed the banking industry.

In just a few months, lenders were forced to learn how to process a year’s worth of loans in six weeks. Numerated worked with lenders to process nearly a quarter of a million PPP loans on our platform. We had a front-row seat to how the pandemic transformed lending and drove a technological reckoning (which we shared with Bank Director).

We’ve identified a number of strategies, perspectives and traits that contributed to lenders’ success during the crisis. Working with banks to shift their focus to a post-PPP world, we’re seeing how incorporating these key learnings from the program will separate the winners from the losers going forward.

As banks and credit unions pivot to the new normal, the most successful lenders will be those who accomplish these four things:

Successful lenders will lean in on digital. It goes without saying that in the middle of a pandemic, every bank needed to figure out how to serve customers with closed branches. Digital capabilities were put to the test — everyone quickly figured out where their digital footprint fell short. A lot of sensitive documents were emailed, workflow was lost and most processes wouldn’t have passed audits in normal times. Digitally-mature lenders and those who successfully adopted technology for PPP had efficient, secure processes that didn’t burn out their customers or employees. Technology will be key to keeping customers satisfied and employees happy during inevitable future crises or unexpected shifts in the industry.

Successful lenders will prioritize speed to market. When Congress first announced the PPP, lenders had to make a quick decision: lean in and figure out how to help their businesses or sit it out. One of the biggest differences in PPP performance we’ve identified was how quickly lenders got into the market.

Two client banks in California both did the same number of PPP loans — despite one being 10 times larger than the other. The smaller bank identified their needs, adopted our platform and rapidly rolled it out to their borrowers faster than their larger counterpart. This gave the smaller bank a foot up in the market. Some banks think committees and consensus mean they can’t move quickly. In 2021, successful banks will understand speed matters, crisis or not.

Successful lenders will achieve efficiency ratios not previously thought possible. The workflow on Small Business Administration loans is complicated; despite the SBA’s best efforts, this was true for PPP as well. The best lenders leveraged technology to get PPP loans done the same day as applications. They pre-filled applications, automated decisions, automatically generated and digitally executed loan documents, and used APIs to board to the SBA. Loans that would have taken a banker five to six hours were done in less than an hour.

At the height of PPP, we saw lenders processing nearly two loans a second — the equivalent of $250 million of PPP loans per hour. Banks will need to find radical efficiencies like these to grow earnings in a challenging 2021 budget season. The most successful lenders are already using PPP learnings to reengineer their normal loan operations.

Using data is key. In 2021 and beyond, it will no longer be enough for lenders to digitize their processes. Going beyond these commonplace efficiency gains will require using reliable, actionable data that can automate and eliminate work. Unfortunately, as anyone who’s worked with financial technology knows, bank data is a mess.

During PPP, we worked with the SBA to create a connection to their systems that let us detect errors in our banks’ data. There were many, many errors; enabling our banks to fix these data issues saved countless hours of rework. Successful lenders are finding ways to clean their data so that software can automate more of their normal lending processes. These conversations are integral to their 2021 plans.

As the pandemic still grips the nation and without further government assistance in the immediate future, banks find themselves in uncharted waters as they set their budgets for the new year.

One of Numerated’s investors is Patriot Financial Partners’ Kirk Wycoff — one of the most successful community bank investors in the United States. In a recent Numerated webinar, he shared his perspective that this year’s budget conversations will be more focused on technology than ever before. “We need to get that message across to senior leadership teams that for investment in technology, there needs to be a realization that the building’s on fire.”

The ability to put out that fire effectively will determine much of lenders’ success in 2021 and beyond.

Navigating Troubled, Murky Waters

Written by

Banks face a cloudy future as they navigate today’s unique environment, characterized by an economic downturn — caused by a health crisis rather than an asset bubble or industry malfeasance — and a prolonged low-rate environment.

“This downturn is different,” says Steve Turner, a managing director at Empyrean Solutions who has focused on balance sheet management and risk over his multi-decade career.

“All of the problems in the last downturn, you pretty much knew where you were. You could look at your balance sheet, you could look at the credit profiles,” he continues. But this time, “we have such a wide range of things that could be happening to us over the next number of months and years.”

With that in mind, Turner joined me as co-host for a virtual peer exchange on Aug. 5, where 10 chief financial officers shared their perspectives on how they’re planning for loan losses and handling the deposit glut, and the lessons they learned from the last crisis.

Asset Quality Remains Strong … For Now
So far, these CFOs aren’t seeing indicators of weakness in their markets. Yet, their experience in the industry tells them that losses are coming. How does a bank still using the incurred loss model justify a loan allowance that aligns with U.S. accounting principles and still prepares it for what history tells them is inevitable?

“The allowance, we’re struggling with that a little bit,” says Suzanne Loken, CFO at $1.3 billion S.B.C.P. Bancorp in Cross Plains, Wisconsin. “Just looking at our data, we don’t see the losses coming through.”

The bank provides talking points to lenders so they can conduct structured conversations with troubled clients, she adds.

Banks are doing their best to monitor the environment, sometimes employing a deeper analysis so they can better assess any potential damage. Joseph Chybowski, CFO at $2.8 billion Bridgewater Bancshares, shares that his team at the Bloomington, Minnesota-based bank created a tenant rental database to better identify troubled areas. “[It’s] a much more granular look on a go-forward basis of what our borrowers’ tenant bases look like,” he explains.

Focus on Deposits, Funding Costs
Arkadelphia, Arkansas-based Southern Bancorp planned to jettison its excess liquidity in 2020, as part of its strategy to improve earnings and profitability. Instead, Paycheck Protection Program loans have swelled the balance sheet of the $1.5 billion community development financial institution (CDFI). “And when these loans are forgiven, our excess liquidity is going to almost double from that perspective,” says CFO Christopher Wewers. “So, [we’re] working hard to drive down the cost of funds.”

In the discussion, the CFOs report that new PPP customers were required to open a deposit account with them to apply for the loan, fueling deposit growth. They expect to deepen these relationships, as their banks essentially kept these customers afloat when their old bank left them out to dry.

The group also confirms that they’re exercising caution around promoting particular deposit products, like certificates of deposit. And the retail team, like the lending team, should be provided talking points so they can better convey today’s reality to customers, says Emily Girsh, CFO at Reinbeck, Iowa-based Lincoln Savings Bank, a $1.4 billion subsidiary of Lincoln Bancorp. “We need to help walk [customers] through and educate them about the market.”

Lessons from the Last Crisis
While the root of the coronavirus crisis differs from the 2008-09 financial crisis, bankers did learn valuable lessons about managing through a prolonged low-rate environment.

“We learned a deposit pricing lesson,” says Michele Schuh, CFO at Anchorage, Alaska-based First National Bank Alaska, which has $4.6 billion in assets. To strengthen customer relationships in the aftermath of the previous crisis, the bank floored deposit rates. “Our assets didn’t immediately downward reprice [then], so we wanted to continue to share and provide some level of above-market yield to the customers that had money deposited in the bank.”

No one could have forecasted that a decade later, rates would remain low. “As rates have come back down … we’ve taken a little bit more practical approach to trying to decide where and how we might floor rates,” she adds.

There’s also caution around hedging. Out of the last crisis, “there were institutions for five years that were betting on rates going up, and [those] institutions lost a lot of money,” notes Kevin LeMahieu, CFO of $2.2 billion Bank First Corp., based in Manitowoc, Wisconsin. “

In the most uncertain environment in memory, how bank leaders look ahead will matter,” says Turner. “Stress testing should look at more scenarios, early warning indicators and processes should be beefed up, and sensitivity to staff and customer concerns should be heightened. Fee income opportunities and creating relationships with new customers from the PPP program will be opportunities to offset some of the lost income from net interest margin compression.”