A client was recently presented with a large lending opportunity. The borrower requested pricing and terms on a $6MM loan. Additionally, the borrower guaranteed that they would keep $500k of deposits with the bank. Like many community banks, growing loans was a key priority for our client and they were eager to win this deal. The loan amount was at the high end of the bank’s legal lending limit, so they contemplated selling a portion of the loan. Also, they worried about the increased interest rate risk of a large, longer-term loan and therefore wanted to keep the amortization period short.
FORVIS LoanPricingPRO® loan evaluation tool was selected to determine whether to book the entire loan or participate a portion of it. After close examination of participation and non-participation options, in the end, the bank decided to book the entire loan in order to recognize the full profit impact. Even though the ROE was slightly lower, the bank did not have a good interest income alternative for the $3MM they would still need to deploy in the participation scenario. While it is easy to focus only on the ROE of individual loan requests, it is important to also look at the macro picture and make sure pricing decisions account for total impact to the bottom line.
LoanPricingPRO® is an easy-to-use software program that provides lenders with competitive loan pricing analytics, as well as information highlighting the value of customer relationships. Learn more by visiting www.loanpricingpro.com.