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A New Approach To Commercial Loan Fees

In the ongoing low interest rate environment, driving revenue growth in commercial lending has been challenging. In collaboration with S&P Global Market Intelligence’s Performance Optimization Program, a regional bank created a new approach to commercial loan fees for its Business Banking line of business. With more than half of their loans at less than $100,000, the goal was to significantly enhance top-line revenue, without adversely impacting the bank’s commercial loans spreads, non-credit revenue, or loan volume objectives.

Alongside S&P Global Market Intelligence’s market data, the first step the Performance Optimization Program team took was to analyze the bank’s portfolio data and existing approach to commercial loan fees. The results suggested that there was a significant revenue improvement opportunity if the bank could chance its approach to commercial loan fees:

  1. For both the retail and wholesale channels
  2. For both commercial and industrial (C&I) and commercial real estate (CRE) loans
  3. To take into account differentiated fee levels considering term loans vs. lines, new vs. renewing loans, size of deal, etc.
  4. To align certain types of fees (e.g., commitment fees, unused fees, doc prep fees) to certain types of transactions

Previously, in the retail channel, the bank had two fixed fee levels for every new term loan – one level for C&I terms loans and one for CRE term loans. Lines of credit and renewing loans did not have fees. The bank also lacked tiered/differentiated fee levels for new term loans based on size of deal, despite the fact that many of the bank’s in-market competitors were doing just that.

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In the wholesale channel, fee negotiation was left entirely up to relationship managers on a case-by-case basis, and because of that, there significantly different results across the team. Additionally, there was no reporting and tracking on commercial loan fee performance in the context of the overall relationship, so management to determine whether better fee management could also impact their lending relationships.

In the end, the portfolio analysis confirmed that the commercial loan changes could be implemented without negatively impacting the bank’s other revenue sources and business objectives.

Unused Fee Incidence Increased 30% Over Two Years of the Program

After the analysis, the Performance Optimization Program team worked with the bank to implement differentiated data-driven commercial loan fee guidance levels based on:

  1. Retail versus wholesale channel
  2. C&I versus CRE loans
  3. Differentiated fee levels based on term loans vs. lines, new vs. renewing loans, size of deal
  4. A broader type of fees including commitment fees, unused fees and doc prep fees

We deliver updated fee guidance levels monthly to monitor changes in both the bank and market dynamics. We also provide loan spread guidance to ensure the bank is optimizing its all-in revenue given the dynamics of the local competitive market(s). Additionally, the program provides monthly reporting on key metrics such as channel, geography, team and relationship managers in order to track what is and isn’t working, allowing management to make proactive and tactical changes.

The primary drivers for improvement are:

  1. Achieving fees on revolving lines of credit in the retail channel– particularly low usage lines,
  2. Optimization of fee incidence (% if deals with a fee) versus fee levels (bp level) in the retail channel by adding tiered and differentiated fee levels based on market deal characteristics (loan size, C&I vs, CRE, etc.)
  3. Implementing fee guidance based on deal characteristics as determined by the market, where no guidance existed previously

This new fee initiative has helped the bank achieve a revenue improvement of 10 basis points.

Many banks sacrifice profitability due to lack of data or discipline around loan pricing. The Performance Optimization Program provides your team with deep account-level data and analytics to help them price new loans and renewals, while driving deposit and treasury service revenue.

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