As interest rates continue rising, community financial institutions that take a more strategic and data-driven approach to loan pricing and portfolio management will stand to benefit from the strengthening economy. Loans are one of the most profitable ways to leverage an institution’s funds, so banks and credit unions with an extensive understanding of their loan pricing models will be positioned for maximum portfolio growth and profitability.
Financial institutions continue to try to find a way to increase their bottom line, whether it is with new clients, new dollars, or increasing profitability.
Traditional sources utilize the institution’s individual loan account interest rates compared to an overall cost of funds; while the institution’s individual deposit account interest rates compared to the overall yield. In this methodology, deposits are evaluated as a single source of funds and loans/leases are evaluated as a single use of funds. Each pool is assessed relative to one another on an account-by-account basis, where the specific rate on a given deposit account is assessed relative to the overall yield of the institution, and the specific rate on a given loan/lease account is assessed relative to the overall cost of funds of the institution.
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