1. A Practical Guide to Pricing for Risk
Craig Poms
EVP, Chief Delivery Officer

2. Introductions & Housekeeping
Carl Ryden
CEO
cryden@precisionlender.com
980-297-7110
Craig Poms
EVP – Chief Delivery Officer
cpoms@precisionlender.com
980.297.7103
PrecisionLender provides world-class
loan & deposit Pricing Management
Solutions to financial institutions.
Clients – ~143 banks with assets from $50 million to over $180 billion.
Usage – ~3,600 lenders and managers pricing $6 billion in commercial
loans each quarter and growing.
Experience – Direct experience deploying pricing solutions to over 500
financial institutions.
Please – Questions and comments are ALWAYS welcome AT ANY TIME.

3. It is All About Risk
Absent an illegal or immoral
use of the funds, all we care
about is getting repaid as
expected.

4. Why don’t we think about
pricing the same way?
Shouldn’t we apply the same
risk assessment when we
price?

5. We would like to propose a name
change

6. RAMA
The Risk Acquisition and
Management
Association

7. It is as much about how we Acquire
Risk as it is about how we Manage
Risk
Isn’t this how we make money?

8. Risk Acquisition is not just about Marketing and Sales
It is also about how we use Pricing in
the Risk Acquisition Process

9. Using Pricing to proactively acquire and manage risk
is sorely missing in most banks today

10. How Do You Price Today?

11. What we hear…
“As long as we think we will get paid back, we will take almost anything.”
“The good deals are so incredibly competitive. Sometimes I’m scared when we WIN.”
“I’m not sure that we are appropriately incorporating risk into our pricing. ”

12. From one of our client CFO’s:
“In my 35 years in banking, what I have found to be true is that you
tend to
Win the Most, What you Misprice the Worst.”

13. How Would You Like to Price?

14. What we hear…
“You want to be a price maker, not a price taker.”
“You can’t bring emotion into pricing. The pricing has to have structure.”
What should drive our pricing?

15. The Pricing Dynamic TM

16. The Pricing Dynamic
We have been talking pricing with banks for
many years and here is how we have come to
think about Pricing:

17. profit from precision – compete with confidence TM
Our View of the Pricing Dynamic…
17
Competition
Pricing
Portfolio
Relationship
Relationship
Relationship
Profitability
Goals
Portfolio Needs / Relationship Awareness

18. Impact
Pricing loans and
deposits is the most
significant thing banks
do every day.
Pricing is at the center of what
you can manage.
It is where the rubber hits the road – where your strategy
meets execution. It is the most important lever that you
can pull as it directly and tangible impacts:
Wins – Pricing determines which deals you win, which
deals you lose.
Profit – Pricing determines how much you get paid on
those that you win.
Type – Pricing determines what types of deals you win
(asset quality, duration, risk, collateral, rate structure etc.)
Quality – Pricing determines the quality of the resulting
relationship.

19. Pricing Environment

20. Today’s Concerns
#1: Low point in the rate cycle

23. Today’s Concerns
#2: When rates will rise

25. Today’s Concerns
#3: BASEL III will increase Tier 1
capital requirements
#4: Capital is scarce

26. So What Can You Do?
Adopt a pricing system based upon risk-
adjusted ROE targets

27. How is Pricing Used Today inYour
Bank?

28. How is Pricing Used Today in Your
Bank?
Is it reactive to the competition?
- You don’t match the competition in
their assessment of credit risk, then why
match their assessment of pricing risk?

29. How Should Pricing Be Used Today
in Your Bank?
Is it used proactively to build the
portfolio that you want to live with
in terms of both interest rate risk and
credit risk.

30. How Do You Factor In Risk Today?
Can you accurately adjust pricing for:
Credit Risk?
Interest Rate Risk?
●
Collateral Risk?
Guarantees?

31. How Do You Factor In Risk Today?
Can you quantify the effect on your rate for:
Credit Risk?
Interest Rate Risk?
●
Collateral Risk?
Guarantees?

32. What About Accounting for
Relationships?
Can you quantify the Strategic Value of your Relationship?
Multiple loan facilities
Deposit accounts
●
Other fee based business

33. Pricing Management System

34. AnAn effective Pricing Management System should have:
+
Profitability Modeling:
• Industry standard math
• Fully incorporate risk
• Price full opportunities
On-going Management:
• Proactively manage relationships
• Manage products over time
• Create & manage rate sheets
• Comprehensive pricing reports
Measure & Monitoring:
• Real-time dashboards
• Continuous relationships ranking
• Monitor published rate sheets
+
1 2 3
The Fundamental Components

35. AnAn effective Pricing Management System must have:
+
The Critical Components
Ease of Use / Actionable Results
• Intelligently guides & suggests alternatives
• Lenders immediately see what drives profit
• Empowers lenders to win
Trust & Transparency
• Never a “Black Box”
• Consistent with common sense
• Engages credit, risk, finance and sales / lending

36. • A disciplined and objective methodology to set loan prices based on risk
is a necessity. Many banks pay lip service to this requirement but too
often cite the need to match the competition as a reason not to abide by
it.To be effective, loan pricing should take into account the entire
customer relationship, the loan loss provision and cost of risk, an equity
allocation, the duration of the credit and its funding cost, and the risk
rating of the credit.A secondary benefit to a disciplined approach to loan
pricing based on objective factors is that it provides a solid defense from
charges of unfair or discriminatory pricing in small business lending.
• American Banker: Community Banks Must Stay Disciplined as C&I Lending Surges, Claude A. Hanley, Jr. and John R. Barrickman, MAR 5, 2013
3:00pm ET

37. Best Practices
• A Proactive Approach to Pricing
• Pricing used as a tool, in the moment, to Win More Deals
• Pricing Used as a tool to build the kind of portfolio that you want to manage
• Give lenders better knowledge of different pricing options
• Lenders pricing the wayYou want them to
• Improve cross-selling of deposits and other products
• Understand the value of your existing relationships

38. Bad Practices
• Pricing to the competition
• Using spread as an indicator of price
• Inconsistent pricing from loan to loan or lender to lender
• Not understanding the value of your existing relationships

39. Not All Margin is Created Equal
The danger of reaching for yield:
- You can create immediate margin by going out longer on the yield curve
with lower rated loans.
- However, this will cost you over time in terms of increased loan losses, rate
risk and capital requirements.

40. Let’s See the Pricing Dynamic in
Action…
40

41. Impact
Pricing today determines your
portfolio of tomorrow.
Pricing with a Pricing Management System helps:
Grow Your Portfolio – Empowering your lenders to win
more of the best deals in your market.
Increase Profitability – Knowing what drives the
profitability on each deal and accurately comparing the
risk-adjusted profitability of all new Pricing Opportunities.
Strengthen Relationships – Empowering your lenders to
focus on the exact needs of each borrower and instantly
hand-crafting options that meets your borrower’s needs
and meets or exceeds your profitability targets.
Compete with Confidence – Consistently explore pricing
alternatives that appropriately incorporate all aspects of
risk is a powerful competitive weapon.
Pricing helps you win and keep your best relationships

42. In Summary
- Pricing is the most important thing you do
- Pricing in terms of risk-adjusted ROE targets is critical
- Pricing needs to be a discipline

43. THANK
YOU
blog.precisionlender.com
Craig Poms
EVP – Chief Delivery Officer
cpoms@precisionlender.com
980.297.7103
Carl Ryden
CEO
cryden@precisionlender.com
980.297.7110