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What Are You Worth to Your Bank?

Have you ever considered the value of your business to your bank? If not, you should. Knowing what profit you bring to your bank is paramount to negotiating better loan rates, fewer fees and smaller charges.

The net profit your financial institution makes on your account depends upon loans, deposits, and other bank services. Let’s begin with loans.

Loan Profit – To calculate your bank’s profit on your loans, you don’t just look at the interest you paid because there is a cost to the bank of the money it lends to you. The easiest benchmark for a bank’s cost of funds is the Federal Funds Rate. This rate is published daily (in most financial newspapers and on the internet) and is the rate that banks can borrow money from the Fed. By adding one-quarter point for internal servicing costs, you will be close to the bank’s cost structure. For instance, if the Federal Funds rate is 0.25%, figure the actual cost at 0.75%.

To calculate your bank’s profit on your loans, subtract their cost of funds from your actual loan rate, and then multiply the result by your loan balances. Use the average loan amount outstanding over the year.   The result is the bank’s profit on your loans. For example, if you have a $500,000 average balance loan, your rate was 5%, the Fed Funds rate was 0.25%, and we figure a 0.25% cost, the calculation is $500,000 x 4.5% or $22,500 profit for your bank.

Deposit Profit – If you leave money in non-interest bearing accounts, you will multiply that amount by the Fed rate. That’s the money your bank doesn’t have to borrow because you give it to them for nothing. For interest bearing accounts, take the Fed rate minus your interest rate for the profit. Next, we need to factor in the fees they charge on your depository accounts. You will be in the ballpark if you figure 50% of every penny of fees you pay is sheer bottom-line profit. Be sure to look at these fees before any interest credits for deposits. Remember, you’ve already accounted for deposits earlier. Don’t forget about wire fees, EFT processing, etc.

Other Services – The last step to add is any other services you purchase from your bank. This could range from investment and trust services, to retirement accounts, to payroll processing. The general rule of thumb is to estimate a profit to your bank of 50% of your total fees.

To calculate the total worth your business brings to your bank on an annual basis, simply add the loan profit, deposit profit, and other services profit. Depending upon the size of your company, loans and deposits, you will likely discover a substantial number. That number can become very valuable to you when negotiating your next deal or renewal. Can you imagine yourself saying to your banker, “You know Bob, I’m really pleased that you want to make this new loan for us, but the fees are just too high! Before this meeting, I took some time to calculate what we bring to your bottom line using a Fed Funds rate basis. Last year alone, you netted about $126,000 on us.   Let’s see if we can get rid of these fees, and then we’ll have a deal.”

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