As many community banks continue loosening underwriting standards for commercial real estate (CRE) and regulators heavily scrutinize CRE portfolios, it’s a good time for financial institutions to review their CRE loan portfolio management.
So says Robert Ashbaugh, Executive Risk Management Consultant at Abrigo, formerly Sageworks, Banker’s Toolbox, and MST. After all, billions of dollars on the balance sheets of community banks are at stake, considering banks are still looking to grow CRE portfolios and there isn’t any assurance that the 10-year U.S. economic recovery will continue, Ashbaugh told bankers recently during the American Bankers Association Conference for Community Bankers.
Ashbaugh and Roger Shumway, Executive Vice President and Chief Operating Officer of Bank of Utah in Ogden, Utah – an Abrigo customer – were the headliners of a new CRE educational track during the ABA Conference for Community Bankers, the premier event developed for – and by – community bank CEOs. Ashbaugh and Shumway will provide a repeat of the speech Feb. 26 at 2 p.m. ET during the Abrigo webinar, “CRE Lending Market Simplified: Key Insights for 2019.”
Regulators are asking about stress testing practices related to CRE portfolios, the strength of risk rating practices, underwriting guidelines, bank policies and procedures related to CRE lending, and institutions’ reporting on CRE concentration, Ashbaugh said. This focus will continue, he predicted, even though banks in recent quarters have shaved CRE growth rates as they contend with rising delinquencies and stiffer competition from non-bank lenders.
“You want to make sure you’re managing the risk, that you’re always evaluating the portfolio and making sure you know where the risk is,” Ashbaugh said. “And once you’ve identified it, you want to make sure you’ve mitigated that risk. Banks have to ask, ‘Am I adding additional covenants for debt service recovery, for getting additional financials, have I priced and risk rated it appropriately?’ ”
In addition to providing information on best practices for CRE portfolio management and stress testing CRE, Ashbaugh and Shumway’s session at the conference also included an update on the upcoming shift to the current expected credit loss model, or CECL.
Attendees were advised that the two biggest issues to consider as it relates to CRE and CECL might be the segmentation of loans and the average life/remaining life of loans in the portfolio. Data quality and utilizing accurate risk ratings and risk-based pricing are also important considerations that were discussed during the session.
More than 1,100 banking and financial services professionals were slated to attend the four-day national conference in San Diego.
Register for the Abrigo webinar, “CRE Lending Market Simplified: Key Insights for 2019,” to learn more about CRE loan portfolio management.
With the recent start of 2019, financial institutions that have only this year to complete their current expected credit loss (CECL) models have hit an important milestone. Financial institutions have known about this “new” accounting standard for approximately three years, and now the frequently discussed deadline is coming to fruition. Public business entities who are registered with the Securities and Exchange Commission (SEC) have to comply by Q1 2020. Non-SEC filers and all other entities have until 2021 or 2022 to transition to forward-looking credit loss models.
CECL should be a critical item that financial institutions prioritize on their strategic agendas this year regardless of whether the institution is an SEC filer or not. There have been recent discussions and changes that FASB has made in an attempt to improve the standard after gathering industry feedback from peer groups, however, banks may be at a disadvantage in implementing in a timely manner if they view these changes as an opportunity to slow efforts to prepare.
When asked to describe their progress in preparation for and transition to CECL, in MainSreet Technoogies’ 2018 CECL survey, more than half the responding financial professionals, 55 percent, indicated they were “having internal discussion/meetings.” MST Senior Advisor Paula King, a former bank CFO and co-founder, contends, “that’s not far enough along for many institutions. If you are an SEC filer you will be estimating under CECL on March 31, 2020. You’ll want to start testing your models by the first quarter of 2019, which gives you less than a year to secure external help if you need it, budget for your transition, draft your roadmap, which will include gathering and assessing your data and re-segmenting your pools, and then ultimately implementing your plan.” King further advises that institutions and their teams should have advanced in the implementation timeline to either the stages of testing CECL-compliant methods or evaluating vendors.
Supporting the survey’s findings that institutions are often delayed at getting started, Jessica Shorney, chief financial officer at Telcomm Credit Union said in a survey after a recent CECL modeling webinar by Sageworks that “our experiences thus far with CECL modeling have been non-existent, as we stalled in the early stages of data gathering and building the files. We recently, however, made significant progress with the files, and hope to be running parallel calculations soon.”
Many financial institutions are similar to Telcomm Credit Union in that they recognize that CECL will require more effort than simply “pushing a button” due to the complex data requirements of the forward-looking models. During the same webinar, Sageworks risk management consultants Brandon Quinones and Danny Sharman polled the audience on the most challenging aspect of analyzing CECL modeling results at their financial institutions. Among 185 attendees, 40 percent specified that they do not have CECL modeling results yet. Both consultants expect this number to significantly decrease in 2019 as institutions either reach or approach their effective dates.
For institutions that have to comply at the end of this year, the final CECL model must be approved by the board of directors and external auditors, and it should take into account any regulatory feedback received by the institution. Final scenarios should be tested and presented to management and shareholders showing the projected impact on ratios, earnings and capital. As CECL is being finalized, this is the right time to introduce more robust stress testing, underwriting and loan pricing programs so that the entire lending process is defensible. Throughout most, if not all, of this year, financial institutions should be running CECL calculations in parallel to the incurred loss model.
Non-registrants and all other entities will be closely observing the actions SEC filers are taking in upcoming months. The SEC requires its registrants to make certain disclosures ahead of CECL implementation, i.e., now. These include pertinent dates for adoption and a discussion of the impact unless it is unknown or unable to be estimated. At the end of this month, Managing Director of Sageworks Advisory Services Garver Moore will be giving a web presentation to financial institutions on what their CECL models should look like in their final year before implementation. Registration for “A Practical CECL Transition: Preparing with only one year left” can be found here.
Every year, millions of Americans make a New Year’s resolution in an attempt to make a positive change in their life, whether it’s going to the gym, becoming more fiscally responsible, or taking up a new hobby. According to poll by YouGov and Statista, one of the top five most common New Year’s resolutions is to read more, garnering 18 percent of responses. So for some banking professionals, this begs the question, “Am I reading enough?”
Warren Buffet, CEO of Berkshire Hathaway and famed investor, has been quoted stating he spends as much as 80 percent of his day reading and has compared reading 500 pages a day to compounding interest for knowledge. While that time commitment might not be feasible for everyone, reading presents many benefits, from preventing memory loss to serving as relaxation or exercise for the brain. According to Yale research, reading might even contribute to longevity.
So for the sake of your wellbeing, we’ve compiled a list of five of the most popular blog posts for financial professionals trying to stay on top of banking trends. We’ve also provided links and short descriptions of a few of the banking industry’s best sellers. So as you’re enjoying the last few PTO days of the holiday season, take a moment for a quick, two-minute blog read or use that holiday gift card at your local bookstore.
According to a Bankrate survey, American adults use the same primary checking account for an average of nearly 16 years, and more than 25 percent of adults don’t switch bank accounts for over 20 years. Customer loyalty is at record highs, evidenced by the customers who stick with their banks despite data breaches or scandals, such Wells Fargo, which suffered a scandal involving 3.5 million accounts in 2016. In fact, 82 percent of retail bank customers trust their bank. However, there are select customers who decide to shop for a new bank, and there are still ways that banks can increase satisfaction amongst its clientele and convince them to stay put, from keeping an eye on banking fees to paying attention to the largest generation in the workforce – millennials.
Banks and credit unions across the country understand the benefits of an electronic signature during the lending process according to P&S Market Research. The firm believes digital signatures will see a compound annual growth rate of 26.5 percent over the next five years, driven primarily by banking, financial services, and the insurance sector. Looking past the obvious speed benefits of digital signatures, community banks are also using this method to increase efficiency and foster customer satisfaction during loan underwriting and the loan application process, while also saving up to $20 per document.
No banking customer is exactly alike, but there are commonalities among banking preferences that can be leveraged to make informed decisions about how to shape your community bank or credit union’s customer experience in 2019. A survey by PwC outlining the top issues for financial institutions points at lack of technology options among banking processes as a pain point for many banking customers. In fact, the survey states 46 percent of customers skipped in-person interactions at banks, relying on smartphones, tablets, and online browsers to access deposit account information or apply for loans. While it’s no secret that digital banking is a top priority for today’s community banks, it’s still critical for banks to understand how customers expect their digital branch to function, from security desires and concerns to mobile access and loan application automation.
Bitcoin, cryptocurrency, and blockchain have all been buzzwords over the past few years, and banking customers are making note of it. Cryptocurrency is a type of currency that only exists digitally and relies on encryption for the security of transactions. As more and more customers ask your credit union about cryptocurrency and as its popularity grows, especially among millennials, it’s important to be a resource for your members and educate them about the associated risks with investing in cryptocurrency. Learn more about the volatility, regulations, and security threats accompanying the new form of currency as well as how to inform your customers as they plan for 2019.
Checking accounts, savings accounts, money markets, and certificates of deposits all serve two key purposes for community banks – methods for community banks to balance liquidity and cross-sale to onboard loans. A steady stream of deposits assures community banks and credit unions are better equipped to onboard loans, but large banks are starting to increase deposit market share. In Agile Bankers: How Community Banks are Addressing Disruption, Risk and Growth, Sound Financial Bancorp. CEO Laurie Stewart says online deposits will play a huge role in which community bank will win loan accounts, stating, “We’re seeing regional banks start to pay up for deposits that have never done that before.” As competition between online-only banks, community banks, and larger financial institutions heats up, community institutions that integrate a customer-centric approach will win the battle for deposits.
“In 25 concise steps, you will learn the basics of blockchain technology. No mathematical formulas, program code, or computer science jargon are used. No previous knowledge in computer science, mathematics, programming, or cryptography is required. Terminology is explained through pictures, analogies, and metaphors.” – By Daniel Drescher
“Bank 4.0 explores the radical transformation already taking place in banking, and follows it to its logical conclusion. What will banking look like in 30 years? 50 years? The world’s best banks have been forced to adapt to changing consumer behaviors; regulators are rethinking friction, licensing and regulation; Fintech start-ups and tech giants are redefining how banking fits in the daily life of consumers. To survive, banks are having to develop new capabilities, new jobs and new skills.” – By Brett King
Book: Too Big to Fail
“In one of the most gripping financial narratives in decades, Andrew Ross Sorkin—a New York Times columnist and one of the country’s most respected financial reporters—delivers the first definitive blow-by-blow account of the epochal economic crisis that brought the world to the brink.” – By Andrew Ross Sorkin
On-demand Webinar: Credit Risk Readiness: One Decade after the Great Recession
A new year is bound to bring new challenges and opportunities to the banking industry. Technology has played a heavy role in 2018, with banks and credit unions combining superior customer service efforts with technological advancements to set itself apart from competition. Will your financial institution be prepared to compete with tech-heavy banks in the new year?
According to The State of Digital Lending report from the American Bankers Association (ABA), 75 percent of bank customers reported low overall satisfaction with traditional banks. That dissatisfaction emanated from a lack of online processes according to a 2016 Federal Reserve survey, which states 42 percent of respondents complained about difficult loan application processes. Despite the need for change, only 38 percent of small banks are using a digital loan origination system.
Streamlined banking technology isn’t just a draw for customers – it’s also an important component for bank employees’ satisfaction. Big banks are investing in technology from within internal processes to talent acquisition, as large banks such as JPMorgan employ 50,000 tech roles – nearly double the number of employees at Facebook. Young bank customers, who are most likely to choose a bank for its digital services, mirror their millennial and Generation Z counterparts graduating from college and entering the financial workforce.
The digital future of lending is here, and the key to competing in a digital-first banking environment is simply to start. Invest in technology that offers benefits to banking customers and banking employees alike. If you’re searching for a starting point, read below to find tools that might help you optimize and deliver a customer-centric banking experience at your institution next year.
Build an online loan onboarding process
For lending prospects who are crunched for time, a digital branch and online loan application is the ultimate convenience. According to the ABA, 4 in 10 banking customers access their deposit account information online, and that number will only increase as more financial institutions begin to offer similar capabilities such as online loan applications. Of the banks that offer digital channels, 96 percent of those banks offer a digitized loan application according to the same ABA report. For community banks that want to gain a leg up on the competition next year, adopting an online lending solution that streamlines documentation collection before credit analysis will put your financial institution on the fast track to success.
Secure borrowers with a CRM
The immediate ROI of a fully-integrated customer relationship manager (CRM) is an efficient task management system and central record of daily customer engagements. A CRM does the legwork when it comes to documenting touchpoints – and pointing out if prospects have been touched one too many times. But for financial professionals who choose to think outside of the box, a CRM can provide numerous benefits beyond its bank-facing features. Community banks can utilize a CRM to enhance and personalize its customer service efforts, gain a 360-degree view of the borrower or potential cross-sale opportunities and capitalize on relationship lending and referrals.
The proverb, “You don’t know where you’re going until you know where you’ve gone” is a phrase we’ve all heard before, but its message rings especially true when it comes to bank analytics and reporting. Gaining access, aggregating and organizing bank-wide data can be a daunting task. However, leveraging internal data can often shed light on missed opportunities and drive bank strategy in the new year. An analytics tool puts banks in the driver’s seat, taking the guesswork out of strategy building and allowing banks to recognize key patterns within the portfolio.
For community institutions, some of the best insight often comes from peer data. Understanding your institution’s competition is and how it stacks up against peer institutions is critical for determining the institution’s goals and opportunities. Utilizing a peer analysis tool allows financial institutions to compare themselves against local, regional and national competition – whether its measuring loan concentrations or key performance metrics, such as return on assets or interest rates – and identify weaknesses that may have otherwise gone undiscovered. While several community banks have completed planning for the new year, it’s important to reevaluate plans as the banking environment shifts throughout the year. Community bank mergers and closures have risen significantly over the past 30 years, with just 4,880 commercial banks open today of the 12,343 commercial banks open in 1990. A peer benchmarking tool can be a valuable resource for improving initial strategies as competitors arise and fall.
For some community banks, it’s easy to continue onboarding and underwriting processes as they’ve been done for years because it’s what staff, executives and customers are comfortable with. However, it’s critical for banks to realize that in order to offer superior customer service and a one-of-kind customer experience, tapping technology will put them in the best position to succeed in the new year.
On-demand Webinar: Group Demo: Shorten the Loan Process with the Electronic Tax Return Reader
For small businesses, planning a strategy around identifying and combating competitors is a must. After all, it’s impossible to gauge performance without comparative metrics. For example, a flower shop owner might ask herself:
Is the flower market saturated within the local area?
What is competitive pricing for roses around me?
How close is my storefront to the competition?
The same methodology applies to community banks and credit unions. Small financial institutions know this, often vying for the latest FDIC data or OCC report to gain a leg up on the competition. It’s also not uncommon for banks and credit unions to perform a strength, weakness, opportunity and threat (SWOT) analysis of peer data, exploring internal and external opportunities for improvement, as well as areas where a financial institution thrives against its competition. This competitive analysis can serve as a measuring stick to gauge one financial institution against its peers.
Though, during peer data analysis, there are critical questions that banks should ask to provide valuable insight, such as:
Are we paying attention to the correct metrics and competition?
Are our goals clear and concise?
How do we compare to the local and national banking environment?
With access to the correct peer data, answering each of these questions can be achieved with a thorough analysis.
Identify the competition
Just because Bank of America or BB&T have locations next door doesn’t mean those branches are your competition. Sometimes it’s the community bank with a similar asset size that should be watched carefully, but even though asset size should be noted, community banks have to move beyond common characteristics if they wish to accurately define their competition.
Identifying the competition, first and foremost, begins within the institution. Understanding the bank’s primary goals and its corresponding key performance indicators (KPIs) – whether it’s focusing on deposit products or growing commercial loans – allow the bank to measure itself against its true competitors in the space. Peer groups should be built based on the unique metrics your institution cares most about. Banks can tap technology to analyze loan portfolio concentrations within other institutions or better analyze metrics such as return on assets, efficiency ratio, yield on earning assets, or net interest margin. During peer analysis, it’s considered best practice to include a range of banks that perform worse and better than your institution for chosen KPIs to benchmark competition.
Identify strengths and weaknesses compared to peers
In a regulated competition – like an NFL game, for example – strategizing a gameplan is futile without understanding what your team excels at and areas where improvement is necessary. Banking is no different.
No bank or credit union is the same, meaning each financial institution must uncover holes in the portfolio that are unique to their institution to be best prepared for shifts in the banking industry. A peer analysis tool grants banks access to the insights that point out financial institutions’ weaknesses so they can be remedied quickly.
An example of this could be CDE Credit Union. While CDE has seen over 40 percent loan growth year over year, bank executives are poking holes in the portfolio to complete end-of-year planning. CDE Credit Union uses peer benchmarking technology to measure itself up against its two community bank peers down the road – DEF Community Bank and First Town Community Bank – and benchmark its performance. To their surprise, despite high YOY loan growth, the bank’s concentration of commercial real estate (CRE) loans has decreased since last year. To better access the situation and cross out the notion this is circumstantial, the executives check more peer data of banks around the county and a few more across the state only to realize it’s not a trend. With this data in mind, CDE Credit Union decides it will focus on CRE loans and check data again in the coming months to gauge the market and set future goals.
Set goals based on measurable benchmarks
Once you’ve identified the KPIs that matter most to your institution, it’s time to set clear benchmarks to strive for based on your competition’s performance metrics. In a BankNews article, Larry N Laminger, banking consultant, stated these benchmarks will not only serve as a method to measure overall performance, but it’s used to, “achieve higher levels of strategic, operational and financial performance.” Each benchmark can serve as a guiding light as banks plan future initiatives.
Setting a clear goal involves two main components: A KPI and a timeline to reach it. It’s important to be aggressive, yet realistic, when determining the appropriate timeline for your benchmarking goals. Is the KPI improvement achievable after one quarter or will it take the entire year to reach?
Perhaps your financial institution is in the bottom 20 percent for return on assets and you’re hoping to improve throughout 2019. After running a peer analysis, you recognize that there is a heavy correlation between the efficiency ratio and return on assets – as noted by Laminger – and decide that your institution should aim to lower the efficiency ratio to top that of the competition. In order to do so, your financial institution must decrease the ratio, which might take up to two years. In this case, your measurable goal might state: In order to increase the institution’s return on assets, by the end of 2020, the bank will lower the efficiency ratio by 4 percent.
When community banks and credit unions revisit their strategies throughout next year, a peer benchmarking tool can be a valuable resource. As the local and national banking environment shifts, small banks and credit unions should go back and identify new competitors in the space, consistently assess benchmarks and improve existing lending and marketing strategies by analyzing peer data.
On-demand Webinar: Credit Risk Readiness: One Decade after the Great Recession
U.S. banks have been posting strong profitability, and credit quality remains sound thus far in 2018. In fact, regulators have noted as much in both the FDIC’s third-quarter banking profile and the OCC National Risk Committee’s semiannual report on risks issued recently.
Despite the positive trends, these same regulators expressed concern in both reports that credit risk is building, and they are urging banks to maintain discipline in underwriting and with credit standards.
“In the broader financial sector, demand for higher-yielding assets remains strong and has driven an increased appetite for credit assets with higher risk, lower quality, and narrower pricing,” the OCC’s Semiannual Risk Perspective report released this week stated. “Banks continue to see increased competition from nonbanks for loan originations, which can stress banks’ willingness to maintain credit discipline.”
Despite positive quarterly results for FDIC-insured financial institutions, FDIC Chairman Jelena McWilliams said in November, “the extended period of low interest rates and an increasingly competitive lending environment have led some institutions to ‘reach for yield.’ Additionally, the competition to attract loan customers has been strong, and it will remain important for banks to maintain their underwriting discipline and credit standards. These factors have led to heightened exposure to interest-rate risk and credit risk.”
Linda Keith, CPA, a credit risk consultant who trains lenders in financial statement and tax return analysis, says the concern expressed by these regulators isn’t surprising to her or to many others in banking. Keith recently commissioned the 2018 Credit Risk Readiness Study because she sensed worry among her community bank and credit union clients. This worry was not about whether a recession or other credit disruption would come. As she notes, recessions and disruptions always come. Rather, Keith was hearing concern, “that we are backsliding from the lessons learned” during the Great Recession.
Through 30 in-depth interviews with senior credit professionals and a survey of 250 credit professionals from 235 institutions, Keith developed a snapshot of the U.S. banking industry’s readiness for the next major credit disruption. She will provide details on the 2018 Credit Risk Readiness Study during a Dec. 13 webinar hosted by Sageworks.
Keith found in the survey that bankers have significant concern about a retreat from prudent lending practices – the same unease that regulators expressed in these recent reports. In the survey, 54 percent of respondents agreed with the statement, “Increased competition is causing backsliding in prudent credit risk practices in the banking industry generally,” while only 23 percent disagreed.
This finding is consistent with the FDIC commissioner’s comment and concerns about increased competition and bankers reaching for yield.
“Now, note that these respondents didn’t say that their company was backsliding; we didn’t ask that question,” Keith noted. “However, the large share of agreement about backsliding indicates that when financial institutions are trying to strengthen their credit risk readiness, it’s wise to recognize that there is more and more pressure to relax credit discipline.”
“That pressure is at all levels,” she said. “It’s originators trying to meet goals when their competition isn’t requiring guarantors or is giving in on loan to value, coverage ratios or other covenants. And it’s loan managers holding the line when asked: ‘Can’t we do this deal, because they’re getting this offer down the street?’ “
One manager of commercial credit at a $500 million community bank told Keith that the bank had learned lessons from the past recession. However, the banker said, “We quickly chose to forget and we’ve loosened up the lending. We were way too loose on commercial real estate, especially. It just concerns me that we’re getting to that point again.” Other senior credit professionals expressed success and determination in maintaining the needed credit discipline.
Keith during the webinar plans to review many of her findings from the survey on credit risk readiness, and she will ask webinar participants about their own views. “The attendees will compare their thinking to their peers on the webinar as well as lending and credit professionals across the country. We’ll focus on concerns and best practices to improve credit risk readiness.”
In the OCC Semiannual Risk Perspectives report, regulators said that in new commercial loans, particularly in commercial and industrial lending and leverage loans, “abundant” investor liquidity is fueling demand and driving eased underwriting and risk layering. “Also, there is increasing concern that strong loan performance is masking the accumulated risk in loan portfolios from successive years of eased underwriting and low interest rates, as well as contributing to greater complacency in risk assessment,” the OCC report said. The regulator’s National Risk Committee said increased credit risk oversight is warranted, based on the number of matters requiring attention (MRA) notices that called out risk management weaknesses related to credit policy exceptions and credit analysis.
Continuing weakness in commodity prices, increasing expenses and the unknowns related to U.S. trade policies are among factors that are increasing agricultural lending risks, the OCC added. Commercial real estate concentrations seem to be less of a concern; the OCC said CRE concentrations remain elevated but noted growth has slowed, especially among community banks, based on results through the June quarter.
Keith said in her study that many senior credit professionals are paying more attention to either avoid, or adequately mitigate, a return to high concentration in CRE. Interestingly, however, she saw some differences of opinion between frontline workers and leadership about whether financial institutions have sufficiently mitigated the risk of CRE concentration. Among frontline staff, which includes credit analysts, underwriters and relationship managers, 43 percent agreed their institution had sufficiently mitigated the risk of CRE concentration. However, among leadership (CEOs, chief lending officers, chief operating officers, senior loan officers), agreement was 60 percent. “Generally, throughout the survey, the frontline agreed with the leadership, but not on the subject of CRE concentration,” Keith noted in her study. “Does the frontline have more of a pulse on this issue? Or does leadership have more experience with mitigation at the institutional level?”
Join Keith for a discussion of this and other credit risk issues during the webinar, “Credit Risk Readiness: One Decade After the Recession.”
Community banks and credit unions face more competition and disruption than ever before. In an interview for the eBook, Agile Bankers – How Community Banks are Addressing Disruption, Risk and Growth, Tom Bugielski, CEO of Republic Bank of Chicago, says, “The retail banking challenge that we face today is something I’ve never seen before, both with the number of branches that are closing and the enhanced utilization of technology and digital channels.”
The number of community banks has declined by 24 percent since 2010, from 7,007 to 5,331 in 2017; similarly, the number of credit unions has declined by 22 percent during the same period. While consolidation and mergers have swept up many peers, there are also significantly less new formations of banks and credit unions. From 2001 to 2009, there were 814 new community banks formed and 62 new credit unions. From 2010 to 2017, that number dropped to 10 new community banks and 19 new credit unions. Many financial institutions face upheaval in customer expectations, regulations, products, branches and even competition for funding.
While technology is certainly a “disruptor” to the banking landscape, it is also helping banks more nimbly address their challenges. The question is no longer “Should my bank leverage fintech partnerships and technology,” but rather, “How can my bank leverage fintech partnerships and technology?” If your financial institution is considering tapping technology to address its headwinds and challenge the competition, consider the following to prepare for a partnership.
Know what you’re solving for
Are you looking for a better mobile experience? Faster loan decisioning? Maybe online deposits? Whatever it is your bank is searching for, it’s important to identify the problem before chasing after shiny objects. There are numerous technological advancements in the fintech space, and it’s important to find the right partner to help solve your unique challenges, rather than try to implement recommended technology from peers that might alleviate issues they face but doesn’t fit your institution’s needs.
Take the time to fully assess potential vendors and partners. From compliance and regulatory changes to the bank’s core processor and other internal systems, banks are far from one-size-fits-all, so the solution should be unique to your institution as well. There are many moving parts involved with technology implementation, and finding a partner that will be there for your institution every step of the way is important in order to find value in the investment.
Create the culture
Picking the right technology provider to collaborate with can be a major hurdle for banks with weaker cultures of innovation. While executives will call the shots when it comes to signing on the dotted line, there are many moving parts to implementation—many before implementation even begins. For example, compliance and legal staff, as well as internal stakeholders will need to be involved early in the process. Most likely, the new technology will create operational changes, which will need to be communicated to end users to utilize the system, as well as educate their customers.
Technology implementation touches nearly every person within an institution, thus not only requiring new operational changes, but also a cultural shift in mindset. Creating a culture of innovation won’t happen overnight, but it’s critical that the bank or credit union garners buy-in and involvement from employees throughout the entire institution.
The topics executives will need to address include, but isn’t limited to:
Creating transparency into the partnership will help prepare staff to embrace innovation.
Stick to the plan
For a successful technology partnership, one of the most important pieces of the implementation puzzle is to create a realistic timeline – and adhere to it. To do this, institutions must be as upfront as possible with the provider regarding its current technology, resources and timeline expectations. In turn, the institution must also understand the technology provider’s needs regarding time and resources. Talk to current customers or other peer institutions that have implemented similar technology. Take into consideration core technology, staff size, and other resources that your institution may or may not have in comparison.
While your institution certainly wants to see the benefits of the partnership as soon as possible, it’s critical to understand that it takes ample time to successfully implement the product to fully realize its value. If your institution is considering multiple integrations, consider adding multiple phases into your rollout timeline. Be sure to give your institution enough time to test and learn the product to the fullest, as well as document customer feedback. After all, the purpose of implementing new software is to ultimately heighten the customer experience and product offerings.
Whether your financial institution is looking to become more efficient, more profitable or more customer-centric, odds are that it’s likely looking toward fintech to meet its needs. Technology will continue to disrupt traditional banking, and for community banks and credit unions that need a competitive advantage, technology partnerships are an appealing option. Disruption in the banking industry does not necessarily mean disruption within the institution. Ensuring that your bank or credit union has a strategy to fulfill a need, a plan to communicate and execute the change to its employees, as well as a thoroughly thought-out timeline can help alleviate many obstacles that financial institutions face in this transition.
For additional tools to prepare your financial institution for obstacles and opportunities in 2019, download Sageworks’ free eBook, Agile Bankers – How Community Banks are Addressing Disruption, Risk and Growth.
Webinar: Keys to a Data-Driven Banking World
At the risk of stating the obvious, bankers are generally good with numbers.
So it makes sense that lenders and financial institutions are more enthusiastic about making the larger business loans than making the smaller loans. After all, it takes as much time to process a small loan as a big one, yet the banker’s commission and the bank’s profit are higher for the larger loans.
But forward-looking banks are finding they can originate small business loans profitably and enable lenders to sell them for a worthwhile commission by digitizing the lending process. And in digitizing the business lending process, financial institutions also address frustrations small business borrowers have with slow, paper-based application processes that don’t meet their needs.
Digitizing the small business lending process will be the focus of a presentation this week by Abrigo representatives at American Banker’s Small Business Banking Conference in Nashville. The conference is expected to draw representatives from more than 150 financial institutions, technology vendors and other industry experts.
Abrigo representatives Alex Rousseau and Rick Anderson will provide a brief demonstration of the company’s banking platform, an end-to-end solution that automates lending, credit risk and portfolio risk. The suite of products can also drive faster lending decisions and scalable processes that grow with the loan portfolio and the bank.
“At the American Banker’s conference, we’ll be showing how financial institutions can capture more loans and automate the process, how we can digitize that process and really improve the speed,” Rousseau said. “We can make the process more consistent, faster and digital.”
Rousseau said a lot of banks don’t have the ability to digitally accept and process business loan applications, so part of the demonstration will show the Sageworks Online Loan Application. “It’s a digital funnel; business borrowers can deliver a completed application and all the supporting documentation electronically. The application can be completed either online, in the branch or with the help of a lender,” Rousseau said.
Even though many customers want the flexibility that digital applications provide, a recent survey by state banking commissioners of 521 community banks (most with assets below $10 billion) found that only 39 percent offered online loan applications on an ongoing basis. Another 38 percent don’t offer them and have no plans to offer them, according to the “Community Banking in the 21st Century 2018” report. Twenty-three percent of those surveyed don’t currently offer online loan applications but plan to do so in the next 12 months.
The Abrigo Banking Platform also has the ability to automate the rest of the loan approval process, Rousseau noted. Once the application is complete, all of the information is captured and used for all other stages of the approval process so that staff don’t have to keep manually re-entering data.
“We can automatically pull the credit report and can recommend a decision that tells the institution electronically whether it’s a thumbs up on the loan or a thumbs down or a ‘maybe’ loan – all without anyone from the bank touching it, or if they do touch it, doing it with just a few clicks,” he said.
All of this allows the bank to get back to the customer more quickly, providing a better customer experience, Rousseau said. But it also provides operational benefits.
“You want to process the small loans quickly, so that your lenders can rapidly book them and be more efficient, leaving extra time to focus on the bigger, more complex loans,” Rousseau said. “You want these loans, but you want to make them as quick and as painless as possible. This is a way to do that, and it’s a way to keep up with these new digital, non-bank platforms, too.”
Rousseau and Anderson are among several Abrigo experts who speak regularly on a variety of topics, including loan-growth practices, credit risk, global cash flow analysis, the allowance for loan and lease losses (ALLL) and stress testing.
Remaining competitive in small business lending will also be the focus of a panel discussion during the American Banker Small Business Banking Conference, and that panel will include Laurie Stewart, president and CEO of Sound Community Bank and a member of the Abrigo Advisory Board.
Stewart and other members of the Sageworks Advisory Board recently discussed how they are addressing current challenges related to lending and other areas of their financial institutions, as well as how technology is helping to address some of those challenges, in a Sageworks eBook, “Agile Bankers: How Community Banks are Addressing Disruption, Risk and Growth.”
Abrigo Advisory Board member Duane Abadie, who is president of First Bank and Trust of New Orleans, noted in the eBook that his bank has been able to produce about 40 percent more loan packages with existing credit department staff since his bank automated its credit analysis process.
“Getting it done easy and quick and as efficiently as possible allows us to focus our resources for maximum return … focusing them on business opportunities as opposed to the administrative aspect,” Abadie said in the eBook.
Looking at the entire small business lending cycle, from loan request through approval to closing, technology can transform the business lending process from one that consumes 35 labor hours at a cost of $2,422 to one that takes 16 hours at a cost of just over $1,000, according to Abrigo Vice President of Banking Neill LeCorgne. He estimates a technology lending solution like the Abrigo Banking Platform offers can also shorten small business lending renewals to just over 3 hours (at a labor cost of just over $300), compared with a typical process that parallels new loan onboarding (35 hours at a cost of $2,422).
Those who aren’t attending the American Banker conference can see a demonstration of the Abrigo Loan Automation solution on Wednesday via a webinar with Abrigo Senior Risk Consultant Bryce Lugar. He will provide information on the solution’s configurable loan application templates and will demonstrate how the solution allows conditional logic to be applied in various loan decisioning scenarios.
Community bankers establish close relationships with many of their borrowers and in fact, it is these relationships that many community banks tout as one way they are superior to their larger rivals.
When it comes to small business customers, however, community banks have untapped opportunities to deepen relationships beyond the typical lender-borrower partnership by offering advisory services, according to a couple of recent surveys. Deeper relationships can mean new deposit accounts, new lines of credit, even new service areas for banks looking to fill the role of trusted advisor.
A majority of community bankers said they rarely or never offered the following services, according to a survey in the 2018 “Community Banking the 21st Century” report (link opens a PDF) by the Federal Reserve System, the Conference of State Banking Supervisors and the FDIC:
For example, three-quarters of those surveyed said they rarely or never provide the additional service of connections to customers or suppliers. Only 1 in every 10 said they always or usually provide management succession advice to small business customers.
Bankers surveyed were most likely to offer long-term strategic advice to small business customers, but even then, about 45 percent of those surveyed said they rarely or never offered such advice.
Interestingly enough, small business owners are indicating they would find some advisory services very beneficial if their banks provided them. J.D. Power’s 2018 Small Business Banking Satisfaction Survey examined responses from customers of the 23 largest banks in the U.S. and found that large banks have room to improve their level of focus on advisory services for business owners. While the survey related to customers of large banks, their responses indicate opportunity for small banks to set themselves apart by beefing up their advisory services to small business customers.
Only 18 percent of small business owners surveyed reported that their banks had provided tips for reducing business costs and fees in the last three months, according to J.D. Power, and 23 percent received banking advice specific for business owners. Only about one third of survey respondents strongly agreed with the statement that the bank “understands my business.” A paltry 1 in every 4 respondents strongly agreed that they learn new things from their bank.
This presents a missed opportunity by large financial institutions, as small business owners overwhelmingly indicated their desire for certain types of advice or assistance for their business. Seventy-nine percent of survey respondents said it would be very or somewhat beneficial for the bank to conduct an annual review of their business, and 82 percent said it would be very or somewhat beneficial for the bank to refer the business owner to customers for the business.
“The desire for advice is there, and right now banks have plenty of opportunity to improve,” said Lou Farrace, senior manager of industry analytics for J.D. Power, in an email exchange.
Given this evidence that small business owners are interested in advisory services, community banks might consider how they can weave aspects of these services into their interactions with small business owners. Some credit analysis solutions being used by banks generate a wealth of information that, if shared with a small business owner, could help the owner in managing their business. For example, banks could provide:
Bankers can also make a focused effort to connect small business clients with other professionals who can help the business owner in other areas. These professionals could include lawyers, accountants, business valuation professionals, and wealth managers.
Another option is to provide value to small business clients by incorporating helpful resources in every contact. For example, you could include a link to an article about their industry in an email or help them connect with others on LinkedIn. Business bankers often know a lot of people in the community, and making introductions solidifies your role as a resource for clients.
These gestures remind the business owner that the bank is concerned about their success even when a new deal or transaction isn’t at stake.
Business relationships are supposed to be beneficial for both parties. When they are, bank customers are less likely to switch banks based on price alone. As community banks wrap up planning for 2019, financial professionals should look for opportunities to offer advisory services – either formally or informally –in order to retain and attract new SMB clients away from the competition at large banks.
Across the country, community banks are facing an increasingly relevant problem: Large banks are winning the battle for deposits. From 2013 to 2017, total deposits fell at banks with $1 billion or less in assets by 7.5 percent as total deposits at banks with $1 billion more in assets increased by trillions of dollars. One looming question that community institutions must answer to start 2019 off strong is how will they catch up and win back a significant share of deposits?
Retail deposits – such as checking accounts, savings accounts, money markets or certificates of deposit (CDs) – serve as a primary method for community banks to balance liquidity and onboard loans. Without a steady stream of deposits, community banks miss out on a valuable method to fund loans.
The Federal Reserve has increased federal fund rates five times since 2015, and small banks should take note. Due to the increased rates, online-only banks have gained market share of deposits over the past year by amplifying interest rates on deposits. Synchrony Bank, Ally Financial, Goldman Sachs increased deposits by 11.5 percent, 16.2 percent and 20.6 percent respectively from June 2017-June 2018 using this tactic. In addition, large banks are beginning to set up shop within rural, deposit-rich areas, which can affect smaller institutions with little competition in rural communities.
In an American Banker article, Neil Stanley, CEO of deposit consulting firm Core Point, said, “…smaller banks need to consider increasing deposit rates and improving their deposit and loan products to give consumers more compelling reasons to switch from banks that have vast branch and ATM networks and, generally, more sophisticated mobile banking technology.”
For community financial institutions, the time to focus on retail products is now. As the competition intensifies for bank deposits, two options for smaller banks to retain deposits and attract new deposits are to:
1) embrace client-facing technology the way their larger bank peers have, and
2) capitalize on their strong relationship-banking capabilities.
Improve client-facing tech and backend technology
Despite the Federal Reserve’s increase of federal fund rates, large banks have yet to similarly boost rates on deposit accounts. Why not? Larger financial institutions provide a technology-driven accountholder experience that reduces the pressure to raise rates in order to remain attractive.
Big banks with a high revenue stream through deposits place a high priority on reinvesting back into the business for technology advancements that keep accountholders, often pouring millions of dollars into the effort to win tech-savvy customers. This year alone, JPMorgan Chase spent $1.4 billion on technology.
Whether looking for a small business loan or a deposit account, today’s bank customers still expect an online component to their banking experience. Sixty-four percent of borrowers say it’s important to have devices that allow them to access their online banking according to an Accenture report.
Digital features, such as an online loan application or a borrower portal, offer easy access to information for on-the-go accountholders and can be more enticing to millennial retail and commercial customers, who may not have time to visit bank locations during the daytime. A strong online presence with access to convenient services during the lending process also builds your financial institution’s reputation as a forward-looking, tech-driven bank in other areas as well.
Community banks can also tap technology for the direct benefits it can provide the institution. A customer relationship manager made for banks provides a full view of the borrower’s credit history, previous business with the institution and connections throughout the local community for a global cash flow analysis.
Capitalize on relationship banking
When speaking about relationship management vs. technology in an American Banker article, Michael Iannaccone, vice president at Plexus Financial Services, said, “Banks are using more technology to gather deposits, including virtual branches and more aggressive social media tactics to lure people through mobile banking. But relationship banking is still needed to woo the no interest cost customer.”
Financial professionals that practice relationship banking and act as both relationship managers and resource managers can play an integral role in the onboarding and cross-sale of deposits at community banks.
Relationship managers refer to lending professionals who build personal relationships with the client, gain a deep understanding of their finances and act as a consultant to help clients reach personal and business financial aspirations through relationship banking. Resource managers go one step further, providing supplemental help to customers by passing along helpful information based on customers’ personal or business ventures or connect clients with other financial professionals who can help them achieve their financial goals.
With access to analytics and reporting about a borrower or accountholder, financial institutions can connect the dots and better qualify customers for additional bank products. Smart lenders who work with low-risk, high-value borrowers can see the benefits of continuing business with quality customers or their cohorts and might cross-sell low-cost deposits. For example, a spouse of an ideal borrower could open a checking account or a co-borrower could open up a savings account, creating a deeper partnership between the institution and the original borrower.
Relationship banking extends beyond the doors of your community bank. Financial institutions that encourage employees to involve themselves in the community through philanthropic or volunteer work often see the benefit of relationships built at those events. Community banks that communicate their involvement with local charities to its existing customers and prospects build a positive reputation that can lead to new business. Community institutions can also strengthen their reputation and gain deposits through recommendations.
According to the American Marketing Association’s Journal of Marketing study, Referral Programs and Customer Value, referrals can be priceless. The study states referred bank customers are 25 percent more profitable for the bank, 18 percent more likely to stay with the bank and have 16 percent higher lifetime value.
As community banks finalize their 2019 plans, outbidding large banks and online-only banks for deposit accounts will be an important consideration, and as loan demand improves and interest rates increase, the competition for deposits will only grow as well. Community banks that implement a strategy integrating relationship banking and technology will have the best chance of leveling the playing field with competitors.
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