For entrepreneurs, start-ups, and growing businesses seeking funding for their enterprise, Small Business Administration 7(a) loans are a popular choice. SBA loans are guaranteed up to 85 percent of the loan by the Small Business Administration. SBA loans allow these small businesses to borrow money for a variety of business purposes, from purchasing inventory or equipment, to buying real estate. Due to low interest rates and flexible terms, SBA loans are one of the most sought-after types of financing for small businesses.

If you’re a small business owner looking to obtain one of these loans, there’s a good chance you’re going to a community bank to get one. In March 2019, the approval percentage for small business loan applicants hit a record high of 27.3 percent at big banks; small banks, on the other hand, have an approval percentage of nearly 50 percent (49.4). Small business loans have been called the “lifeblood” of community banks. While they only hold 13 percent of all industry assets, community banks account for 42 percent of small business loans. According to the 2018 Community Banking in the 21^st Century survey, 91 percent of community banks reported small, midsized, or regional banks to be their primary competitor for small business loans. Only two percent of those surveyed reported large banks (more than $50 billion in assets) being a primary competitor. SBA loans, in particular, are offered by nearly 70 percent of community banks, the same survey reports.

Drawbacks to SBA loans

If borrowers are looking to get money in their hands as soon as possible, SBA loans may not be the best route to take. A major drawback for SBA loan applicants is the extensive amount of time and paperwork required to apply. On top of the extensive amount of time it takes to submit an application, it can take, on average, 60 to 90 days from the initial application to the release of funds. A customer can spend months going back and forth with their bank trying to get the necessary paperwork and documentation together…and still get turned down. In fact, the Federal Reserve found that the average small business borrower spent more than 25 hours on paperwork for bank loans.

There are four main stages of the SBA loan application process, as Fundera outlines:

1. Borrower gathers documents, applies for loan (1-30 days)
2. Lender underwrites loan (10-14 days)
3. Lender approves the loan, sends commitment letter (10-21 days)
4. Lender closes on the loan (7-14 days)

Customers needing money in their hands faster for their small business needs have started turning towards online lenders. While online lenders can’t match the same favorable repayment terms or low interest rates that smaller banks can, online lenders have found a distinct advantage in the speed of their decision-making.

Customers have the need for speed, and banks are listening

Banks aren’t too concerned about losing less credit-worthy borrowers to alternative lenders; however, they are worried about losing creditworthy customers who have been “seduced by the speed and ease that alternative lenders are pitching,” noted David O’Connell, a Senior Analyst at Aite Group, in an American Banker article. Because of this, banks are looking for – and implementing – new technology to create a more efficient lending experience for small business loans.

Remember the 10 to 14 days a bank could spend underwriting an SBA loan application? Today’s technology affords smaller banks the opportunity to streamline the underwriting process by creating online loan applications and avoiding mounds of paperwork and documentation, reducing redundant data entry, and automating analysis.

SBA loans are being approved at big banks at rates that haven’t occurred since the beginning of the Great Recession. For smaller banks that rely on small business loans for profitability and growth, it will be increasingly important to ensure that small business loans stay at the community banks. As SBA loan technology becomes more readily available for smaller financial institutions, these institutions must take advantage of the time- and cost-savings that SBA technology can bring their borrowers and their lenders.

 

 

By Tom Cunningham, PhD

The March National Employment Situation report from the Bureau of Labor Statistics looks optimistic. After an underwhelming job growth month in February, March bounced back with 196,000 jobs created – well above the 170,000 expected. Meanwhile, the headline unemployment rate (U3) remained unchanged at 3.8 percent, as expected, and the broader measure of labor underutilization (U6) also remained steady at 7.3 percent.

The decent pace of job creation suggests that last month’s dismal performance of 20,000 jobs was likely an anomaly and that the economy is still strong. February’s job creation was revised, bringing the total to 33,000 – still very low – but that was preceded by an extremely strong January with 312,000 jobs. This month’s notable gains occurred in health care, professional and technical services, and food services. Construction increased slightly, and manufacturing broke its positive streak with a minor decline of 6,000 jobs. Other sectors were essentially unchanged.

Average hourly earnings are up 3.2 percent over the last twelve months, which is off from last month’s 3.4 percent growth pace. This slight slowdown is a little disappointing, as it had been expected to continue at its previous pace.

All in all, the March job report decidedly takes the edge off of last month’s slowdown. While this doesn’t necessarily mean that we can relax as financial markets – particularly the yield curve – have been sending some warning messages, the March report makes it clear that the labor market remains in rather good condition.

 

Today, professionals across all industries are feeling a sense of urgency to complete projects, serve customers, or check off tasks from the to-do list. After all, time is money. For financial professionals, this mantra holds especially true. Banks and credit unions must not only find ways to meet regulatory requirements efficiently from a time and cost perspective; they must also quickly meet changing customer expectations in order to retain and grow those relationships.

In Abrigo’s newest eBook, Agile Bankers: How Community Banks are Addressing Disruption, Risk and Growth, James Anthony, CEO of Martha’s Vineyard Bank, says that technology is driving transformation within the banking industry. He believes community financial institutions can utilize technology to save time and increase efficiency in certain functions so that employees have more time to provide the cornerstones of community banking: building relationships and making informed, local credit decisions.

“We are not trying to automate in order to replace people with technology,” Anthony says in the Agile Bankers eBook. “It’s about empowering and arming the people we have with technology so that we can get the noise of the day to day out of the way and they can focus on the more impactful things that human minds are good at addressing – those things you can’t automate.”

One of the major benefits of doing business with community banks is the personalized customer service and access to relationship banking that’s rarely found at larger financial institutions. However, some bankers face common roadblocks during the lending process. These include:

• gathering materials from the prospect in a timely and efficient manner
• tracking and managing documents throughout the approval process
• ensuring consistency from one lender to another during credit analysis.

The delays to a decision caused by these issues only increase the chance that the prospect will take their business elsewhere, and the inefficiencies only increase the cost to the lender.

In the past, some community financial institutions shied away from tapping technology due to affordability concerns. Today, however, savvy community financial institutions are capitalizing on their ability to purchase financial software on a per user basis and achieve advantages of scale that allow them to provide superior customer service and the modern conveniences that banking customers have come to expect. Here are a few ways that processes can be streamlined and financial professionals can be less distracted by mundane tasks.

Loan Applications – Stop chasing down prospects.

For banks and credit unions, processing applications should be the simplest part of the lending process. However, time and time again highly compensated lenders must chase down paper documentation from potential borrowers – and in some cases, guarantors or business partners. Following up or meeting with each prospect can be a time-consuming task, particularly when a single loan officer could be handling up to 75 relationships at one time and especially if those meetings prove to be inefficient because the client doesn’t end up having all of the required paperwork. According to a study on meeting productivity by the Harvard Business Review, 65 percent of those surveyed stated meetings keep them from completing their own work, and 71 percent say that meetings are unproductive and inefficient.

Furthermore, when traveling to meet with prospective borrowers, travel expense reimbursements can add up for banks and credit unions. Within an easy-to-use loan application portal, prospects can upload tax returns, asset account information and supplemental documentation at their own convenience – rather than meeting with loan officers during the daytime, when many applicants are busy running their businesses.

Loan Administration – Gain rapport with your clients

When you do a Google search for “credit decision complaints” what do you see? The search results page typically renders a long list of complaints regarding fair-lending complaints or local reviews regarding credit decision times and customer service. No financial institution – large or small – wants to be on the receiving end of negative feedback by prospects or customers, especially when access to those reviews are widely available. Most prospects – particularly young prospects – are hitting the search box before visiting your institution, and the demand for digital product offerings is increasing. According to McKinsey & Company, banking habits have continued to revolve around the use of digital banking tools. Fifty-six percent of bank customers would be willing to purchase banking products digitally, despite just 13 percent saying they have done so.

Abrigo has found that loan underwriting software can reduce the administrative workload by up to 35 percent through automation of client correspondence and steady tracking of documents, covenants and loan exceptions.

Loan Decisioning – Focus on the loans with the biggest upside

Loan decisioning affects financial institutions on multiple fronts – influencing how regulators judge underwriting as well as playing a key role in customer satisfaction and whether or not community financial institutions will win the loan to begin with, according the New York Federal Reserve. The 2016 Federal Reserve survey found that 45 percent of respondents complained of long waits for a credit decision. So what’s the hold up?

According to Neill LeCorgne, Abrigo Vice President of Banking and former President and COO of Regent Bank, several community institutions are not properly segmenting loans within the portfolio. He says loan applications can be streamlined by classifying loans based on the probability it will be approved – or loan pathing. Loans that have a low chance of approval or have a high chance of approval can be streamlined to a speedy yes or no using underwriting software. This loan pathing process saves time for credit analysts to focus on the loans that will maximize earnings and lenders to focus on booking more loans.

LeCorgne says, “When a loan is not bankable in its present state, an institution should make a speedy decision, respond to the borrower and move on.” In an upcoming whitepaper set to be released this month, LeCorgne details the benefits of loan pathing using financial software for community financial institutions.

For community banks and credit unions willing to take the leap toward technology, the lending process can be simplified and streamlined, effectively silencing the noise that most bankers must deal with at the workplace. The only question is, is your institution ready for its set of earplugs?

Banking has been completely redefined in recent years. Today, there are virtual banks, virtual credit cards, and virtual customer assistants. And yet, as megabanks get bigger and technology enables some banks to go branchless altogether, community banks continue to be as important as ever to many customers all across the country.

April is Community Banking Month, and it is a great time to reflect on all the ways that community banks remain integral to Abrigo.

Here are five reasons to celebrate community banking this month (and every month):

1. The landscape and number of community banks have changed drastically in the past few decades. However, community banks continue to play an integral role in rural and “micropolitan” counties, where these institutions hold the majority of banking deposits. One in five U.S. counties have no other physical branches besides those from community banks.

2. Although Wells Fargo or Bank of America might be more familiar bank brands, community banks comprise roughly 94 percent of all banks in the United States.

3. Community financial institutions play a crucial role in our national economy and our local communities. Not only do these institutions help local businesses thrive by providing them with credit, but they also do it by helping them make good financial decisions and manage their capital properly. Community banks and credit unions hold roughly $6.5 trillion in loans.

4. Community financial institutions are critical for local economies. In addition to supporting local businesses through lending, these institutions support local communities throughout the country by employing over one million people.

5. A big advantage community financial institutions have over their megabank counterparts is their emphasis on relationship banking and relationship lending. According to a study from D3 Banking Technology and The Harris Poll, a majority of consumers (58 percent) prefer to deal with local and regional banking providers instead of large banks. Why is that? These consumers point to better customer service and a more personalized experience at local and regional institutions as their reason why they prefer banking with these providers.

Download the Community Banking Infographic here.

Last year’s inaugural U.S. Retail Banking Advice Study from J.D. Power revealed that three out of four (78 percent) retail bank customers were interested in receiving financial advice from their bank. Not only do customers want financial advice from their bank, but it’s becoming a critical component of overall customer satisfaction.

This year, the study found that big banks are outpacing regional banks in the financial advice space – which is becoming a key battleground as routine branch transactions decline, the J.D. Power study notes. Community and regional banks have long been associated with relationship banking; however, a majority of community bankers reported rarely or never offering financial advice services such as wealth management advice, management succession advice, or general management advice, according to a survey in the 2018 “Community Banking of the 21^st Century” report by the Federal Reserve System.

“Retail banks that get the financial advice formula right are scoring major points with their customers in the current marketplace,” said Paul McAdam, Senior Director of the Banking Practice at J.D. Power, in the most recent study.

So what exactly is that formula? How are big banks outpacing regional and community banks, and how can these smaller banks catch up?

Give the right advice

It’s not just about giving advice but giving the right advice. Take a look at your customer base. Tailoring advice to specific segments of customers is important. If you have a large number of business loans or depository accounts with physicians, you could consider offering them investment advice. Or, if your clients include many retailers, then you could offer tips on cash flow management.

Overall, the 2019 U.S. Retail Banking Advice Study by J.D. Power and a recent BankRate survey revealed that these five areas are among the top themes that customers would like financial advice on:

• Tips to improve financial circumstances
• Investment-related advice
• Retirement-related advice
• Advice to keep track of spending and budgeting
• Tips for saving for large purchases

Go digital

Customers want more services, but they don’t want to have to go to a physical branch to utilize those services. Financial advice is no different. The 2019 U.S. Retail Banking Advice Study by J.D. Power revealed that a majority of bank customers would like to receive their financial advice digitally, preferably via website or mobile app. This area saw the most significant satisfaction point gain over the previous year and had the most impact on customers under 40 years old.

“More than any other channel… [digital advice] is where clients really want to receive this information,” McAdam noted in the study. “To me, that was a key.”

Fifty-eight percent of customers reported wanting to receive advice through their bank’s website and mobile app, but only 12 percent of customers had actually received advice in this manner. For community and regional banks looking to bolster their digital financial advice offerings, it might be helpful to look at the customer satisfaction advice leaderboard. Bank of America, the institution with the highest-rated advice satisfaction ranking, has many areas both on its website and within its app to assist customers with the financial advice they may be looking for. In fact, Bank of America has a section on their website called “Better Money Habits®,” where it offers a wide variety of videos and articles to help customers manage numerous areas of their financial life, including debt, home ownership, college, and retirement. Offering a digital loan application, for example, can not only make it more convenient for businesses to apply outside of their work hours, but it can also help them get information online about what information required for a loan application and what lenders look for when they approve loans.

Be the resource customers can trust

If there’s one area that sets community banks apart from big banks, it’s their local focus and knack for relationship banking. Community banks tend to work more closely with their customers to ensure their needs are met and ensure that they are served with a personal touch. Providing financial advice to customers and small business customers is an untapped opportunity for these community financial institutions to deepen their relationships beyond the typical depositor-borrower partnership.

To leverage this in financial advice, the J.D. Power Retail Banking Advice study found that overall satisfaction with the account opening process increases 161 points (total scores are on a 1,000-point scale) when benefits and features are explained completely and 44 points when fees are clearly explained. In other words, transparency is critical to potential bank customers in new accounting opening, which is a common venue for delivering advice. Moving from a sales focus to an “advice culture” has increased banks’ new account openings, trust, and advocacy.

While customers want to receive advice digitally, only 45 percent of customers felt that their needs were met when using a bank’s website or app for advice, and 33 percent among those receiving advice via email. However, a majority (58 percent) of customers who received face-to-face advice from their bank felt that their needs were completely met. Digital offerings are incredibly important to customer satisfaction, but for community banks that have fewer resources to invest in technology, this is a positive statistic.

The quality of financial advice is seen as a key differentiator for banks across the country, yet many banks – especially smaller community and regional banks – miss out on this opportunity. Going forward, it will be especially important for these banks to tap into ways to deliver financial advice, whether it’s through face-to-face interactions or digital offerings, in order to keep pace with big banks.

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.

About Sageworks

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. 

Why do people switch banks?

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.

Electronic signature benefits for banks

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.

What do borrowers want?

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.

Credit unions on cryptocurrency: What members need to know

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.

How community banks can win the battle for deposits

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.

Book: Blockchain Basics: A Non-Technical Introduction in 25 Steps

“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

Book: Bank 4.0: Everywhere, Never at a Bank

“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

About Sageworks