Franklin Synergy Bank Partners with Built Technologies to Streamline Construction Lending


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For banks that finance construction projects, managing their loan portfolio—and particularly the draw disbursement process—can be an especially burdensome undertaking.

Most construction projects financed by a bank contain a draw schedule, which is a timeline of intervals for which funds will be disbursed to borrowers and contractors for use. The goal for banks is to make progressive payments as work is completed. Disbursing funds before work is completed or materials have been delivered puts the bank’s capital at risk. Late disbursement often entails delayed projects and poor client satisfaction.

The problem is, many banks have an arduous, time consuming—and ultimately costly—process for fulfilling draw requests. Which is exactly the challenge that Franklin Synergy Bank (FSB) had been facing for quite some time. Headquartered in Franklin, Tennessee, FSB operates with 12 branches, servicing over $400 million in construction and development (C&D) loans. FSB’s loan administration and draw disbursement processes were fraught with administrative headaches: large staffing overhead, heavy phone call volume, duplicate data entry into multiple systems, use of multiple spreadsheets, unmanageable email communications and antiquated fax and paper usage.

In short, FSB’s loan administration approach was not only costing the bank time and money, but it wasn’t allowing it to deliver a top-notch customer experience for their clients. Seeing technology as the most plausible solution to these issues, FSB decided to partner with Nashville-based enterprise software company Built Technologies. A web-based application with mobile functionality, Built’s application is designed to simplify draw management and disbursement for construction lenders like FSB. Built also allows clients and borrowers to manage the loan from their end, delivering a more seamless customer experience. In addition, borrowers and contractors gain more visibility into the draw management process, increasing confidence in their lending institution.

Prior to partnering with Built and implementing the firm’s platform, FSB had to handle most of the draw process manually. A single residential construction loan draw might involve an average of eight back-and-forth emails prior to approval, in addition to significant manual data entry. As a result, FSB’s loan portfolio had grown more expensive to manage, harder to report against and more prone to human error.

After the Built implementation, FSB no longer needs to receive emails to manage construction draws. Upon closing, the bank loads a new loan into the Built platform and grants the borrow, builder and inspector access based on specific user-based permission levels. The borrower or builder can then simply log into the platform and request a draw, triggering an automated series of events within a pre-defined workflow that facilitated only a single approval touchpoint at the end of the process on FSB’s end. Built then releases funds in an automated and fully documented fashion that saves time and energy across all user groups—including builders, borrowers, loan officers and inspectors. The result is providing construction borrowers the same level of access, visibility and convenience that retail customers experience when they bank online.

Adopting the Built platform has allowed FSB to streamline its construction loan administration team from four employees to two full-time and one part-time staff members. And the team went from managing roughly 750 loans at any given time to an increased capacity of over 1,000 loans. FSB was also able to reduce its draw processing time from 24 hours to a mere 30 seconds, resulting in both an increase in interest income and client satisfaction. Human error has been substantially decreased, and Built’s reporting capabilities have provided FSB greater insight into its construction lending portfolio. FSB can now easily identify, and proactively address, overfunded draw requests and stalled construction projects. In fact, this might be the most innovative aspect of the Built and FSB partnership, because it enables the bank to manage its construction loan risk better than its competitors.

The partnership between FSB and Built is a fitting example of a regional partnership setting the pace for what’s likely to be a national trend. Manual and paper processes are a productivity drain on businesses in any industry in terms of time, money and customer satisfaction. And with the enormous amounts of capital invested in building projects, nowhere is this more evident than the construction lending sector. Once other lenders realize the return on investment that merging technology with their loan management and draw disbursement processes can result in, similar partnerships are sure to follow.

This is one of 10 case studies that focus on examples of successful innovation between banks and financial technology companies working in partnership. The participants featured in this article were finalists at the 2017 Best of FinXTech Awards.

M&A Alert for Banks: Preparing to Be a Buyer


strategy-1-27-17.pngBefore a board and management of a bank pursue an acquisition, they should realistically assess their bank, the characteristics of the board and the shareholders, and the alternatives available.

The board and senior management should develop a strategic plan for the bank. The Federal Deposit Insurance Corporation has cited an increasing number of banks for lack of strategic planning in matters requiring board attention. The Office of the Comptroller of the Currency also has focused on strategic planning in the last few years. 

All board members must share a commitment to the strategic plan. Divisiveness in the boardroom often jeopardizes a bank’s ability to achieve its objectives.

The board has a fiduciary duty to make fully informed business decisions as to what is in the best interests of the hypothetical shareholder who is not seeking current liquidity. Management must assume the responsibility of educating the board (or bringing in consultants to do so) regarding the bank’s strengths and weaknesses, its inherent value, and the market(s) for targets. The board and senior management should meet regularly to discuss the bank’s strategic direction.

Debate in the planning process is healthy, but once the board agrees on a course of action, the board and management should speak with a united voice.

The board and management should communicate the bank’s strategic direction to shareholders. If key shareholders disagree with the direction, the board and management should arrange for such shareholders to be bought out or be comfortable that the bank need not do so. It is difficult to achieve strategic objectives if the board and key shareholders are working at cross purposes.

Evaluate Alternatives
The prospective buyer has a number of alternatives for enhancing shareholder value or multiple paths to be pursued at the same time. The board should evaluate such alternatives to identify the most attractive transaction.

Evaluate Your Prospects for Success
In embarking on bank M&A in the current environment, sellers will demand assurances that buyers can close. Here are some of the factors purchasers should consider:

  • Community Reinvestment Act and compliance ratings: Purchasers need to understand the “hot button” issues driving regulatory reviews and stay up to date. Yesterday’s focus on asset quality, anti-money laundering and Bank Secrecy Act compliance and third-party relationships have been joined by redlining, incentive compensation, concentration risk and cybersecurity, among others.
  • Capital levels: Determine whether the bank’s capital is sufficient to support an acquisition. If not, where will your bank obtain the needed funding?
  • Management: Does the purchasing bank have sufficient senior management capacity to staff the acquired bank or will target management be needed to implement the acquisition?
  • Systems and facilities: The purchasing bank’s board should evaluate whether the bank has compliance management systems and an enterprise risk management program that can scale for the acquisition.

Coming up with a good strategic plan while considering the bank’s alternatives is important for the board to discuss before embarking on an acquisition.

Negotiating the Transaction
There still may be a problem: What if there are very few targets that the bank has identified as “fits,” and none of them are in the market to sell?

Increasingly would-be buyers are willing to consider offering stock as part or all of the merger consideration. There are several drivers of this newfound willingness. First, buyers must meet increasingly challenging capital requirements. The exchange ratio in the merger may offer more attractive pricing to the buyer than issuing common equity to the market. Second, sellers have become more willing to accept private or illiquid stock as merger consideration. This may be a function of sellers’ understanding that economies of scale offer potential for greater returns on investment while enabling sellers to refrain from taking their “chips off the table” as would be the case in a cash sale. The recent run up in the stock market indexes has not yet translated into a general increase in M&A pricing. Third, a transaction that provides for a significant stock component allows for more one-on-one negotiations. Lastly, a strategic combination allows for mutuality of negotiation.

Just offering the selling shareholders stock may not be enough to convince a reluctant seller to consider a transaction. Would-be community bank buyers must recognize that there are social issues in any transaction (even when the merger consideration is cash). Accordingly, the buyer must evaluate in advance the roles of senior management of the seller, retention arrangements to proffer, severance to provide as well as bigger picture social issues such as board representation, combined institution name and headquarters.

A focus on the social issues and a willingness to put stock on the table may allow community bank buyers to continue to compete for acquisitions despite the rebounding stock market. Other competitors may be able to offer nominally more attractive pricing, but such an offer may not have better intrinsic value.

Could a Republican President Mean More M&A Activity?


Banking-Industry-8-12-15.pngWith the first prime time Republican primary debate of the 2016 election cycle in the rear view mirror, we have all gotten an inkling of what the candidates think about the banking industry. I did take particular note of Senator Marco Rubio when he stressed the importance of repealing the Dodd-Frank Act. As Commerce Street Holdings’ CEO shared in an article on BankDirector.com, “many bankers feel that given the legislative and regulatory environment coupled with low rates, low margins, low loan demand and high competition, growth is very difficult.”  So repealing Dodd-Frank is a dream for many officers and directors, and Rubio is echoing their concerns.

Senator Rubio’s comments build on those of former Texas Governor Rick Perry, who recently laid out a sweeping financial reform agenda earlier. He believes the biggest banks need to hold even more capital—or Congress should possibly reinstitute elements of the Glass-Steagall Act. While his campaign appears to be winding down, I do agree with his call for government to work harder to “level the playing field” between Wall Street banks and community institutions.

With so much political scrutiny already placed on banks, it is interesting to think of the pressures being placed on institutions to grow today. On one side, you have politicians weighing in on how banking should operate. On the other, regulatory and investor expectations are higher now than in recent years. Buckle up, because I believe the coming election will only further encourage politicians with opinions, but little in the way of detailed plans, about “revitalizing” the economy.

Against this political backdrop, today’s business environment offers promising opportunity for bold, innovative and disciplined executives to transform their franchises. But I believe regulatory hurdles are making it tougher to do deals. Indeed, the recently approved merger of CIT Group and OneWest Bank creates a SIFI [Systemically Important Financial Institution] which will have to submit to increased regulation and scrutiny. However, when the deal was first announced, CIT’s CEO, John Thain, suggested that his purchase of OneWest could spur other big banks to become buyers. A year later and such activity has yet to be seen.

I see the absence of bigger deals reflecting a reality where any transaction comes with increased compliance and regulatory hurdles. For CIT, going over the $50 billion hurdle meant annual stress tests will now be dictated by the government, as opposed to run by the bank. The institution will have to maintain higher capital levels. Thain seems to think that those added costs and burdens are worth it. By the lack of action, other banks haven’t yet agreed.

Without a doubt, regulatory focus has impacted strategic options within our industry. For instance, we learn about CRA [Community Reinvestment Act] impacting deals and also find fair lending concerns and/or the Bank Secrecy Act delaying or ending potential mergers. Consequently, deals are more difficult to complete. As much as a bank like CIT can add cost savings with scalability to become more efficient, you can understand why banks in certain parts of the country need to debate whether it is better to sell today or to grow the bank’s earnings and sell in three to five years.

The evidence is clear that big banks are not doing deals. Maybe a GOP victory in the next election will thaw certain icebergs, creating a regulatory environment more friendly to banks. While regulators have to comply with existing laws, the leadership of regulatory institutions is appointed by the president and the tone at the top is critical in interpreting those laws. Until we see real action replace cheap talk, I’m looking at CIT as an outlier and simply hoping that political rhetoric doesn’t give false hope to those looking to grow through M&A.

Some Forms of Bank Capital Are Making a Comeback


capital-markets-8-10-15.pngSubordinated debt and preferred equity securities are making a comeback, with small community banks placing private offerings among high net worth investors and pooled investment vehicles alike with greater frequency and ease than in years past.

After years of worrying about whether community banks would survive the economic downturn, investors appear to be willing to tolerate the higher risks of subordinated debt, which falls behind senior debt but ahead of equity instruments in a bankruptcy. Major players like StoneCastle Financial and EJF Capital have established investment vehicles to acquire subordinated debt and other fixed-rate securities from community banks. These funds generally seek investments from $2 million to $15 million per institution, with rates from 6 percent to 8 percent and maturities of five, seven or 10 years.

For smaller community banks that have largely been frozen out of capital markets since the beginning of the Great Recession, the thaw presents a welcome opportunity because the benefits of such securities are significant for issuers. First, they do not dilute existing shareholders as occurs in any issuance of common stock. Second, for debt securities, interest payments are tax deductible, unlike dividends to holders of common or preferred shares. Finally, the proceeds of such securities, which may qualify as Tier 2 capital at the bank holding company level, are treated as Tier 1 capital when injected into a subsidiary bank if the company qualifies as a “small bank holding company.”

This shift in the market comes as more banks have the opportunity to use holding company debt to finance bank growth thanks to recent amendments to the Federal Reserve’s Small Bank Holding Company Policy Statement, which increase the policy’s consolidated assets threshold from $500 million to $1 billion and extend coverage to savings and loan holding companies.

As bankers consider whether these securities are the right way to boost their balance sheets, there are at least three major legal issues to consider before making an offering:

  • First, does the instrument qualify for capital treatment under Federal Reserve and Federal Deposit Insurance Corp. rules? For subordinated debt securities, there are a number of boxes that need to be checked to ensure an offering will qualify for Tier 2 capital treatment under Federal Reserve rules, such as subordination requirements, the elimination of common acceleration provisions, minimum maturity periods and the absence of other provisions designed to protect debtholders. Likewise, for preferred securities to qualify for favorable capital treatment, dividends must be noncumulative and redemption rights, if any, must be at the option of the issuer only. Federal Reserve regulations and policy statements generally require that redemption of these securities be conditioned upon receipt of prior Reserve Bank approvals.
  • Second, does the offering comply with federal and state securities laws? To qualify for an exemption under the securities laws, it is common to limit subdebt and preferred stock offerings to accredited investors only. However, even under those circumstances, it is important to provide full and fair disclosure to prospective investors to ensure that the offering is eligible for an exemption. As such, an offering memorandum should be prepared for the private offering that complies with applicable federal and state securities laws.
  • Finally, will the subdebt be sold to individuals or to a pooled investment vehicle? The aggregation of community banks’ subdebt into pools that will be sold to institutional buyers bears a striking resemblance to the pools of trust-preferred securities that proved so challenging to deal with during the last financial crisis. If your company’s subdebt will be issued to a pool, it is important to understand the legal mechanisms that will be available and with whom you will be dealing if there is an event that causes a payment to be missed.

Many community banks are seizing the moment, using such offerings to refinance debt, finance growth, redeem the Small Bank Lending Fund or trust-preferred securities, and pursue acquisitions in a way that is not dilutive to holders of common stock.

That said, subdebt or preferred stock may not be the best option available for all banks, particularly those with minimal holding company senior debt. For those that have not exhausted options to obtain bank stock loans, that market also has thawed and offers rates that are often 100 to 200 basis points less than coupons payable on subordinated debt or preferred equity.

How Community Banks Can Grow Loans by Partnering With Competitors


bank-capital-8-5-15.pngWhat many bankers have seen as the industry’s greatest peril is suddenly becoming their most powerful possibility: shadow banking. Shadow banking is frequently the term used to describe nonbanks who offer services and products that are similar to what banks offer. A new business model for community banks is transforming shadow banks from rivals to partners, enabling the two worlds to partner to compete with the biggest banks in ways community banks standing alone never could.

How could shadow banks that often compete directly with banks instead enable something entirely different? Imagine a world in which community banks—currently limited by their smaller scale in the array of products and services they can deliver to their customers—combine their acclaimed community focus, service and customer experience with the reach, depth, technology and convenience of direct nonbank lenders.

That sounds, but isn’t, almost too good to be true. The explanation lies in both what community banks already know—what separates them from the largest banks—and in what they may not: the ways in which shadow banking has evolved, offering products that can complement and empower rather than compete and threaten.

The biggest institutional banks—the five to 10 largest—are often inefficient, stodgy and misaligned. They resist innovation. Their legacy burdens include bad systems, faceless and painful customer experiences, and regulatory issues. Yet they have the capital and reach to provide consumer loans, often at interest rates that can top 20 percent (think credit cards) in a less competitive environment because community banks lack the scale to go up against them.

The more than 5,000 community banks in the country are innovative, agile and acclaimed for customer service. By definition, they can never be too big to fail. Together, they hold $2.3 trillion in assets—14 percent of the economy.

Yet as many types of lending have shifted from relationships to technology, community banks have lacked, first, the expertise, resources and scale to offer these services themselves, and, second, the technology to connect their own platforms with those that can. It’s little surprise that their share of the consumer lending market has collapsed from more than 80 percent to less than 10 in the last 25 years.

Recently, new nonbank lenders like Lending Club have exploited the inefficiency of the big banks by providing direct loans with best-in-class customer experiences. They offer better returns to investors and better rates to customers. But these new nonbank lenders have come to recognize they lack existing relationships with customers and low-cost, stable capital—exactly what community banks have in abundance.

A new model holds out the promise of combining the ideals of community banking—trust, service, relationships, low cost capital—with the best of these new nonbank lenders: scale, efficiency, technology and superior customer experience. The idea is to bind community banks together into alliances with nonbank lenders. This blends the service of the former with the lending platforms of the latter and allows each to do what it is uniquely good at—all while providing the customer with the best possible product and experience. The only losers: the biggest banks.

My organization, for example—BancAlliance—has gathered more than 200 bank members across 41 states into a collaborative pool with the scale and expertise to compete with the largest banks. We’ve assembled an innovative partnership between this group and Lending Club to offer community banks a consumer lending platform so they no longer have to turn away customers looking for consumer loans—and so they can focus on what they do and know best, which is serving individuals face-to-face. The first bank went live with offering loans through this partnership via its website just this summer.

Surely other models will emerge, and there will be enormous opportunities to replicate this approach to other products, such as unsecured small-business loans, that make sense (but are challenging) for community banks. Some trends are clear. One is that the big banks no longer own an exclusive title to this space. Another is that community banking remains as competitive—and crucial—as ever. Finally, and every bit as important, shadow banking is no longer solely competition for community banks. For community banks, the opportunities it presents are suddenly compelling and potentially transformative.