Loan Growth: Curation, Credit Monitoring

SavvyMoney.pngOne community bank is using a fintech to deepen lending relationships with customers and help them monitor and improve their credit score.

Watford City, North Dakota-based First International Bank and Trust wanted to offer customers a way to proactively monitor their credit and receive monthly or incident-related alerts about any changes — without needing to use external vendors, granting external access to accounts or even paying for it. It chose to partner with SavvyMoney, which provides customers with their credit scores and reports alongside pre-qualified loan offers from within the bank’s online and mobile apps.

The fruits of the relationship were one reason the fintech was awarded the Best Solution for Loan Growth at Bank Director’s 2020 Best of FinXTech Award in May. CommonBond, a student loan refinancer, and Blend, which offers banks an online, white-label mortgage processing solution, were also finalists in the category.

In exploring how it could help customers improve their credit score and manage their finances, First International knew some customers were already using similar services through external websites. But the $3.6 billion bank wanted to convey that it had invested time and IT resources to ensure SavvyMoney’s validity, accuracy and status as a trusted partner, says Melissa Frohlich, digital banking manager. The SavvyMoney feature takes about 45 seconds to activate once a customer is logged in, and the customer experience is the same in the mobile app or website.

“From the fraud standpoint, we definitely recommend to our customers that … they use SavvyMoney because it’s free to them,” Frohlich says. “Especially with all the breaches that happen, it’s a good way for them to self-monitor their credit.”

The bank also uses the platform to share specialized credit offers along with a customers’ loan information and credit score, which it crafts using public records and extends based on internal criteria. It has launched two credit card balance transfer offers since rolling out the product two years ago. The fintech offers First International a way to “slice and dice” data to truly target customers with customized offers, as opposed to “throwing out a fishing line and hoping someone bites,” she says.

Launching the offers takes “very little” time to implement and consists of updating a term sheet, whipping up bank graphics and sending out a simple email blast. The first offer netted more than $190,000 in balance transfers — all from one email campaign.

“It was just very, very little work for us with pretty significant impact, without a ton of manpower or money that we had to put into it,” Frohlich says.

The balance transfer offer included messaging about how much customers would save with the new interest rate. If First International wanted to offer auto loan refinancing, it could input different rates based on the year of the vehicle and loan term.

First International was drawn to SavvyMoney in part because it had an existing relationship with a variety of core providers. That’s key, given that SavvyMoney connects to a bank’s core to pull in personal customer information from online and mobile banking sources. And because it would be sharing customer data, First International spent several months conducting due diligence, combing through SavvyMoney’s system and organization controlsreports and speaking with both its core and the fintech.

Frohlich says the actual implementation took about a month and was as straightforward as flipping a switch to activate the capability in customer accounts. She continues to work with her representative at SavvyMoney to add or change loan offers.

“They have probably the best integration that I’ve seen with Fiserv from a third party or a fintech, out of any other product that Fiserv doesn’t own,” she says. “The actual implementation was the best that I’ve ever taken part in.”

SavvyMoney can also integrate with the bank’s new loan platform that was slated for a March launch, a fact that Frohlich didn’t know when the bank selected either. Loan applications submitted through SavvyMoney will feed into the software’ auto decision-making.

“That will be a game changer for us, then we will heavily start doing more promotions,” she says.

Even after the bank switched cores, it has been able to keep SavvyMoney given its vendor relationships with other cores. “There have been other solutions, that now that we’re moving to a different platform, that I could consider,” Frohlich says. “But to be honest, our experience has been so great with SavvyMoney that I have no reason to look elsewhere.”

Data In The Best, And Worst, Of Times

Helping their community and delivering personalized service is the foundational differentiation of every community bank. Now more than ever, customers expect that their community bank understands them and is looking out for their best interests.

Customers are communicating with their banks every day through their transactions — regardless if they are mobile, in person or online, each interaction tells a story. Are you listening to what they’re telling you? Whether your bank is navigating through today’s COVID-19 crisis or operating in the best of times, data will be key to success today and in the future.

Business intelligence to navigate daily operations is hard to come by on a good day, much less when things are in a pandemic disarray. Many bankers are working remotely for the first time and find themselves crippled by the lack of access to actionable data. A robust data analytics tool enables employees at all levels to efficiently access the massive amounts of customer, market, product, trend and service data that resides in your core and ancillary systems. Actionable data analytics can empower front-line bankers and risk managers to make data-driven decisions by improving and leveraging insight into the components that affect loan, deposit and revenue growth. Additionally, these tools often do the heavy lifting, resulting in organizational efficiencies that allow your bankers and executives to focus on strategic decision-making — not managing cumbersome data and reporting processes.

A tool that aggregates transformative data points from various siloed systems and makes them readily available and easy to interpret allows your management team to be better prepared to proactively manage and anticipate the potential impact of a crisis. This positions your bank to offer products and services that your customers need, when they need them.

But most community banks have not implemented a data analytics solution and as such, they  must consider how to manually generate the information needed to monitor and track customer behaviors to assist them in navigating this crisis. Below are a few potential early warning indicators to monitor and track as your bank navigates the current coronavirus crisis so you can proactively reach out to customers:

  • Overdrafts, particularly for customers who have never overdrawn.
  • Missing regular ACH deposits.
  • Past due loans, particularly customers who are past due for the first time.
  • Line of credit advances maxing out.
  • Lines of credit that cannot meet the 30-day pay-down requirement.
  • Declining deposit balances.
  • Large deposit withdrawals.
  • Businesses in industries that are suffering the most.

If your community bank is one of the many that are proactively assisting customers during this pandemic, make sure you are tracking data in a manner that allows you to clearly understand the impact this crisis is having on your bank and share with your community how you were able to help your customers during this critical time. Some examples include:

  • Paycheck Protection Loan Program details: number of applications received, processed and funded; amount forgiven; cost of participating for the bank; customer versus non-customer participation, impact on lending team, performance.
  • Customer assistance with online banking: How did you help those who are unfamiliar with online banking services? How many did you assist?
  • Loan modifications, including extensions, deferments, payment relief, interest-only payments and payment deferrals.
  • Waived fees and late charges.
  • Emergency line of credits for small business customers.

Having easy access to critical customer information and insights has never been more important than it is today, with the move to remote work for many bankers and rapidly changing customer behaviors due to the economic shutdown. Customers are making tough choices; with the right data in your bankers’ hands, you will have the ability to step up and serve them in ways that may just make them customers for life.

One Risk in M&A You Maybe Have Not Considered


core-provider-9-25-18.pngThe vast majority of middle-market community banks and credit unions will at some point explore acquiring or being acquired because M&As are one of the quickest and most effective ways a bank can scale up, expand reach, and grow. Unfortunately, many of these banks have no choice but to watch lucrative opportunities pass them by because they unwittingly agreed to grossly unfair and inequitable terms in their core and IT contracts.

Financial institutions constantly assess risk from nearly every conceivable perspective to protect shareholder value, but far too many realize too late that hidden astronomical M&A termination fees and other hidden contractual penalties render a deal totally unfeasible. Over and over again, blindsided banks are hobbled by stifled growth.

Simply stated, core and IT suppliers punish banks with excessive termination, de-conversion and conversion fees because they can get away with it. Suppliers also sneak in large clawbacks for discounts awarded in the past as an added pain for measure. Banks fall for it because they don’t know better.

Bank deals are complex procedures with the possibility of extraordinary payoff or extraordinary peril. Terms regarding potential M&As are buried deep within the pages of lengthy and convoluted core and IT supplier contracts. Suppliers are betting that arduous language within these five- to seven-year agreements deter bankers from looking too closely or fully comprehending terms and conditions they contain. Many banks are not thinking about a merger or acquisition when they originally signed those contracts. The suppliers’ bets pay off, and banks either lose the deal or are forced to pay in spades.

Termination fees core and IT suppliers secure for themselves in most contracts with community banks and credit unions border on unconscionable. Banks find themselves saddled with the prospect of paying 50, 80, or even 100 percent of the amount due to the core provider based on what would have been paid if the institution remained with that supplier for the life of the contract.

And these fees apply even if the financial institution they’re merging with or acquiring has the same core IT supplier. Even in cases where the core has virtually nothing to lose in the deal, they still demand a fat check for their “pains.” These fees are so high they can easily kill a potential deal before it even reaches the negotiating table — and they often do.

Banks Have Defendable Rights
A contract isn’t a contract unless there’s some cost for exiting it early. But there’s fair and then there’s fleecing — and let’s just say core and IT suppliers wield a pretty big pair of shears.

The reality is that more than half of all states will not tolerate these termination fees in court, provided they’re challenged by institutions. The maximum amount of liquidated damages a supplier is entitled to legally — provided they can rationalize how they were harmed — is the discounted value of remaining net profit. This might not be more than 18 to 22 percent of remaining contract value, or about one year on a five-year deal. That’s nowhere close to what is often claimed by core suppliers.

But you have to know your rights before you can demand they be respected, and a wealth of knowledge regarding the most favorable core and IT contract terms available can’t be acquired overnight. It’s taken many years for Paladin to amass proprietary core and IT supplier contract data.

Secure Fair Terms Now to Protect Deals Later
By updating your contracts before a transaction, you can speed the M&A process, protect your institution and shareholders, and prevent unforeseen deal risks. But you’ll need to come armed and ready for battle. Core and IT suppliers have enjoyed decades of manipulating the system to their advantage. Going it alone in your next contract negotiation will likely result in ending up with more of the same hidden and unfair terms. That’s how good these guys are at getting what they want from the community banks they call their “partners.”

There are experts with a proven track record of going toe-to-toe with core and IT suppliers and coming out ahead for community financial institutions. Time and again, we’ve approached the table with our clients, advocated for a fair deal, and walked away with terms that make sense for both parties — not just the suppliers.

The Link Between Board Diversity and Smart Business


board-of-directors.pngOur time is one of rapid technological and social change. The baby boom generation is giving way to a more diverse, technology-focused population of bank customers. In conjunction with the lingering effects of the Great Recession, these changes have worked to disrupt what had been a relatively stable formula for a successful community bank.

Corporate America has looked to improve diversity in the boardroom as a step towards bringing companies closer to their customers. However, even among the largest corporations, diversity in the boardroom is still aspirational. As of 2014, men still compose nearly 82 percent of all directors of S&P 500 companies, and approximately 80 percent of all S&P 500 directors are white. By point of comparison, these figures roughly correspond to the percentages of women and minorities currently serving in Congress. Large financial institutions tend to do a bit better, with Wells Fargo, Bank of America and Citigroup all exceeding 20 percent female board membership as of 2014.

However, among community banks, studies indicate that female board participation continues to lag. Although women currently hold 52 percent of all U.S. professional-level jobs and make 89 percent of all consumer decisions, they composed only 9 percent of all bank directors in 2014. Also of interest, studies by several prominent consulting groups indicate that companies with significant female representation on boards and in senior management positions tend to have stronger financial performance.

In light of these studies, new regulations mandating the formulation of diversity policies are understandable. The Securities and Exchange Commission instituted mandatory statements of diversity policy for publicly traded companies in recent years. This initiative has also been echoed in a recent policy statement from the Federal Reserve that focuses on a company’s “organizational commitment to diversity, workforce and employment practices…and practices to promote transparency of organizational diversity and inclusion.” These initiatives are meant to promote a corporate culture that allows for what is known as “effective challenge.” Demonstrating effective challenge, which includes the company’s ability to avoid group-think and to include new voices in critical debates, is a cornerstone of the federal bank regulators’ risk management model. In the eyes of these regulators, a more inclusive and diverse board is more likely to create effective challenge, improving the institution’s governance and operation.

As a result, board diversity goes to the heart of effective corporate governance—does the board have the skill set and perspective needed to keep pace with a rapidly changing economy? Are directors asking the right questions of management and their advisors? And do directors have access to the appropriate information to make good decisions for the institution’s shareholders? Incorporating fresh voices and skills into the boardroom can shore up weaknesses and allow the board to better represent the institution’s customers.

But increased diversity on a bank board goes beyond just gender and racial diversity. It also includes greater range in the age of the directors and inclusion of skill sets, such as technology expertise, that are necessary in understanding risk in today’s business environment. Here are some ways to consider diversity in your organization:

  • Start with the strategic plan. Is your institution contemplating remaining an independent institution for the foreseeable future or is it looking to sell in the near term? The answer to that question will likely be a key driver of how and when to incorporate new voices into the boardroom.
  • Reassess your market. The pace of demographic change is increasing. Failing to have a strong handle on who lives and works in your market area can result in lost opportunities. These shifts can drive organic growth and new product offerings in your market or signal a need to expand your footprint.
  • Reach out to current and potential customers.  Board composition is a strong signal as to which customers the bank seeks to serve. Is your board a help or a hindrance in reaching out to the customers targeted by your strategic plan?

Evaluating board diversity should not focus only on numbers or quotas, but rather on whether the board has the human resources it needs to reflect its community and to provide the perspective necessary to manage the bank profitably into the future. On this basis, tapping into a deepening pool of diverse director candidates as part of an effort to build a more transparent and inclusive corporate culture is just smart business. 

What to Do (And Not Do) When Providing Liquidity to Shareholders


capital-strategy-06-22-2015.pngThe absence of market liquidity is a common source of frustration for privately held community bank shareholders. In response, banks may be tempted to facilitate or otherwise become more directly involved in shareholder trading. Such involvement may benefit shareholder relations, but it also involves risk. Banks should be aware of those risks and structure liquidity programs to comply with applicable securities laws.

The Risk of Direct Involvement in Shareholder Trading
As a general rule, the more direct involvement a bank or bank holding company has in its own shareholder liquidity program, the higher the risk that (1) the institution could be subject the broker-dealer registration requirements under the Securities Exchange Act of 1934, (2) trades of the institution’s stock under the liquidity program could require registration under the Securities Act of 1933 and (3) the liquidity program could subject the institution to liability under the Exchange Act’s anti-fraud provisions.

Liquidity Program Alternatives
In light of these risks, banks desiring to implement shareholder liquidity programs should minimize exposure by limiting direct involvement. To avoid broker-dealer and Securities Act registration, banks should ensure that they do not (1) directly handle shareholder funds or securities during the course of a trade (except through an escrow account as discussed below); (2) make any recommendations to shareholders regarding trades; (3) participate in price negotiations among shareholders; or (4) accept any compensation for services provided in connection with the liquidity program. In addition, banks should limit their involvement in liquidity programs to ministerial activities, such as communicating the availability of the program and possibly holding related shareholder funds in escrow. Alternatives for programs that incorporate these recommendations are discussed in more detail below.

Limited Involvement Shareholder Matching Service
One low-risk alternative for a liquidity program is a shareholder matching service in which the bank has limited direct involvement. Under this alternative, an institution could maintain a list of shareholders that have expressed an interest in purchasing additional shares of its stock. When approached by shareholders desiring to sell, it could direct the selling shareholders to the persons included on the prospective purchaser list. Shareholders would then negotiate directly with each other regarding the possible trade. Upon consummation, the institution should record the trades in its stock records as a direct trade between the buying and selling shareholders. The bank should not handle the related funds or securities, except possibly to hold them in escrow on behalf of the selling shareholder pending final closing of the transaction.

Stock Repurchase Program and Re-Offering of Securities
Another alternative for providing shareholder liquidity is to implement a periodic stock repurchase program.  Under this type of program, the board of directors will adopt a standing resolution authorizing the institution to repurchase shares of its common stock from shareholders over a specified period of time and for a specified price. The repurchase program should be subject to limitations, including limitations based upon available funding, insider blackout periods and compliance with applicable laws and regulations. In addition, the bank should not make any representations regarding the value of its stock to a selling shareholder. After shares of an institution’s stock have been purchased in a repurchase program, the institution could make those shares available for purchase by its shareholders or others through periodic offerings. Those offerings would have to be conducted under an available exemption from registration under the Securities Act.

Over-the-Counter Listing
Another alternative for enhancing shareholder liquidity is for the bank to have its stock quoted on an over-the-counter market, such as the OTCQX for Banks (OTCQX). The OTCQX is a quotation service that facilitates trading in securities that are not listed or traded on the NASDAQ, NYSE or any other national securities exchange. By having its stock quoted over-the-counter, a bank could provide more liquidity for its shareholders while avoiding risks arising out of its direct involvement in such trades. Those benefits, however, must be weighed against the costs. To have its stock quoted over-the-counter, the bank generally would be required to engage a corporate broker, satisfy certain eligibility requirements and provide certain financial and other disclosures on an ongoing basis.

Conclusion
Privately held community banks are increasingly confronted with shareholder demands for liquidity. A bank may respond to such demands, but in doing so, its board of directors should be mindful of the risks and consider all available alternatives. Shareholder liquidity programs should be carefully structured to fit within the institution’s overall capital strategy and to comply with federal and state securities laws.