The Trouble That Johnny Allison Sees

Johnny Allison, chairman and chief executive officer at Home Bancshares in Conway, Arkansas, prides himself on running a very conservative institution with a strong credit culture. And Allison has not liked some of the behavior he has witnessed in other bankers, who are slashing their loan rates and loosening terms and conditions to win business in a highly competitive commercial loan market.

Allison says those chickens will come home to roost when the market eventually turns, and many of those underpriced and poorly structured loans go bad.

“Now is a dangerous time to be in banking, in my opinion. It is a scary time because our people want to match what somebody else did,” said Allison during an extensive interview with Bank Director Editor in Chief Jack Milligan for a profile in the 1st quarter issue of Bank Director magazine. (You can read the story, “Will Opportunity Strike Again for Johnny Allison?” by clicking here.)

Allison feels strongly enough about the credit quality at $15 billion asset Home that he’s willing to sacrifice loan growth, even if it hurts his stock price. In the following excerpt, Allison — whose blunt and colorful talk has become his trademark — opens up about the challenge of maintaining underwriting discipline in a highly competitive market.

The Q&A has been edited for brevity, clarity and flow.

BD: You said some very powerful things in your third quarter earnings call. And you said it in sort of the Johnny Allison way, which makes it fun and entertaining. But you were fairly blunt about the fact that you see stupid people doing stupid things. That has to have an impact on your performance in 2019. You’re letting certain kinds of loans run off because you don’t like the terms and conditions and the pricing. That impacts your growth, which then impacts your stock price. That has to be a difficult choice to make.
JA: It’s extremely tough, because my people in the field are seeing dumb stuff being done. “Well, so and so did this, or so and so did that, and, Johnny, they gave him three-and-a-half fixed for 10 [years], and interest only, and nonrecourse.” I mean, there will be a day of reckoning on those kinds of bad decisions, in my opinion. Am I going to write at three and a quarter [percent] fixed for 10 to 15 years? I’m not going to do that. Do I not think I’ll have a better opportunity coming next year to where I haven’t spent that money, and I spend it next year? So, my attitude is [to] take what they give us. Stay close to your customers, support your customers. It is extremely tough. It is one tough job keeping the company disciplined. Don’t let it get off the tracks. We’re known as a company that runs a good net interest margin. We’re known as a company that has good asset quality, that runs a good ship.

BD: If you were more aggressive on loan growth, if you were willing to play the same game that other banks were playing and not worry about the future so much, would your stock price be higher today?
JA: We don’t believe that. If I loan you $100 and I charge you 6%, or I loan you $100 and I charge you 3%, you’ve got to do twice as many loans just to keep up with me. And there’s a limit to how much you can loan, right? We got $11 billion worth of loans. We’re about 97% loan-to-deposit [ratio]. Could we go up to 100%? Sure. We were at [100%] over six years ago. The examiners fuss at you a little bit. But we’ve got lots of capital. So, we kind of run in those areas close to 100% loan to deposit. But we’ve got $2.7 billion worth of capital, so we can rely on that. Plus, the company makes a lot of money.

BD: You said in the earnings call that you were building up the bank’s capital because you didn’t quite know where the world was going, or you weren’t quite certain about the future. So, how do you see the future?
JA: I’m very positive with the future, except the fact I keep hearing these naysayers on and on. We’re optimistic people. I’m rocking with the profitability of this company, and [people] tell me the world’s coming to an end. Then the [bank’s] examiner came in during [the] third quarter and said, “The world’s coming to an end, Johnny. Get ready. Be prepared. Get your reserves [up].” We didn’t ever see it. It didn’t happen. Could somebody be right? Could there be a hiccup coming? Let me say this, and I said it on the call, banks are in the best financial condition that they’ve ever been in.

Someone said, “Boy, you give the regulators credit for that.” I said, “Regulators had nothing to do with it. Absolutely nothing to do with it.” What did it was [the financial crisis in] ’08, ’09, and those people who wanted to survive, and those people who wanted to keep their companies and don’t want to cycle through that again. What’s happening is, the shadow banking system is coming into the [market], and they’re taking our loans. How many [loan] funds are out there? They all think they’re lenders. Every one of them think they’re lenders. And they’re coming into the bank space. Where we’re at 57% loan to value, they’re going to 95% loan to value.

There’s the next blow up, and that’ll hurt us. We’re going to get splashed with it. We’re not going to get all the paint, but we’re going to get splashed with that.

That’s the next problem coming, these shadow bankers, the people chasing yield. REITs. Oh, God. REITs. I’m in at $150,000 a key in Key West, Florida, with a guest house owner who is a fabulous operator. We financed her for years and years, and she’s built this great program with these guest houses. She sold it to an REIT for $500,000 a key. Now, let me tell you something, you can’t have an airplane late getting into Key West. There can never be a wreck on [U.S. Highway 1]. And there can never be another hurricane. Everything has to be hitting on all cylinders and be perfect to make that work. That’s kind of scary to me. We’ve seen several of these REITs coming [in with] so much money. They won’t give any money back to the investors. They won’t say, “We failed.” Instead, they’ll go invest that money. And they’re just stretching that damn rubber band as far as they can stretch it, and I think some of those rubber bands are going to pop.

[Editor’s note: An REIT, or real estate investment trust, owns and often operates income-generating real estate.]

So, I think that’s the danger. I don’t think it’s the normal course of business. I think those things are the danger. And when it slows down a little bit like it did, these bankers panic. They just panic. “What can we do to keep your business? What can we do?” They just lay down and play dead. “What can I do? What can I do? Two and a half? Okay, okay, okay. We’ll do [loans at] two and a half [percent].” We just got back from a conference, and they’re talking in the twos. Bankers are talking in the twos. I don’t even know what a three looks like, and I sure don’t know what a two looks like. So, I can’t imagine that kind of stupidity.

BD: So, where are we in the credit cycle?
JA: Well, two schools of thought. One, that we’re in a ten-year cycle, and it’s time for a downturn.

BD: Just because it’s time.
JA: Just because it’s time. Johnny’s thought is that we were in an eight-year cycle with [President Barack] Obama, and he didn’t do one thing to help business. Absolutely zero things to help any kind of business at all. Didn’t know what he was doing. Nice guy. Be a great guy to drink beer with. Had no clue. And then here comes [President Donald] Trump. So, did the cycle die with Obama and start with Trump? That’s my theory. My theory is that [the Obama] cycle died, and we’re in the Trump cycle. Now, if we have a downturn, if something happens somewhere, he’s going to do everything he can to get reelected, right? So, he’s going to try to keep this economy rolling. But if we have a downturn, it’s not going to be anything like ’08, ’09.

The regulators blame construction for the [financial crisis]. It wasn’t construction that caused the crash. It was the lenders and the developers that caused the crash, because nobody put any money in a deal. Nobody had any equity in a deal. I remember many times, my CEO, I’d say, “See if you can get us 10%.” No. [The customer] got it done for 100% financing. If you want the deal, they give it to you. But it’s 100% financing. There wasn’t any money in the deal. There was no money in those deals, and when the music stopped, they just pitched the keys to the bankers, and here went the liquidation process. I was involved in it, too. I did some of it myself. So, I’m not the brilliant banker that skated that. I was involved in it. Not proud of that, but I learned from that lesson. I learned from that lesson.

Now is a dangerous time to be in banking, in my opinion. It is a scary time, because our people want to match what somebody else did. That’s my toughest job. And a lot of them think I’m an ass because I hold so tight to that. Now, let me tell you. This is my largest asset. This is my baby in lots of respects. I have lots of my employees that are vested in this company. I have lots of shareholders, local Arkansas shareholders that are vested. We have created more millionaires in Arkansas than J.B. Hunt [Transport Services], or Walmart, or Tyson Foods. Individual millionaires, because they believed in us and invested with us, and I am very proud of that.

When the Earnings Get Tough, the Mergers Get ‘Strategic’

Pressure on earnings and a continued evolution in bank operations could give rise to more “strategic mergers,” according to presenters during the first two days of Bank Director’s 2020 Acquire or Be Acquired Conference.

Deal activity, specifically “strategic mergers,” could accelerate in 2020 because of slowing growth and continued momentum in the space, say presenters ranging from the heads of investment banks to CEOs who had undertaken or announced their own transformational mergers. Factors like declining interest rates and a decreasing number of potential partners could motivate executives to look to acquisitions to leverage capital, add growth or find scale and efficiencies.

Community banks across the country are grappling with the realization that superregionals like BB&T Corp. and SunTrust Banks decided last year to combine to form Truist Financial in a bid for scale — and what those decisions mean for their own prospects, says Gary Bronstein, a partner at Kilpatrick Townsend & Stockton. In a nonscientific, real-time poll conducted during one session, 48% of respondents believe their bank will be an acquirer during the year, with a plurality seeking to either acquire core deposits or gain scale.

One reason could be that loan growth among small and mid-cap banks has been slowing since 2015, says Keefe, Bruyette & Woods President and CEO Tom Michaud. His firm is modeling no earnings per share growth for these banks in 2020 because of net interest margin compression. At the same time, banks’ net income has been bolstered by share repurchases: excluding buybacks, earnings per share would be lower by 6% in 2020, and log no growth in 2021.

Bigger banks have been thinking about how to achieve meaningful, strategic change that can jumpstart internal transformation and external results. Enter the “strategic merger,” Michaud says, which his firm defines as transactions where the target owns 25% or more of the pro-forma company. Many of these recent deals have been among regionals and were structured as mergers-of-equals, which helped define M&A activity in 2019.

The MOEs are back. That was a popular method of consolidation in 2019, and I believe we’re going to see more of it,” he says. “It is the major theme as to how this industry is consolidating.”

Indeed, for the second year in a row, the conference coincided with an MOE announcement — this time, between Winter Haven, Florida-based CenterState Bank Corp and Columbia, South Carolina-based South State Corp. to form a Southeastern institution with $34 billion in assets.

The financial attractiveness of these deals is undeniable, say investment bankers and executives: the no-premium deals carry low dilution and quick tangible book value earn-back periods as well as double-digit earnings per share accretion and enviable returns on tangible common equity. The logic seemed to resonate with attendees: 61% of respondents during the nonscientific, real-time poll conducted during a session indicated they would consider an MOE during the year.

“These deals are being structured to make these companies more profitable … and to build better companies,” he says.

Michaud wasn’t the only presenter convinced that MOE interest and momentum will continue this year. Joe Berry, managing director and co-head of depositories investment banking at Keefe, Bruyette & Woods, points out the potential stock outperformance of certain MOEs and other strategic mergers, especially after they announce capital actions.

But recording the eye-popping results from a strategic merger only comes about after the “soft issues” are hammered out, Berry says. The MOE announcement between TCF Financial Corp. and Chemical Financial Corp., which occurred during the 2019 Acquire or Be Acquired conference, was motivated partially by a desire to achieve scale to serve larger credits, says David Provost, executive chairman at TCF Bank. The bank is now based in Detroit and has $45.7 billion post-merger. But first, executives needed to negotiate a “reverse divorce” to determine the new name and headquarters location.

It then comes down to who gets the dog, and you both love the dog. That’s the CEO title,” he says. Deal filings indicated that Provost “was going take the dog for 18 months and then [President and CEO Craig Dahl] was going to take the dog. In the end, I decided to give up the dog and create $1 billion in value for shareholders.”

The MOE catalyst has not been limited to regional banks. Randy Greene, president and CEO of Richmond, Virginia-based Bay Banks of Virginia, says an MOE transformed his bank. The 2016 deal allowed two more-rural based banks to combine and move to a more-urban area; Bay Banks now has $1.1 billion in assets.

But bankers contemplating an MOE must also ensure that internal expansion doesn’t erode the strategic financial gains of the deal. BJ Losch, CFO at $43.3 billion First Horizon National Corp., says the bank is trying to “become bigger without becoming big” as part of its MOE with Lafayette, Louisiana-based IBERIABANK Corp.

An MOE allows a bank to “build Star Wars from an IT perspective, but then you become big —like the bigger banks that you want to be more nimble than,” he says.

The MOE spared Memphis, Tennessee-based First Horizon and IBERIA from needing an “upstream” buyer, says fellow panelist Daryl Byrd, IBERIA’s current president and CEO, who will serve as the pro forma bank’s executive chairman. The dearth of potential buyers has emerged as a competitive dynamic for institutions of all sizes, including the $31.7 billion bank.

“It’s a musical chair game and you don’t want to be left without a chair. And we recently lost two very big chairs,” he says.

Michaud points out that many of the companies involved in these strategic mergers are “really good banks in their own right,” deserving of their independence. These executives do not need to find a merger partner but believe the transactions’ defensive attributes will allow them to keep up with digital transformations and changes in the bank space down the road.

He says executives are asking, “‘If we don’t do this, what’s the industry going to look like in three to five years? How relevant are we going to be and how much are we going to … make sure our shareholders have a long-term play here?’”

The Secret To Mortgage Lending To First-Time Buyers

mortgage-2-11-19.pngMarket volatility and interest rate hikes have created uncertainty for the entire mortgage industry. Lending portfolio growth has also met pressure from the tight housing supply and the influence of fintech on the mortgage process.
One bright spot in the coming years will undoubtedly be the first-time homebuyer market, but banks must adapt traditional lending practices to capitalize and compete successfully.

First-time home purchasers are now 33 percent of potential buyers. Some surveys have indicated millennials–the largest future housing buyer population–are starting to embrace home ownership. Crafting effective loan options for this demographic can provide opportunity for mortgage and home equity portfolio growth, achieve consumers’ home ownership goals and deliver beneficial partnerships between banks and borrowers for years.

Banks must address the following concerns with the first-time buyer:

  • Affordability: They are more likely to seek popular urban and so-called “surban” (new or redeveloped areas with an urban feel) environments to live. Today’s first-time buyers are enticed by alternative housing choices that typically have higher-priced entry points. Traditional builders have not focused on this sector due to profitability pressures from increased labor and materials costs, leading to a limited supply of entry-level housing. Rising interest rates further stress affordability factors for the first-time buyer and limit the options available for mortgage funding. 
  • Debt and Lack of Savings: More than 50 percent of millennials carry a rising amount of debt, with the average 2016 graduate holding more than $37,000 in student loans compared to $18,000 for the average 2003 graduate, according to Forbes. The pressure of this debt load means would-be buyers have little or no savings available for the traditional 20 percent down payment. Rate increases, especially on adjustable student loans, can exacerbate this issue for the first-time buyer though Redfin predicts a competitive labor market should bring higher wages in 2019.
  • Income and Alternative Purchase Structures: The rise of the “gig economy” has led to a high number of independent contractors in this cohort, according to Forbes. Emerging first-time buyers have also shown interest in purchasing homes to create opportunities for rental income and nontraditional co-borrowers.

Lenders can differentiate their approval process from competitors by empowering loan underwriters with structures and guidelines that address the unique challenges of the first-time borrower. Revising mortgage guidelines and devising strategies for affordable home ownership will create valuable long-term relationships with first-time homebuyers. Just a few approaches to consider are:

  • Rethinking Loan Parameters: Mixed-use properties and home-improvement loans are typically excluded from the primary mortgage process. Banks incorporating alternative building structure options and creating allowances for home renovations in the initial mortgage parameters can substantially increase the pool of homes available to buyers. 
  • Differentiating Loan Structures: Traditional mortgages may be out of reach for many first-time buyers and may not address alternative housing solutions. While options with a higher loan-to-value ratio exist, most require mortgage insurance and are subject to increased scrutiny. Pairing conforming first mortgages with home equity loans and lines offer affordable loan structures at higher loan-to-value ratios and create long-term relationships. With proper planning, including the possible use of portfolio protection products, these structures can be offered without adding risk to the bank’s loan portfolio. 
  • Diversifying Income and Debt Guidelines: Considering tenant income and/or co-borrowers may be the only option for a potential buyer to enter the housing market. In addition, banks may also need to expand guidelines to allow for alternate sources of income, such as independent contracting income, in the underwriting decision process. 

Even with numerous obstacles, first-time home buyers offer opportunity in the mortgage origination market. Addressing the needs of this sector while avoiding the risks, lenders can create profitable mortgage and home equity portfolios, which may be the best way to mitigate the uncertainty of traditional lending in the future.

NFP is a leading insurance broker and consultant that provides employee benefits, property and casualty, retirement, and individual private client solutions through our licensed subsidiaries and affiliates. Our expertise is matched only by our personal commitment to each client’s goals.

Today’s Outlook For Bank M&A



Bank Director’s 2019 Bank M&A Survey finds that many banks see themselves as prospective acquirers. However, as a result of a recent wave of industry optimism—fueled by strong loan demand and regulatory relief—fewer banks may want to sell in 2019. So how can buyers position themselves to win in a more competitive M&A marketplace? Rick Childs, a partner at survey sponsor Crowe LLP, shares how a strong strategy is key to success. He also provides his outlook for the banking environment in 2019.

  • Advice for Prospective Acquirers
  • Expectations for Bank M&A in 2019

In accordance with applicable professional standards, some firm services may not be available to attest clients. © 2019 Crowe LLP, an independent member of Crowe Global. crowe.com/disclosure

Optimistic About Loans But Worried About Deposits


risk-3-5-18.pngThere are a lot of reasons why Greg Steffens is confident about the economy. As the president and CEO of $1.8 billion asset Southern Missouri Bancorp, which is headquartered in the southern Missouri town of Poplar Bluff, he sees that consumers are more confident, wages are growing, most corporations and individuals just got a tax break, and the White House announced a major infrastructure funding plan.

Steffens projects that a strong local economy will help Southern Missouri to grow loans by 8 to 10 percent this year. But he sees the potential for net interest margin compression as well, particularly because competition for loans and deposits has gotten so tight.

His thoughts about the future, a mixture of optimism and concern, are typical of bankers these days as shown by Promontory Interfinancial Network’s latest Bank Executive Business Outlook Survey. Although bankers report higher funding costs and increased competition for deposits, their optimism about the future has improved, and economic conditions for their banks are better now than they were a year ago.

Top-Lines-Q4-2017-long-version.pngAlong with a generally improving national economy and improvements in the banking sector, the passage of the Tax Cuts and Jobs Act shortly before the survey was taken likely influenced the increase in optimism among many bankers. The emailed survey, conducted from Jan. 16 through Jan. 30, included responses from bank CEOs, presidents and chief financial officers from more than 370 banks.

Some highlights include:

  • Sixty-three percent say economic conditions have improved compared to a year ago, while 5 percent say things have gotten worse, compared to 49 percent last quarter who said conditions improved and 9 percent who said things had gotten worse.
  • Slightly more than 58 percent report a recent increase in loan demand, up 7.5 percentage points from last quarter.
  • Bankers think the future will be even better with 64 percent projecting an increase in loan demand in 2018, compared to just 51.2 percent who projected annual loan growth in the fourth quarter 2017 survey.
  • The Bank Confidence IndexSM, which measures forward-looking projections about access to capital, loan demand, funding costs and deposit competition, improved by 2.4 percentage points from last quarter to 50.5, the highest rating for the index since the second quarter of 2016.
  • Regionally, the highest percentage of bankers expecting loan growth is from the South at 71.9 percent. But the biggest improvement in expectations for loan growth is in the Northeast, which climbed 27.1 percentage points from last quarter to 64.1 percent expecting loan growth in 2018.

Charlie Funk, the president and CEO of MidwestOne Financial Group, a $3.2 billion asset banking company in Iowa City, Iowa, says he expects the tax cuts will lead to higher commercial loan growth, although he hasn’t seen evidence of that yet.

He’s worried now about another factor on his balance sheet: deposit competition. “Deposits are going to be where the major battles are fought,’’ he says. The bank already is paying some large corporate depositors more than 1 percent APR on money market accounts, compared to 30 basis points just after the financial crisis. He expects the bank’s net interest margin to narrow somewhat this year as deposit costs increase faster than loan yields.

Other bankers report higher levels of deposit competition as well. In the Promontory Interfinancial Network survey, 80 percent of respondents expect competition for deposits to increase during the year, compared to 77.4 percent who thought so last quarter. The overwhelming majority have seen higher funding costs this year at 78.1 percent, compared to 68.4 percent last quarter who experienced higher funding costs. Nearly 89 percent of respondents expect funding costs to increase this year.

Representatives from larger community banks, with $1 billion to $10 billion in assets, were more likely to say funding costs will increase. The Northeast had the highest percentage of respondents saying funding costs will moderately or significantly increase, at 92.3 percent.

One of those Northeastern banks is Souderton, Pennsylvania-based Univest Corp. of Pennsylvania. With $4.6 billion in assets and a 100 percent loan-to-deposit ratio, the highly competitive deposit market is putting pressure on the bank to match loan growth with deposits. Univest Senior Executive Vice President and Chief Financial Officer Roger Deacon says funding costs have inched up, partly driven by competition for deposits. “The competition is almost as high on the deposit side as on the loan side,’’ he says.

The good news is that the bank is asset sensitive, meaning that when rates rise, its loans are expected to reprice faster than its deposits. “I’m cautiously optimistic about the impact of rising rates on our business,’’ Deacon says.

Why Your Bank Should Be Watching Amazon


amazon-7-7-17.pngCould Amazon be a threat to banks? The online retailer announced in June that its Amazon Lending program, a small-business loan service that the company began offering in 2011, had surpassed $3 billion in loans globally, to more than 20,000 small businesses. One-third of those loans—$1 billion—were created in the past year, making it larger than most small banks.

Competition from nonbanks in small business lending isn’t new. But while lending startups in the past have often excelled in technology, they struggled to gain customers, and funding was more expensive than for traditional banks. In contrast, banks have had the expertise and relationships, and can fund loans more cheaply.

Amazon’s loan growth may represent a new phase in loan disruption, according to Karen Mills, a senior fellow at Harvard Business School and former head of the U.S. Small Business Administration.

“Having a pipeline into a set of small business owners who are doing business with the platform, knowing a lot of data about their business, could very well be the equivalent of a customer pipeline that’s unparalleled except at some of the most important traditional banks,” Mills says.

Amazon isn’t putting banks out of business, at least not in the foreseeable future. While 20,000 small businesses and $3 billion in loans is nothing to sneeze at, the program is invitation-only and limited to Amazon sellers, with the company leveraging its data on its client businesses to make credit decisions.

“Amazon looks at everything as basically a use case,” says Steve Williams, a partner at Cornerstone Advisors, based in Scottsdale, Arizona. “Is it something that we can do that the customer would want, can we technically deliver it, and can we make a business out of it?”

Banks should prepare for a reality, led by companies such as Amazon, where customers expect rapid credit decisions and an easy loan process. An employee describes the lending process as “three fields and three clicks” in a video published by Amazon in 2014.

“You can’t waste your customer’s time, and Amazon is relentless in trying to make things easier for its partners and customers,” says Dan O’Malley, the chief executive officer at Boston-based Numerated Growth Technologies, which spun off from Eastern Bank’s lab unit in May. That unit developed an express business loan program for the bank, and banks can now license the lending platform through Numerated.

Mills recommends that banks examine whether they want to grow their small business lending portfolio and if so, examine if they can provide the platform in-house or need to use an outside company.

Banks have been increasingly partnering with fintech firms, but Amazon’s suitability as a partner is debatable: O’Malley says Amazon is notoriously difficult to work with. But Amazon seems open to relationships of convenience. JPMorgan Chase & Co. offers an Amazon Prime Rewards Visa credit card, which gives 5 percent cash back to Amazon Prime members on their Amazon.com purchases. BBVA Compass has been testing the Amazon Locker program in its Austin, Texas, branches, so Amazon customers can safely and conveniently pick up their orders. Presumably, this would drive more traffic to BBVA’s branches.

And there’s Alexa, Amazon’s voice-operated digital assistant, which is used in Internet-enabled speakers such as the Echo. So far, Capital One Financial Corp. and American Express are among the few financial institutions whose customers can use Alexa for tasks like making a credit card payment or getting details on spending.

Amazon sees promise in its voice-enabled devices. “We’re doubling down on that investment,” Chief Financial Officer Brian Olsavsky said in Amazon’s first quarter 2017 earnings call. With the Echo, Dot and Tap products, Amazon has about 70 percent of the smart speaker market cornered, according to TechCrunch.

“Voice commerce and having to deal with voice as a channel is an important thing that [banks] are going to have to figure out,” says James Wester, the research director responsible for the global payments practice at IDC Financial Insights.

Amazon likely doesn’t have its sights set on becoming a bank—at least not for now, says Wester. But the company’s customer-first approach to improving processes is setting the tone for commerce, and if Amazon thinks it can make life easier for its customers and make money doing it, it won’t shy away from competing with the banking industry.

The possibilities are endless. Amazon unveiled its Amazon Vehicles webpage as a research tool for consumers in 2016, and the retailer is gearing up to sell cars online in Europe, according to Reuters. “There’s no reason that people won’t say, ‘I’m going to buy my car through Amazon and finance it,’” says Cornerstone’s Williams. Auto loans may very well be the next financial product on Amazon’s radar, and then, what’s next?

How PrecisionLender Helped Woodforest Bank Expand into Commercial Lending


Precison-Lender-2.png

When Woodforest National Bank made the strategic decision to grow its commercial loan portfolio in 2015, it wanted to leverage the latest technology to take full advantage of that opportunity. Woodforest is a privately held bank based in Woodlands, Texas, with over 740 branches across 17 different states, and also in-store branches with WalMart and Kroger. At the time, Woodforest management realized that the bank’s lending portfolio was heavily weighted towards commercial real estate. The commercial lending operation was based out of—and primarily managed by—its Houston office. Rates and pricing were based strictly on what the market would bear, with no system in place to tailor rates to different markets, industries or clients. Woodforest then sought out a technology partner to help implement a more intelligent pricing model and methodology for the commercial side.

After establishing five different commercial lending business lines, Woodforest partnered with Charlotte-based PrecisionLender to help relationship managers (RMs) win better deals that aligned with the bank’s strategy, in terms of profit, risk and growth. The cornerstone of the PrecisionLender platform is “Andi,” an AI-powered virtual assistant. Andi works with relationship managers as they price each opportunity, showing them multiple ways to structure deals that will reach their targets, while also highlighting ways to expand the relationship.

Part of what made PrecisionLender an ideal partner was the ease and speed of which Woodforest could implement the platform across relationship managers in multiple states. The firm worked closely alongside the Woodforest business and IT teams during the implementation, and the platform was launched in March 2016. The commercial banking team now uses the system to input pricing for all opportunities that require approval. To help ensure the RMs price deals that work for both the borrower and the bank, Andi considers a multitude of factors, such as fixed versus adjustable rates, fee structures, duration and deposits the applicant already has with the bank. This flexible, data-powered approach empowered Woodforest’s RMs to better tailor deals by client, industry and region, helping the bank rebalance its portfolio and put a greater emphasis on middle market banking.

Woodforest and PrecisionLender conduct a quarterly return on equity (ROE) meeting to discuss performance trends of products, branches and even individual relationship managers. PrecisionLender also reviews ROE targets set for each region during these sessions. And at last year’s third quarter ROE analysis meeting, the firm surfaced several key issues from the system that Woodforest could not have found without this rich data set.

PrecisionLender continues to seek feedback from Woodforest to optimize and improve on its use of Andiand the overall platform. Currently, the firm is working to create a “Promise versus Delivery” dashboard, which will give management a snapshot of lending opportunities in progress in comparison to what’s been forecasted for each region, branch and relationship manager. This will create real-time visibility into each potential deal, and ensure that relationship managers are providing accurate forecasts.

There’s also a “performance scorecard” in the works to evaluate each relationship manager as if they were running their own mini business, taking into consideration not just new loan generation but also income generation and risk management.

“PrecisionLender helped us grow from a Houston commercial banking organization into a national presence with five new locations from coast to coast while generating the return needed for the expansion, while also providing flexibility to our relationship managers and great relationship pricing for our clients,” says Derrick Ragland, president of commercial lending at WoodForest.

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.

Making Sense of Fintech Lending Models



What type of fintech lending solution should your bank pursue? Mike Dillon of Akouba outlines what management teams and boards need to know about these lending models, and how each can benefit the bank.

  • The Three Fintech Lending Models
  • How Each Model Can Meet a Bank’s Strategic Needs
  • Benefits of Technology-Enabled Loans

Is Your Bank’s Loan Review Good Enough?


lending-2-27-17.pngFor almost three decades, regulators have mandated independent loan review of commercial loans. So what could be needed to improve this time-tested concept? Well, for one, like all other aspects of banking, loan review must evolve and modernize to retain its effectiveness. This is more pertinent given that, statistically speaking, we may be in the fourth quarter of the credit cycle, which could be problematic as loan officers may pursue growth at the expense of loan quality. Also, there’s a growing dependence on loan review to facilitate accurate portfolio credit marks in mergers and acquisitions. Many loan reviews, whether in-house or externally contracted, remain too subjective, too random, are outdated technologically, lack collaborative processes, and, perhaps most importantly in the modern era, lack holistic linkage to the more quantitative and dynamic macro aspect of portfolio risk management.

So, for a board of directors, this may be a good time to assess your bank’s loan review processes. Here are some timely tips to push this evolution along:

  • Remember credit quality assessments—including those of regulators—typically are trailing, not leading indicators. There’s a perception that community banks have been beaten up enough over the past few years and that some of the regulatory credit dogs have been called off; thus, be vigilant to dated reports indicating stable credit quality. Additionally, historical loan performance indicates loans made at the end of credit cycles are sometimes made for the purpose of enhancing growth, and have proven to be more problematic.
  • Embrace updated—and secure—technologies to enable remote reviews and eliminate travel expenses. With the availability of imaged loan files, loan review can be done remotely; however, it must be done securely. Too many contract reviewers are putting banks at risk using their own porous laptops.
  • Ensure more file coverage and promote more collaboration within the bank’s risk management forces. Remember that loan review’s primary mission is to validate original underwriting, post-booking servicing, adherence to policies and ultimate agreement with risk grading—not to re-underwrite each sampled loan. An effective reviewer must always be willing to defend his or her work in a collaborative, non-defensive manner.
  • Be aware that industry-wide commercial real estate concentrations have recovered and now exceed pre-crisis levels. Given that highly correlated loan types exacerbated bank failures during the financial crisis, and that higher interest rates will likely put pressure on income properties, loan reviews should go well beyond the blunt concentration percentages by using smart sampling techniques. Peeling the onion on loan subset growth and performances will be critical in defending against and mitigating any significant concentrated exposures.
  • Explore hybrid loan review approaches. Even larger banks with internal loan review staffs are supplementing their work with external groups in order to effect efficiencies, broader coverages, and validations of their own findings. On the other hand, smaller banks relying exclusively on out-sourced loan review vendors should employ credit function policing arms to quick-strike areas of concern. Being totally dependent on a semi-annual loan review is akin to the fire department being open only a couple of weeks a year.
  • Understand the relationships among documentation exceptions, weaker risk grades and larger credit losses. Test technical documentation (capacity to borrow/collateral conveyance) proportionate to the weakness of the risk grade. After all, a lot of weakly documented loans go through the system unnoticed until a credit default occurs.
  • Go deeper than fee comparisons. While it’s understandable to consider fee structures when deciding on a loan review vendor, take the added steps of discussing loan review protocols and requiring examples of deliverables. All too many vendors provide only simplified spreadsheets and write-ups only of criticized-classified loans, in many cases, re-inventorying what the bank already knows. An effective loan review warns of problems about to happen; it doesn’t rehash those already acknowledged. Also, be mindful of the contractor: employee ratio as employee-based firms tend to offer more consistency and quality control.
  • Make loan review a viable bridge between the traditional, transactional analysis and aggregate, macro-portfolio risk management. While you can’t ignore the former, where it all begins, modern portfolio management requires a more quantitative and credible assessment of the latter, the sum of the parts. Thus, loan review emerges from an isolated, one-off engagement to a dynamic informer of all aspects of managing a bank’s credit quality.

Growing the Loan Book Through Automation


lending-1-25-17.pngThere are a million reasons for leveraging fintech to enhance a financial institution’s small business lending experience. To name a few, there’s better efficiency, customer convenience, profitability, speed to decision, speed to capital, cost reductions and a much-improved overall customer experience. However, one that often gets lost in the fray is the impact technology will have on the day- to-day productivity, motivation and morale of the bankers who work so hard to source and sell small business loans. This “banker experience” as it is known, plays a huge role in sales performance, retention, revenue generation and employee satisfaction.

The reality of a day in the life of a small business lender is that a surprisingly small amount of time is spent on sourcing new opportunities or even cross-solving to sell deeper into an existing relationship. Because they are shackled with the responsibility of shepherding deals through the multiple steps in the lending process, the more loan deals a banker has, the less time he or she is able to spend growing the book of business. So how are they spending their time?

  • As many as 80 percent of applications come in either incomplete or with an error on them, delaying the decisioning process and requiring the banker to go back to the client again and again.
  • Unique borrowing situations prompt the back office to request additional information requiring the banker to reach out and coordinate the collection of the information.
  • The collection of documents in the “docs and due diligence” phase of the approval process is tedious and time consuming. Bankers spend a great deal of time reaching out to applicants asking for things like: entity docs, insurance certificates, tax returns and so on.
  • Multiple teams and individuals touch each deal and as a result, things get lost, forcing the banker to invest a great deal of time and energy babysitting deals and checking on their progress from application to closing.
  • Much of the processing time is dependent upon the borrower’s promptness in getting requested information back to the bank. Bankers spend countless hours making multiple calls to collect information from clients.

I ran small business sales for a $150 billion asset institution, and our data proved that whenever a banker had as little as two loan deals in the workflow process, their new business acquisition productivity was reduced by 50 percent. Bankers with five deals in the process had their acquisition productivity diminished by 75 to 80 percent. That’s because they expend all their time and energy shepherding deals through the various stages of the process, gathering additional documentation, or monitoring the progress of each deal.

All of this is challenging for one person to do… but simple for technology to handle automatically, accurately and consistently. Technology can ensure an application is complete before it is submitted. It can ping the client for any-and-all documentation or data required. It can communicate progress and monitor a deal at every step in the lending process. Technology can also facilitate the collection of more and better data and translate that data into information that enables the banker to add value by asking great questions that help solve more problems for the customer.

When technology is used end-to-end, from application to closing, bankers are able to focus on the important things like:

  • Sourcing new opportunities.
  • Cross-solving for existing customers.
  • Preparing for sales calls and follow-up activities to advance the sales process.
  • Providing clients and prospects the value that earns trust and feeds future revenue.
  • Growing their loan book, and their portfolio revenue.

Technology makes the banker’s life simpler. When bankers are able to do what they do best, which is sell, job satisfaction, performance, job retention and morale go through the roof. And that positivity translates into improvements in the customer experience, and increases in revenues for the institution.