Can the Industry Handle the Truth on Credit Quality?

Maybe Jack Nicholson was right: “You can’t handle the truth!”

The actor’s famous line from the 1992 movie “A Few Good Men” echoes our concern on bank credit quality in fall 2019 and heading into early 2020.

Investors have been blessed with record lows in credit quality: The median ratio of nonperforming assets (NPA) is nearly 1%, accounting for nonperforming loans and foreclosed properties, a figure that modestly improved in the first half of 2019. Most credit indicators are rosy, with limited issues across both private and public financial institutions.

However, we are fairly certain this good news will not last and expect some normalization to occur. How should investors react when the pristine credit data reverts to a higher and more-normalized level?

The median NPA ratio between 2004 and 2019 peaked at 3.5% in 2011 and hit a record low of 60 basis points in 2004, according to credit data from the Federal Deposit Insurance Corp. on more than 1,500 institutions with more than $500 million in assets. It declined to near 1% in mid-2019. Median NPAs were 2.9% of loans over this 15-year timeframe. The reversion to the mean implies over 2.5 times worse credit quality than currently exists. Will investors be able to accept a headline that credit problems have increased 250%, even if it’s simply a return to normal NPA levels?

Common sense tells us that investors are already discounting this potential future outcome via lower stock prices and valuation multiples for banks. This is one of many reasons that public bank stocks have struggled since late August 2018 and frequently underperform their benchmarks.

It is impressive what banks have accomplished. Bank capital levels are 9.5%, 200 basis points higher than 2007 levels. Concentrations in construction and commercial real estate are vastly different, and few banks have more than 100% of total capital in any one loan category. Greater balance within loan portfolios is the standard today, often a mix of some commercial and industrial loans, modest consumer exposure, and lower CRE and construction loans.

Median C&I problem loans at banks that have at least 10% of total loans in the commercial category — more than 60% of all FDIC charters — showed similar trends to total NPAs. The median C&I problem loan levels peaked at 4% in late 2009 and again in 2010; it had retreated to 1.5%, as of fall 2019. The longer-term mean is greater due to the “hockey stick” growth of commercial nonaccrual loans during the crisis years spanning 2008 to 2011, as well as the sharp decline in C&I problem loans in 2014. Over time, we feel C&I NPAs will revert upward, to a new normal between 2% to 2.25%.

Public banks provide a plethora of risk-grade ratings on their portfolios in quarterly and annual filings, following strong encouragement from the Securities and Exchange Commission to provide better credit disclosures. The nine-point credit scale consists of “pass” (levels 1 to 4), “special mention/watch” (5), “substandard” (6), “nonperforming” (7), “doubtful” (8) and “loss” (9, the worst rating).

They define a financial institution’s criticized assets, which are loans not rated “pass,” indicating “special mention/watch” or worse, as well as classified assets, which are rated “substandard” or worse. The classified assets show the same pattern as total NPAs and C&I problem loans: low levels with very few signs of deterioration.

The median substandard/classified loan ratio at over 300 public banks was 1.14% through August 2019. That compared to 1.6% in fall 2016 and 3.4% in early 2013. We prefer looking at substandard credit data as a way to get a deeper cut at banks’ credit risk — and it too flashes positive signals at present.

The challenge we envision is that investors, bankers and reporters have been spoiled by good credit news. Reversions to the mean are a mathematical truth in statistics. We ultimately expect today’s good credit data to revert back to higher, but normalized, levels of NPAs and classified loans. A doubling of problem credit ratios would actually just be returning to the historical mean. Can investors accept that 2019’s credit quality is unsustainably low?

We believe higher credit problems will eventually emerge from an extremely low base. The key is handling the truth: An increase in NPAs and classified loans is healthy, and not a signal of pending danger and doom.

As the saying goes: “Keep Calm and Carry On.”

77 Percent of Bank Boards Approve Loans. Is That a Mistake?


loans-5-17-19.pngBank directors face a myriad of expectations from regulators to ensure that their institutions are safe and sound. But there’s one thing directors do that regulators don’t actually ask them to do.

“There’s no requirement or even suggestion, that I’m aware of, from any regulators that says, ‘Hey, we want the board involved at the loan-approval level,’” says Patrick Hanchey, a partner at the law firm Alston & Bird. The one exception is Regulation O, which requires boards to review and approve insider loans.

Instead, the board is tasked with implementing policies and procedures for the bank, and hiring a management team to execute on that strategy, Hanchey explains.

“If all that’s done, then you’re making good loans, and there’s no issue.”

Yet, 77 percent of executives and directors say their board or a board-level loan committee plays a role in approving credits, according to Bank Director’s 2019 Risk Survey.

Boards at smaller banks are more likely to approve loans than their larger peers. This is despite the spate of loan-related lawsuits filed by the Federal Deposit Insurance Corp. against directors in the wake of the recent financial crisis.

Loans-chart.png

The board at Mayfield, Kentucky-based First Kentucky Bank approves five to seven loans a month, says Ann Hale Mills, who serves on the board. These are either large loans or loans extended to businesses or individuals who already have a large line of credit at the bank, which is the $442 million asset subsidiary of Exchange Bancshares.

Yet, the fact that directors often lack formal credit expertise leads some to question whether they should be directly involved in the process.

“Inserting themselves into that decision-making process is putting [directors] in a place that they’re not necessarily trained to be in,” says James Stevens, a partner at the law firm Troutman Sanders.

What’s more, focusing on loan approvals may take directors’ eyes off the big picture, says David Ruffin, a director at the accounting firm Dixon Hughes Goodman LLP.

“It, primarily, deflects them from the more important role of understanding and overseeing the macro performance of the credit portfolio,” he says. “[Regulators would] much rather have directors focused on the macro performance of the credit portfolio, and understanding the risk tolerances and risk appetite.”

Ruffin believes that boards should focus instead on getting the right information about the bank’s loan portfolio, including trend analyses around loan concentrations.

“That’s where a good board member should be highly sensitized and, frankly, treat that as their priority—not individual loan approvals,” says Ruffin.

It all boils down to effective risk management.

“That’s one of [the board’s] main jobs, in my mind. Is the institution taking the right risk, and is the institution taking enough risk, and then how is that risk allocated across capital lines?” says Chris Nichols, the chief strategy officer at Winter Haven, Florida-based CenterState Bank Corp. CenterState has $12.6 billion in assets, which includes a national correspondent banking division. “That’s exactly where the board should be: [Defining] ‘this is the risk we want to take’ and looking at the process to make sure they’re taking the right risk.”

Directors can still contribute their expertise without taking on the liability of approving individual loans, adds Stevens.

“[Directors] have information to contribute to loan decisions, and there’s nothing that says that they can’t attend officer loan committee meetings or share what they know about borrowers or credits that are being considered,” he says.

But Mills disagrees, as do many community bank directors. She believes the board has a vital role to play in approving loans.

First Kentucky Bank’s board examines quantitative metrics—including credit history, repayment terms and the loan-to-value ratio—and qualitative factors, such as the customer’s relationship with the bank and how changes in the local economy could impact repayment.

“We are very well informed with data, local economic insight and competitive dynamics when we approve a loan,” she says.

And community bank directors and executives are looking at the bigger picture for their community, beyond the bank’s credit portfolio.

“We are more likely to accept risk for loans we see in the best interest of the overall community … an external effect that is hard to quantify using only traditional credit metrics,” she says.

Regardless of how a particular bank approaches this process, however, the one thing most people can agree on is that the value of such bespoke expertise diminishes as a bank grows and expands into far-flung markets.

“You could argue that in a very small bank, that the directors are often seasoned business men and women who understand how to run a business, and do have an intuitive credit sense about them, and they do add value,” says Ruffin. “Where it loses its efficacy, in my opinion, is where you start adding markets that they have no understanding of or awareness of the key personalities—that’s where it starts breaking apart.”

Managing Cost, Efficiency & Control in the Loan Portfolio

What sets today’s lending environment apart is the potential for banks to collaborate with technology platforms to manage their risk more effectively and efficiently, explains Garrett Smith, the CEO of Community Capital Technology. In this video, he outlines how banks of varying sizes are diversifying their loan portfolios, and he shares his advice for banks seeking to buy or sell loans on the secondary market.

  • Using Technology to Manage the Loan Portfolio
  • Purchasing Loans on a Marketplace Platform
  • What to Know About Selling Loans

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.

Prepare Your Portfolio for an Economic Downturn


portfolio-11-12-18.pngAs we reach the 10-year anniversary of the inflection point of the 2008 financial crisis, it’s the perfect time to reflect on how the economy has (and hasn’t) recovered following the greatest economic downturn since the Great Depression. If you’ve paid the slightest attention to recent news, you’ve probably heard or read about the speculation of when the nation’s next economic storm will hit. While some reports believe the next downturn is just around the corner, others deny such predictions.

Experts can posit theories about the next downturn, but no matter how strong the current economy is or how low unemployment may be, we can count on at some point the economy will again turn downward. For this reason, it’s important that we protect ourselves from risks, like those that followed the subprime mortgage crisis, financial crisis, and Great Recession of the late 2000’s.

In an interview with USA Today, Mark Zandi, chief economist for Moody’s Analytics, explained, “It’s just the time when it feels like all is going fabulously that we make mistakes, we overreact, we over-borrow.”

Zandi also noted it usually requires more than letting our collective guard down to tip the economy into recession; something else has to act as a catalyst, like oil prices in 1990-91, the dotcom bubble in 2001 or the subprime mortgage crisis in 2006-07.

As the number of predictions indicating the next economic downturn could be closer than we think continues to rise, it’s more important to prepare yourself and your portfolio for a potential economic shift.

Three Tips for Safeguarding Your Construction Portfolio In the Event of an Economic Downturn

1. Proactively Stress Test Your Loan Portfolio
Advancements in technology have radically improved methods of stress testing, allowing lenders to reveal potential vulnerabilities within their loan portfolio to prevent potential issues. Technology is the key to unlocking this data for proactive stress testing and risk mitigation, including geotracking, project monitoring and customizable alerts.

Innovative construction loan technology allows lenders to monitor the risk potential of all asset-types, including loans secured by both consumer and commercial real estate. These insights help lenders pinpoint and mitigate potential risks before they harm the financial institution.

2. Increase Assets and Reduce Potential Risk While the Market’s Hot
If a potential market downturn is in fact on the horizon, now is the best time for lenders to shore up their loan portfolios and long-term, end loan commitments before things slow. This will help ensure the financial institution moves into the next downturn with a portfolio of healthy assets.

By utilizing modern technologies to bring manual processes online, lenders have the ability to grow their construction loan portfolio without absorbing the additional risk or adding additional administrative headcount. Construction loan administration software has the ability to increase a lender’s administrative capacity by as much as 300 percent and reduce the amount of time their administrative teams spend preparing reports by upwards of 80 percent. These efficiency and risk mitigation gains enable lenders to strike while the iron’s hot and effectively grow their portfolio to help offset the effects of a potential market downturn.

3. Be Prudent and Mindful When Structuring and Pricing End Loans
As interest rates continue to trend upward, it’s crucial that lenders price and structure their long-term debts with increased interest rates in mind. One of the perks of construction lending, especially in commercial real estate, is the opportunity to also secure long-term debt when the construction loan is converted into an end loan.

Due to fluctuations in interest rates, it’s important for financial institutions to carefully consider how long to commit to fixed rates. For lenders to prevent filling their portfolio with commercial loan assets that yield below average interest rates in the future, they may find it more prudent to schedule adjustable-rate real estate loans on more frequent rate adjustment schedules or opening rate negotiations with higher fixed rate offerings (while still remaining competitive and fairly priced, of course).

Though we can actively track past and potential future trends, it’s impossible to know for sure whether we are truly standing on the precipice of the next economic downturn.

“That’s one of the things that makes crises crises—they always surprise you somehow,” said Tony James, Vice Chairman or Blackstone Group, in an interview with CNBC.

No matter the current state of the economy, choosing to be prepared by proactively mitigating risk is always the best course of action for financial institutions to take. Modern lending technology enables lenders to make smart lending decisions and institute effective policies and procedures to safeguard the institution from the next economic downturn—no matter when it hits.

What’s The Same – And What’s Not – In Assessing Credit Quality


assessment-7-30-18.pngSince the 1970s, there has been an inevitable march toward a macro, quantitative assessment of credit quality. Technology and big data ensured its emergence to complement the more traditional, transactional counterpart of credit risk management.

Since the adoption of the 2006 allowance for loan and lease losses (ALLL) guidance, and the ferocity of loan losses during the great recession, we have seen the growing confluence among credit, accounting, regulatory and investor constituencies attempting to answer the same age-old questions: How much loss is embedded in the loan portfolio? How much is this portfolio worth?

While having comparable goals, each level of management has its priorities, biases and specialized methodologies for answering those questions. For directors, there may be a need to connect the dots to determine the objective of these measures.

Today’s ALLL
The current loss methodology was also used in 2006, prior to the massive, mainly real estate, credit losses from the great recession. The 2006 methodology included pool, formula-driven and specific impairment loss estimates. The incurred loss bias of the current methodology–often known as a “run-rate” approach–inflates the most recent credit quality performances. With no significant losses prior to the crisis, the industry was largely pushed into the abyss with low loss reserves–unable to raise reserves for forecasted losses. Given the relatively benign state of credit currently, it could be said that we are back to the future, having to defend ALLL levels, largely with qualitative justifications.

Tomorrow’s CECL
The soon-to-be implemented current expected credit loss (CECL) methodology is the inevitable reaction to the roller coaster nature of today’s ALLL. Some even consider it a fall back to the failed bid, about eight years ago, to impose mark-to-market valuations on the entirety of banks’ loan portfolios. Regardless of the pejorative “crystal ball” moniker often describing CECL–not to mention estimates of significant Day One implementation increases in reserves–its integration of historical losses, current conditions and reasonable forecasts is designed to be the more holistic, life-of-loan estimation of losses.

There is a high presumption in CECL that quantitative measures, such as discounted cash flows or probabilities of default (PDs)/loss given defaults (LGDs), overlaid by recovery lags, will be used to project future losses. In theory, it may be a more reliable estimate than the current guidance; however, its greatest hindrance is the perception that it is yet another de facto variant layer of capital buffer mandated by the Dodd-Frank Act, and Basel III.

Exit Price Notion
This accounting-based fair value measure disclosure (ASU 2016-01), often referred to as fair value/exit pricing, is new for 2018 and specifies the method by which public financial institutions calculate the fair value of their loan portfolios for purposes of disclosure. Fair value is the amount that would be received to sell an asset or paid to transfer a liability at the measure date. The estimate of fair value must be supported through specified protocols of valuation and calculation. Credit-based assessments, coupled with ties to loan review and risk grade migrations, will be key to justifying a reasonable, point-in-time fair value calculation.

Credit Mark in Mergers & Acquisitions (M&A)
Speaking of fair value, in M&A, it is truly in the eye of the beholder. How skeptical is the buyer? How much does the buyer want the deal? Determining a credit mark, or rational estimate (or range) of discounts to be applied to a prospective purchased loan portfolio, is very much a credit-based, symbiotic marriage between a traditional, more qualitative loan review and the more quantitative metrics of PDs, LGDs, risk grade migrations, yield marks, recovery lags and probabilistic modeling. Using one approach, without the informing nature of the other, is problematic and increases inaccuracies. What is sacrosanct in credit mark, is that an institution never wants to undershoot the estimates. Accounting plays a greater role when the deal-negotiated credit mark is refreshed at the deal’s completion, known as Day One accounting.

The credit discipline has often described as a qualitative decision stacked on an array of quantitative metrics. That remains an apt description for transactional credit–where it all begins. However, the new frontier in managing credit risk, even at smaller financial institutions, is in the ever-evolving, mostly mandated, macro, quantitative measures–some of which are described above. Each of these, not unlike a Venn diagram, has similarities and overlapping portions, but each has separate purposes, as well. Directors, like credit officers, need to understand and embrace these quantitative measures, which will, in turn, lead to better decision making for the bank.

How Pinnacle Improved the Efficiency of Construction Loan Management


partnership-6-27-18.pngWhen banks make a construction loan on a new office building or housing development, the funds usually are not provided to the borrower in a lump sum, but instead are dispersed as various project milestones are achieved. The administration of these credits are often handled on a simple spreadsheet—one for every loan. That might work for a small community bank that only makes a handful of construction loans a year, but not for Pinnacle Financial Partners, a $23 billion asset regional bank headquartered in Nashville, Tennessee that considers construction lending to be an important business it wants to scale in the future.

Pinnacle wanted a more efficient way of administering its construction loan portfolio, particularly after a series of acquisitions of other banks that also did construction lending. “We’re always looking for ways to improve efficiency,” says Pinnacle Senior Vice President Dale Floyd. “Coming out of the recession, we were growing fairly fast, had merged a couple of banks into us and everyone was doing construction lending differently. We needed some consistency throughout the organization, and to try to be more efficient at the same time.”

And that led Pinnacle to another Nashville-based company, Built Technologies, which has developed an automated construction lending platform that not only centralizes the administrative process, but promises to be an effective risk management tool as well. “Construction loans require coordination between the bank, the borrower, the contractor, the title company and third-party inspectors to review the progress of the project,” says Built CEO Chase Gilbert. Now all of these parties are connected in real time and everyone is looking at the same information instead of information silos, and the draw process can be managed more proactively. “We bring that process online to the benefit of everyone involved.”

Pinnacle and Built were co-finalists in Bank Director’s 2018 Best of FinXTech Startup Innovation award.

The benefits to Pinnacle begin with greater speed and efficiency. “It cuts down on phone calls and emails and paper,” says Floyd. “It reduces the chances for errors … because the [loan] doesn’t have to go through so many hands.” When banks are using simple spreadsheets to administer their construction loans and a builder wants to make a draw against their loan, an inspector will have to drive to the project site and assess whether the required work has been completed, drive back and write up a report authorizing a dispersal. With the Built platform, all this happens much faster. “[All the information] is there and it’s immediate,” says Floyd.

The platform also provides the bank with an enhanced risk management capability. “We do a lot of large loans,” Floyd explains. “I can pull a report at any time of every loan I have over $1 million, by location and by builder. I can track loans that have been fully funded, or I can track loans that we’ve closed but no disbursements have been made for three months. If we see that we want to know why. What has caused this project to stall?”

And when state and federal examiners come into the bank, Floyd can “pull up any loan that they want to see and look at the inspection reports, look at the pictures and see all the numbers,” he says. “That information is there for as long as we want to store it.”

Gilbert says Built spent nine months getting to know Pinnacle and understanding the bank’s goals for construction lending before work commenced on the project. “Pinnacle is a high growth bank and it was looking for something that would allow it to scale [that business],” he says. “The bank is also fanatical about customer experience and it wanted to find a way of giving its borrowers and builders a best-in-class experience.”

Floyd says Built also made some changes to the platform at the bank’s request—for example, building in a feature allowing a borrower to overdraw their loan with the bank’s approval if the situation warrants it. “They’re constantly looking for input,” he says. “They want to make the system better all the time.” And the new platform was easy to implement, according to Floyd. “That’s one of the things I was surprised about,” he says. “The training time is very short, and it’s very user friendly.”

Enhancing the Lending Process Through Data



Customers today expect quicker decisions, and data can empower banks to improve the customer experience. Data can also enable growth as banks gain more and better information about their customers. In this video, Steve Brennan of Validis outlines how banks can confront the challenges they face in making the most of their data.

  • How Data Has Transformed Lending
  • The Benefits of Leveraging Data
  • The Challenges Banks Face
  • Addressing Data Deficiencies

Competition for Credit Analysts Creating New Challenge for Banks


analyst-5-3-18.pngSuccessfully recruiting a qualified credit analyst is proving to be quite a challenge in today’s banking environment. There are a number of contributing factors, including compensation compared to other industries, the evaporation of commercial credit training, and a lack of college graduates in certain areas.

With this shortage, credit analysts are highly sought after, and analysts are demanding higher wages than what the banking industry is accustomed to paying.

In the past, it has been common practice for banks to outsource loan review, compliance testing, and internal audit functions — so why not the credit analyst role?

Thin talent pools flow two ways
Historically, banks have hired recent college graduates as credit analysts with the expectation of developing them into commercial lenders and potentially future management. In theory, this practice makes sense. But in today’s market, the success rate of banks converting a credit analyst into a long-term employee seems to be the exception rather than the norm, causing many banks to abandon their commercial training programs.

Over the past decade, many banks have begun hiring seasoned credit analysts who aren’t looking to move to a customer-facing role, making it more difficult to find affordable, permanent analysts.

In recent years, outsourced providers have started meeting the demand for credit analysts. With the increase in compensation for this role, outsourcing may now be the cost-effective option. This is especially true when you factor in the time and effort spent recruiting and training, while accounting for increased efficiency or production from an experienced analyst/outsourced provider.

Banks Still Have Underwriting Control
It is clear many bankers do not want an outside vendor impacting their underwriting decisions. Banks want to make loans to familiar borrowers, and they don’t want the potential for an overly critical or negative analysis from a third party to hinder their ability to do so.

It’s important to understand that your bank will always own and control the underwriting process. The primary focus for outsourced credit analyst services is to provide all the relevant credit information in a consistent format, which will allow the bank to make a well-informed decision. Outsourcing credit analysis should not impact the bank’s underwriting practices.

Banks take pride in their ability to provide quick responses to their borrowers. Outsourcing analyst work doesn’t mean longer turnaround times. If you are considering an outsourced solution, make sure that you establish clear deadlines with your vendor.

You could also consider segmenting the credit analyst work flow between new credit requests and ongoing portfolio monitoring. It may make sense for a bank to analyze new money requests in-house, and then to outsource the less time-sensitive renewal requests and annual reviews.

Training, Retaining Analysts Can Cost You
Even if you are successful in hiring a qualified analyst candidate, the time and resources needed to properly train a new hire with little or no previous credit experience can be quite extensive. Typically, when a bank is large enough to have a pool of credit analysts, there is usually a full-time employee who helps train and develop their skill set. But if you work at a smaller community bank, you might only have one or two analysts on staff.

It is common for a senior analyst, credit officer, or a manager from the credit administration area to oversee a new analyst. But these employees usually maintain a full workload in addition, which may result in inadequate training, or an overstressed manager.

The challenge doesn’t end once you hire and train a new credit analyst. One of the biggest challenges still remains — keeping the analyst in the role. Most banks are lucky if they can keep an analyst in the role for two or three years before the individual leaves for higher pay or a more satisfying analyst role somewhere else. And then it’s time to start the recruiting and training process all over again.

At the end of the day, banks want a viable option to end the what seems like a revolving door of credit analysts. By outsourcing this role, banks have new opportunities to provide cost savings and improve quality for their customers.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.

How to Pick the Right Digital Small Business Lending Tool: Top 10 Must Have Characteristics


lending-4-24-17.pngHaving access to online lending applications has quickly transitioned from a customer convenience to a customer expectation. It’s only a matter of time before all institutions will be providing digital access to small business lending. That much is certain. What isn’t certain is how to find the right fintech partner. Your partner should understand your institution’s lending processes and digital strategy in that space, and provide you with a solution that meets your unique objectives.

Here are the top 10 characteristics you should demand from any digital business lending partner.

1. Friend Not a Foe Business Model
It’s obvious, I know, but find a partner who is not a competitor of yours. There are business lending fintech companies that once had designs on putting banks and credit union lending departments out of business. If the businesses you serve can also go to your partner’s website and apply directly with them for a loan, they’re not a partner. They are a competitor.

2. Timely End-to-End Functionality
Current business lending processes are onerous for both the client and the bank. Applications are submitted incompletely 60 percent of the time, and data is bounced from one party to another and back again. Technology does an amazing job of doing things right the first time every time. The value in your business lending tool resides in its ability to help facilitate everything from the application to closing the loan.

3. Endorsed by a Trusted Source
Most of the financial services industry’s trusted resources and trade associations provide their members with a list of solutions for which they have completed comprehensive due diligence and identified as an endorsed solution. Entities, like the American Bankers Association, Consumer Bankers Association and others, have the resources to conduct due diligence on the companies they recommend. Leverage their expertise.

4. Control…Control…Control
The institution must be able to retain control over every aspect of the process. Your clients should never even know the tech partner exists. The brand, the credit policy, pricing, scoring, decisions, and all aspects of the customer relationship must be fully owned and controlled by the institution.

5. Customer Experience
Find a tech partner that shares your philosophy of putting the borrower at the center of the process. Look for a tool that creates an engaging, simple, and even fun environment for the application portion of the process, and results in a speedier, more efficient and convenient end-to-end process.

6. Enhances Productivity
Find tech that frees up your sales staff to sell, and allows your back office to spend minutes—not hours—making a decision on a business loan. Sales teams should spend their time growing relationships and sourcing new deals as opposed to shepherding deals through the process or chasing documentation. With the right tool, back office can analyze deals quickly and spend more time on second look processes or inspecting larger deals.

7. Builds the Loan Portfolio
Find a tech solution so good that it will draw new opportunities into your shop—even those folks who would never think about walking into a branch. And make sure the application process can accommodate both the borrower who is online and independent, as well as the borrower who wants to sit next to a banker and complete the application together.

8. The Human Touch
The most important relationship is the one between banker and customer. Don’t lose the personal touch by using technology that cuts out the value the banker brings to the relationship. Instead, find a tool that engages the relationship managers and facilitates their trusted advisor status.

9. Positive Impact on Profitability
By finding a tool that enhances productivity across the board, you should be able to reduce cost-per-loan booked by as much as two-thirds. That means even the smallest business loans should be processed profitably.

10. Cloud-Based Model
The best way to keep pace with innovation in a cost-effective manner is to find a partner that uses the latest technology, development processes and a cloud-based model, which enhances storage capabilities. Your partner should update and enhance often, and not nickel and dime you for every enhancement or upgrade.

Stick to these guidelines and you’ll be sure to find the right tool for your unique institution.