How Banks Can Beat Big Tech at Its Own Game

For the last decade, headline after headline has predicted the demise of banks at the hands of the tech giants. Why? One word: data.

Finance is — and always has been — a data-dependent business. Providing a commercial loan relies on knowing how likely the would-be borrower is to default, a rudimentary data-processing task that is exactly the expertise that Big Tech has. These companies, which include Amazon.com, Apple, Facebook and Alphabet’s Google, can generate and leverage large-scale, granular and real-time data on their users, and have used this to build the largest and most valuable businesses in the world.

By comparison, many banks still don’t fully appreciate the value of their data, and have yet to generate meaningful financial returns from it. This is because most of their data is siloed and sprawled throughout the organization across customer onboarding, marketing, financial crime and fraud and credit risk. Instead of being regarded as a valuable commodity, data is seen as a potential temptation for hackers and a cost that needs to be managed.

If banks can learn to leverage their data like these technology giants — embracing digital transformation to lend faster, smarter and more to businesses — they can beat Big Tech at its own game. Unlike Big Tech, banks have long-worked in regulated environments that require all participants to follow the same rules. As a result, they figured out how to work collaboratively with regulators at speed and at scale, and established robust processes and governance around areas such as data ethics and privacy. This has helped build consumer trust and burnished relationships.

This proved to be a powerful combination over the last 15 months as Covid-19 forced states and businesses to temporarily shut down. The government turned to banks, not Big Tech, to help support businesses, via initiatives such as the Paycheck Protection Program and the Main Street Lending Program.

West Reading, Pennsylvania-based Customers Bancorp rose to this challenge and leveraged OakNorth’s ON Credit Intelligence Suite to identify which industries in its portfolio were more stressed and which metrics it should use to determine risk profiles. Data helps banks such as Customers identify overlooked market sectors and business types that are good credits, but could be difficult for lenders to take on without the data or analytics to make an informed decision. Embracing technology to leverage data effectively allowed Customers Bancorp to provide over 100,000 loans and become the sixth-most active PPP lender in the US – a substantial feat for a bank with $18.8 billion in assets.

Regulatory know-how, proprietary data sources and specialized services offer ways for banks to compete with — or indeed, collaborate — with Big Tech. This has been demonstrated through partnerships such as Goldman Sachs Group and Apple, and JPMorgan Chase & Co. and Amazon. Leveraging data and digital transformation will empower banks to discover gaps in the market and even attract borrowers which Big Tech is unable to. After all, not every business will be keen on the idea of borrowing from the same company that helps them share goofy photos with their friends.

Three Things Bankers Learned During the Pandemic

It’s been well documented how the pandemic lead to the digitization of banking on a grand scale.

But what bankers discovered about themselves and the capabilities of their staff was the real eye-opener. Firms such as RSM, an audit, tax and consulting company that works with banks nationwide, saw how teams came together in a crisis and did their jobs effectively in difficult circumstances. Banks pivoted toward remote working, lobby shut-downs, video conferencing and new security challenges while funneling billions in Paycheck Protection Program loans to customers. The C-suites and boards of financial institutions saw that the pandemic tested their processes but also created an opportunity to learn more about their customers.

Overall, the pandemic changed all of us. From our discussions with the leaders of financial institutions, here are three major things bankers learned about themselves and their customers during the pandemic.

1. Customers Want to Use Technology
Banks learned that customers, no matter their generation, were able to use technology effectively. Banks were able to successfully fulfill the needs of their customers, as more devices and technologies are available to banks at all price points and varying degrees of complexity. Post-pandemic, this practice will continue to help increase not only internal efficiencies but convenience for customers. As banks compete with many of the new digital providers, this helps even the playing field, says Christina Churchill, a principal and national lead for financial institutions at RSM US LLP.

Did you have a telemedicine appointment during the pandemic? Do you want to go back to driving to a doctor and sitting in a waiting room for a short appointment, given a choice? Probably not. Nor will bank customers want to come to a branch for a simple transaction, says Churchill.

The pandemic made that all too clear. Banks had to figure out a way to serve customers remotely and they did. Digital account opening soared. Banks stood up secure video conferencing appointments with their customers. They were successful on many counts.

2. Employees Can Work Remotely
The myth that bankers were all working effectively while in the office was exposed. Instead, some found employees were more effective while not in the office.

Technology helped bridge the gap in the existing skill set: Bankers learned how to use technology to work remotely and used it well, says Brandon Koeser, senior manager at RSM. Senior leaders are finding that getting employees back to the office on a strict 8 a.m. to 5 p.m. schedule may be difficult. “Some bankers have asked me, ‘do we return to the office? Do we not go back?’” says Koeser. “And I think the answer is not full time, because that is the underlying desire of employees.”

After surveying 27,500 Americans for a March 2021 study, university researchers predicted that Covid-19’s mass social experiment in working from home will stick around. They estimate about 20% of full workdays will be supplied from home going forward, leading to a 6% boost in productivity based on optimized working arrangements such as less time commuting.

Still, many senior bank leaders feel the lack of in-person contact. It’s more difficult and time-consuming to coach staff, brainstorm or get to know new employees and customers. It’s likely that a hybrid of remote and in-person meetings will resume.

3. Banks Can Stand Up Digital Quickly
Banks used to spend months or years building systems from scratch. That’s no longer the case, says Churchill. Many banks discovered they can stand up technological improvements within days or weeks. Ancillary tools from third-party providers are available quickly and cost less than they did in the past. “You don’t have to build from scratch,” Koeser says. “The time required is not exponential.”

Recently, RSM helped a bank’s loan review process by building a bot to eliminate an hour of work per loan by simply pulling the documentation to a single location. That was low-value work but needed to be done; the bot increased efficiency and work-life quality for the bank team. A robotic process automation bot can cost less than $10,000 as a one-time expense, Churchill says.

Throughout this year, senior bankers discovered more about their staff and their capabilities than they had imagined. “It really helped people look at the way banks can process things,” Churchill says. “It helped gain efficiencies. The pandemic increased the reach of financial institutions, whom to connect with and how.”

The pandemic, it turned out, had lessons for all of us.

A Lending Platform Prepared for Pandemic Pitfalls

Managing a loan portfolio requires meticulous review, careful documentation and multiple levels of signoff.

That can often mean tedious duplication and other labor-intensive tasks that tie up credit administration staffers. So, when Michael Bucher, chief credit officer at Lawton, Oklahoma-based Liberty National Bank, came across a demonstration of Teslar Software’s portfolio management system, he couldn’t believe it. The system effortlessly combined the most labor-intensive and duplicative processes of loan management, stored documents, tracked exceptions and generated reports that allowed loan and credit officers to chart trends across borrowers. The $738 million bank signed a contract at the end of 2019 and began implementation in February 2020.

That was fortuitous timing.

Teslar Software’s partnership with institutions like Liberty National, along with its efforts to assist banks and borrowers with applications for the Small Business Administration’s Paycheck Protection Program, earned it the top spot in the lending category in Bank Director’s 2021 Best of FinXTech Awards. Finalists included Numerated — a business loan platform that was another outperformer during the PPP rollout — and SavvyMoney, which helps banks and credit unions offer pre-qualified loans through their digital channels. You can read more about Bank Director’s awards methodology and judging panel here.

Prior to implementing Teslar Software, Liberty National used a standalone platform to track every time a loan didn’t meet the bank’s requirements. It was an adequate way to keep track of loan exceptions when the bank was smaller, but it left him wondering if it would serve the bank’s needs as it continued to grow. The old platform didn’t communicate with the bank’s Fiserv Premier core, which meant that when the bank booked a new loan, a staffer would need to manually input that information into the system. The bank employed one person full-time to keep the loan tracking system up-to-date, reconcile it with the core and upload any newly cleared exceptions on various loans.

Bucher says it was immediately apparent that Teslar Software offered efficiency gains. Its system can integrate with several major cores and is refreshed daily. It collects documentation that different areas within the bank, like commercial loan officers and credit administration staff, can access, allows the bank to set loan exceptions, clears them and finalizes the documentation so it can be imaged and stored in the correct location. Staffers that devoted an entire day to cumbersome reconciliation tasks now spend a few hours reviewing documentation.

Bucher was also impressed by the fintech’s approach to implementation and post-launch partnership. The bank is close enough to Teslar Software’s headquarters in Springdale, Arkansas, that founder and CEO Joe Ehrhardt participated in the bank’s implementation kickoff. Teslar Software’s team is comprised of former bankers who leveraged that familiarity in designing the user’s experience. Between February and June of 2020, the earliest months of the coronavirus pandemic, Teslar Software built the loan performance reports that Liberty National needed, and made sure the core and platform communicated correctly. Weekly calls ensured that implementation was on track and the reports populated the correct data.

Teslar Software’s platform went live at Liberty National in June — missing the bulk of the bank’s first-round PPP loan issuance. But Teslar Software partnered with Jill Castilla, CEO of Citizens Bank of Edmond, and tech entrepreneur and NBA Dallas Mavericks owner Mark Cuban to power a separate website called PPP.bank, a free, secure resource for multiple banks to serve PPP borrowers.

“Teslar Software came to the rescue when they provided their Paycheck Protection Program application tool to all community banks during a period of extreme uncertainty for small businesses due to the Covid-19 pandemic,” Castilla says in a statement to Bank Director. “The partnership we forged with them and Mark Cuban was a game changer for so many that were in distress.”

And Liberty National was able to use Teslar Software’s platform to create and process forgiveness applications for the 500 first-round PPP loans it made. Bucher says the forgiveness application platform is similar to the tax preparation software TurboTax — it breaks the complex application down into digestible sections and prompts borrowers to submit required documents to a secure portal. The bank needs only one employee to review these applications.

“We had such a good experience with the forgiveness side that for PPP in 2021, we partnered with them to handle the front end and the back end of PPP [application],” he says. “It’s now all centralized within Teslar so that when we move on to forgiveness, everything is going to be there. I’m expecting the next round of forgiveness to go a lot smoother than the previous round.”

Outside of PPP, Teslar Software has allowed Liberty National’s credit administration team to manage its current workload, even as staffing decreased from 10 people to six. Instead of taking a full day to review and verify loan exceptions, it takes only a few hours. Bucher says the bank is exploring an expanded relationship with the fintech to add additional workflow modules that would reduce duplication and eliminate the use of email to share documents.

Fraud Attempts on the Rise Since Pandemic’s Start

As Covid-19 passes its one year anniversary in the United States, businesses are still adjusting to the pandemic’s impacts on their industry.

Banking is no exception. While banks have quickly adjusted to new initiatives like the Small Business Administration’s Paycheck Protection Program, the most notable impact to financial institutions has been the demand for online capabilities. Banks needed to adjust their offerings to ensure they didn’t lose their client base.

“ATM activity is up, drive-through banking is up 10% to 20% and deposits made through our mobile app are up 40%,” said Dale Oberkfell, president and CFO of Midwest Bank Centre last June.

The shift to digital account openings has been drastic. The chart below looks at the percent change in cumulative number of evaluations from 2019 to 2020 for a cohort of Alloy customers, limited to organizations that were clients for both years. Since the onset of the pandemic, digital account opening has increased year-over-year by at least 25%.

Although the shift to digital was necessary to meet consumer demands, online banking opens up the possibility of new types of fraud. To study the pandemic’s impact on fraudulent applications, we took a closer look at changes in consumer risk scores since the onset of the pandemic. Similar to credit scores, risk scores predict the likelihood of identity or synthetic fraud based on discrepancies in information provided, behavioral characteristics and consortium data about past fraud activity.

Comparing the pandemic months of March 2020 to December 2020 to the same period in 2019, Alloy clients saw a dramatic rise in high-risk applications. Total high-risk applications increased by 137%, driven both by overall growth in digital application volume and a comparatively riskier population of applicants.

There are several ways for you to protect your organization against this growing threat. One way is to use multiple data sources to create a more holistic understanding of your applicants and identify risky behaviors. It also ensures that you are not falling victim to compromised data from any one source. It’s a universal best practice; Alloy customers use, on average, at least 4 data sources.

Another way for you to protect your institution is by using an identity decisioning platform to understand and report on trends in your customer’s application data. Many data providers will return the values that triggered higher fraud scores, such as email and device type. An identity decisioning platform can store that data for future reference. So, even if a risky application is approved at onboarding, you can continue to monitor it throughout its lifetime with you.

Digital banking adoption and usage is expected to only increase in the future. Banks need to ensure that their processes for online capabilities are continuously improving. If your organization is spending too much time running manual reviews or using an in-house technology, it may be time for an upgrade. Click here to see how an identity decisioning platform can improve your process and help you on-board more legitimate customers.

Pandemic-Induced Innovation Charts Path Toward New Normal

As the financial institutions industry embarks on 2021, our reflections capture a world disrupted by the Covid-19 pandemic. Economic uncertainty continues to impact strategic and growth plans for an inestimable period of time. Banks are closely monitoring loan payment trends and deposit account fluctuations as customers continue to struggle with stable employment and small businesses fight to survive.

The Covid-19 crisis occurred at a time of strength for most financial institutions. Unlike the 2008 Great Recession, banks have been able to rely on strong capital positions, which was crucial when it became no longer possible to continue operating business as usual.

Essentially overnight, consumer behavior shifted away from most face-to-face interactions, prompting an increase in online and contactless activity. Banks had to quickly adapt and explore innovation in order to meet both customer and employee needs. Outdated manual processes, continuity vulnerabilities and antiquated methods of communication immediately became apparent, with institutions pivoting to operate effectively. The pandemic became an accelerant and forced banks to embrace innovation to avoid business interruption, while prioritizing information security and employee and customer safety. Necessity is the mother of invention, and the Covid-19 pandemic created necessity — with an emphasis on urgency.

Top Five Covid-19 Challenges That Prompted Innovation

  1. To reduce the potential virus spread, executives found alternative means of meeting and interacting with employees and customers. Virtual meetings were the solution for many banks.
  2. While many institutions allowed for some remote work, this was not permitted for most employees prior to the pandemic. In some cases, chief technology officers had to quickly implement secure VPN access, evaluate hardware availability, order laptops and expand upon remote working policies and procedures.
  3. Digital transformation immediately moved from “wouldn’t it be great if we did this?” to “to be competitive and survive we must accomplish this immediately.” No. 1 on the transformation list was enhancing the customer experience. To remain competitive, transformation was no longer optional but absolutely required. Digital channels have been trending as customers’ preferred way to bank in the last few years, but this became the primary channel for customer engagement out of necessity. This shift prompted banks to reevaluate and enhance digital channel offerings along with supporting technologies.
  4. Round one of the Paycheck Protection Program was a difficult, labor-intensive process for participating institutions. The need for an efficient PPP application process prompted lenders of all sizes to embrace automation and fintech partnerships, resulting in a smoother process during round two.
  5. C-suite executives and bankers across the organization found themselves in a position where it was difficult to access information quickly and easily in order to make timely decisions to improve the customer experience and manage the bank. For many institutions, especially community financial institutions, this continues to be a challenge.

The need for accurate and efficiently delivered information and data across the organization has never been so great. It is still quite common for financial institutions to manage information in data silos, making it impossible to create the contextual customer intelligence necessary to compete in the post-pandemic environment. Financial institutions have the most intimate data about their customers. This data is of little value until it is transformed into meaningful information that can be easily digested, interpreted, and acted upon.

Banks that recognize that their data is a valuable asset are actively seeking out intelligent analytics tools to create contextual customer intelligence that can be strategically deployed across the organization and leveraged for consistent multichannel experiences to generate sales, increase customer and employee loyalty and reduce operating expenses. Financial institutions must have the ability to gather, aggregate and analyze their complex data assets quickly and accurately to remain competitive, meet regulatory reporting expectations and to achieve market success. The ability to analyze this data and act decisively is the path to not only being a better financial institution but prospering in uncertain times. Leveraging high-value data is imperative to thriving and increasing an institution’s competitive advantage.

A Look at the Great Loan Modification Experiment

After almost a year, Congress’ decision to suspend loan modifications rules was an unprecedented, unorthodox and, ultimately, effective way to aid banks and borrowers.

The banking industry is going on four quarters of suspended requirements for coronavirus loan modifications. Suspending the reporting rules around loan modifications was a creative way for regulators and lawmakers to encourage banks in the spring of 2020 to work with borrowers facing coronavirus-related hardships. The result is that the industry, and economy, had more time to reassess the rapidly uncertain environment before needing to process troubled credits.

“Standing here today, having completed most of my year in audit and having a pretty good idea of how things are panning out — I would call it a raging success,” says Mandi Simpson, a partner in Crowe’s audit group. She adds that the decision to pause loan payments may have helped avoid a number of business closures and foreclosures, which will help the economy stabilize and recover long-term.

Ordinarily, these modifications, like no payments or interest-only payments for a period of time before restarting payments and catching up, would have been categorized as troubled debt restructurings, or TDRs, under U.S. generally accepted accounting principles.

TDRs occur after a bank offers a concession on a credit that it wouldn’t otherwise make to a borrower experiencing financial difficulties or hardship. The CARES Act suspended the determination that a loan modified because of the coronavirus would count as a TDR, “including impairment for accounting purposes.” Banks could now offer deferments and modifications to borrowers impacted by the coronavirus without needing to record them as TDRs.

The suspension came as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020, or CARES Act, and was extended in the stimulus bill passed before the end of the year. The move was supported by the U.S. Securities and Exchange Commission, the Financial Accounting Standards Board and bank regulators, who had encouraged banks to work with borrowers prior to the suspension. It is scheduled to be in effect through until Jan. 1, 2022, or 60 days after the termination of the national emergency, whichever is earlier.

“The regulatory community gets a high-five for that, in my opinion,” says Christopher Marinac, director of research at Janney Montgomery Scott. “Think about the accounting change in TDRs as another form of stimulus … For the companies and the clients that received deferrals – this pandemic is not their fault. … There was a recognition that this gave people a way to buy time. The one variable you can’t quantify in a crisis is time.”

The widespread forbearance allowed borrowers to adapt their businesses, get a handle on their finances or apply for Paycheck Protection Program funding from the Small Business Administration. It also gave banks a chance to reassess their borrowers’ evolving risk and offer new loan terms, if needed.

Reported Bank Deferral Data for 2020

Quarter Loans in deferral, median Low range High range Number of banks reporting
Q1’2020 11.1% 0.3% 38% 224
Q2’2020 15.3% 1.2% 46.4% 234
Q3’2020 3% 0% 21.5% 240
Q4’2020 1.4% 0% 14.5% 238

Source: Reports authored by Brad Milsaps, managing director at Piper Sandler & Co.

A number of institutions took advantage of the suspension to offer borrowers relief. Simpson remembers that many banks freely offered short-term forbearance in the second quarter, and panicked borrowers accepted. When those forbearance periods expired in the third quarter, borrowers had a better sense of their financial condition — aided by the PPP — and banks were better prepared to work with customers under continued pressure.

By the end of the second quarter, most banks “expressed optimism” about the direction of deferrals and reported “minimal” second requests, mostly related to restaurant and hotel borrowers, wrote Brad Milsaps, managing director at Piper Sandler & Co.

He expected deferrals to become “less of a focus going forward,” as those loans’ performance normalized or banks felt confident in marking them as nonaccruals. To that end, the median ratio of criticized loans to total loans, excluding Paycheck Protection Program loans, increased to 3.6% at the end of the third quarter, from 2.9% in the second quarter.

“Deferrals were an impactful tool utilized at the beginning of the pandemic, but have fallen to a very minimal level given the impact of PPP, the CARES Act, and improvement in the economy,” he wrote in a February 2021 report. “Although deferral data continues to be disclosed by most banks, the investment community has mostly moved on from deferrals as an area of primary focus.”

But the suspension of TDR guidance is not a green light for banks to wholly ignore changing credit risk. If anything, the year of deferrals gave banks a better sense of which customers faced outsized challenges to their businesses and whether they could reasonably and soundly continue supporting the relationship. Marinac points out that many banks have risk-rated loans that received modifications, set aside reserves for potential losses and migrated those that continued to have stress over time.

And as documented in Milsaps’ reports, a number of banks decided to share their modification activity with the broader public, with many including geography, industry and sometimes even the type of modification offered. These disclosures weren’t required by regulators but demonstrated the credit strength at many banks and reassured investors that banks had a handle on their credit risk.

The suspension of TDR reporting requirements through the end of 2021 gives the industry and stakeholders like FASB, the accounting board FASB, to consider the usefulness of the existing TDR guidance.

The reporting involved with TDRs involves an individual discounted cash flow analysis, which makes the accounting complicated and tedious. TDRs also can carry negative connotations that are impossible to shake: A modified TDR, even if it’s performing, is always recorded as a TDR. Simpson points out that the loan modification disclosures banks made in lieu of reporting TDRs was, in many cases, more useful and insightful than if the banks had just treated all modified loans as TDRs. And while mass loan modifications may have been a lot of work for banks in the midst of the pandemic’s most uncertain days, it would have been exponentially more complicated to do mass restructuring recordings and discount cash flow analyses over those four quarters.

“If you aren’t going to do TDR reporting at the time when — in theory — it would be the most valuable, doesn’t that call into question whether TDR identification is really that useful after all?” Simpson asks. “The standard-setters are doing some outreach and taking a second look with exactly that in mind.”

How Community Banks Can Drive Revenue Growth During the Pandemic

Community banks are the beating heart of the American banking system — and they’ve received a major jolt to their system.

While community banks represent only 17% of the US banking system, they are responsible for around 53% of small business loans. Lending to small businesses calls for relationship skills: Unlike lending to large firms, there is seldom detailed credit information available. Lending decisions are often based on intangible qualities of borrowers.

While community banking is relationship lending at its very best, the pandemic is forcing change. Community bankers have been caught in the eye of the Covid-19 storm, providing lifesaving financial services to small businesses. They helped fuel the success of the Paycheck Protection Program, administering around 60% of total first wave loans, according to Forbes. This was no small feat: Community banks administered more loans in four weeks than the grup had in the previous 12 months.

However, as with many businesses, they have been forced to close their doors for extended periods and move many employees to remote arrangements. Customers have been forced to move to online channels, forming new banking habits. Community banks have risen to all these challenges.

But the pandemic has also shown how technology can augment relationship banking, increase customer engagement and drive revenue growth. Many community banks are doing things differently, acknowledging the need to do things in new ways to drive new revenues.

Even before Covid-19, disruptive forces were reshaping the global banking landscape. Customers have high expectations, and have become accustomed to engaging online and through mobile services. Technology innovators have redefined what’s possible; customers now expect recommendations based on their personal data and previous behavior. Many believe that engaging with their bank should be as easy as buying a book or travel ticket.

Turn Data into Insights, Rewards
While a nimble, human approach and personal service may offset a technical shortcoming in the short run, it cannot offset a growing technology debt and lack of innovation. Data is becoming  the universal driver of banking success. Community banks need to use data and analytics to find new opportunities.

Customer data, like spending habits, can be turned into business insights that empower banks to deliver services where and when they are most needed. Banks can also harness the power of data to anticipate customer life moments, such as a student loan, wedding or a home purchase.

Data can also drive a relevant reward program that improves the customer experience and increases the bank’s brand. Rewards reinforce desired customer behavior, boost loyalty and ultimately improve margins. For example, encouraging and rewarding additional debit transaction activity can drive fee income, while increasing core deposits improves lending margins.

The pandemic also highlights the primacy of digital transformation. With branches closed, banks need to find new ways to interact with customers. Digital services and digitalization allow customers to self-serve but also create opportunities to engage further, adding value with financial wellness products through upselling and cross-selling. In recent months, some community banks launched “video tellers” to offset closed branches. Although these features required investment, they are essential to drive new business and customers will expect these services to endure.

With the right digital infrastructure, possibilities are limited only by the imagination. But it’s useful to remember that today’s competitive advantage quickly becomes tomorrow’s banking baseline. Pre-pandemic, there was limited interest in online account opening; now it’s a crucial building block of an engaging digital experience. Banking has become a technology business — but technology works best with people. Community banks must invest in technologies to augment, deepen and expand profitable relationships.

Leverage Transformative Partnership
Technology driven transformation is never easy — but it’s a lot easier with an expert partner. With their loyal customers, trusted brands and their reputation for responsiveness, community banks start from a strong position, but they need to invest in a digital future. The right partner can help community banks transform to stay relevant, agile and profitable. Modern technologies can make banking more competitive and democratic to ensure community banks continue to compete with greater customer insights, relevant rewards programs and strong digital offerings.

When combined, these build on the customer service foundation at the core of community banking.

How One Small Player Beat Out PNC, Wells Fargo and M&T for PPP Loans

Banks took center stage in the U.S. government’s signature pandemic aid package for small businesses, the Small Business Administration’s Paycheck Protection Program.

But into year two of the program, a nonbank has emerged as one of the top three PPP lenders. The SBA listed Itria Ventures, a subsidiary of the online commercial lending platform Biz2Credit, on Feb. 28 as the No. 3 lender in dollar value in 2021, after JPMorgan Chase & Co. and Bank of America Corp. Not only that, it was the No. 1 lender, of the top 15, in terms of total loans approved. Itria Ventures was the direct lender for 165,827 approved loans in 2021 worth $4.76 billion. Unless Congress extends the program, it runs through the end of March. The SBA updates PPP statistics every Monday so the ranking could change.

As of Feb. 28, the SBA approved $678.7 billion in low-interest PPP loans this year and last year. The potentially forgivable loans have created enormous opportunities for banks to connect with small businesses and allowed financial technology companies to make inroads into the commercial loan market.

But the significance of an obscure-sounding online marketplace lender surging past the likes of household names such as PNC Financial Services Group, M&T Bank Corp. and U.S. Bancorp for PPP dollar volume and loans wasn’t lost on Joel Pruis, a senior director for Cornerstone Advisors.

The PPP gave a much-better opportunity to these fintech companies to get involved and it gave them the volume,’’ he says. “Prior to this, it’s been tough for them to get any type of material volume.”

During the pandemic, small businesses such as restaurants and retail shops that rely on fintech lenders fell on tough times, hurting platforms that then experienced double-digit loan delinquencies in some cases. OnDeck, a prominent online lender valued at about $1.3 billion during its initial public offering in 2014, sold to Enova International last year for about $90 million. Online direct lender Kabbage sold most of its operations for an undisclosed sum to American Express Co. last year.

Biz2Credit received some negative press last year as a merchant cash advance lender that sued some of its New York borrowers struggling during the pandemic. But the company is moving away from merchant cash advance products because the customers of those loans are small businesses struggling the most right now, such as restaurants, says Biz2Credit CEO and co-founder Rohit Arora.

Biz2Credit, which is privately owned and doesn’t disclose financial information, pivoted last year to quickly ramp up its PPP lending platform and partnerships, hoping to capitalize on what Arora anticipated would be a huge government rescue package. It generates business through referrals from the American Institute of Certified Public Accountants and its relationship with payroll provider Paychex, which has strong connections with small businesses.

It also white-labelled its PPP platform to banks and other lenders to process small business loans without the hassles of the paperwork and monitoring. Among its customers are major PPP lender Portland, Maine-based Northeast Bank, the 11th largest PPP lender in terms of dollar value as of Feb. 28.

Other technology companies seeing a surge in business due to PPP include Numerated, which provides a commercial loan platform for banks. Numerated processed nearly 300,000 PPP loans for more than 100 U.S. lenders, totaling $40 billion as of March 1. Cross River Bank, a technology-focused bank in Fort Lee, New Jersey, that works with fintech companies to offer banking services, also rose in the ranks of direct PPP lenders this year. The $11.8 billion bank ranked fifth with $2.5 billion in PPP loans.

Arora says the SBA’s constantly changing documentation, error codes and program rules were a headache for a bank but fit into Biz2Credit’s area of expertise as a technology company. It provided banks with one platform for both PPP origination and loan forgiveness, simplifying the lending process. Given the amount of work involved, Pruis says banks that chose to handle PPP lending on their own platforms have had a tough time, especially in the program’s first round of the loan program. “It was brutal,’’ he says.

Arora says Biz2Credit is perfectly suited for PPP for another reason: Most of its loans go to very small businesses, many of them sole proprietorships or operations with fewer than 20 employees.

These borrowers often don’t have a business banking relationship, pushing them into the arms of online lenders or small banks.

Small businesses have been especially hard hit by the pandemic. The Federal Reserve’s Small Business Credit Survey for 2021 found that 53% of respondents in September and October of 2020 thought their revenue for the year would be down by more than 25%. Of the 83% of firms whose revenues had not returned to normal, 30% projected they would be unlikely to survive without additional government assistance.

“This recession has been brutal for small business,’’ Arora says. “It’s a much-worse recession than the last one for small business.”

Top PPP Lenders for 2021 PPP

Rank Lender Name Loans Approved Net Dollars Average Loan Size
1 JP Morgan Chase 81,430 $6,048,741,297 $74,281
2 Bank of America 87,696 $5,339,101,618 $60,882
3 Itria Ventures LLC 165,827 $4,756,975,303 $28,686
4 PNC Bank 28,633 $2,877,088,585 $100,482
5 Cross River Bank 106,086 $2,511,524,537 $23,674
6 M&T Bank 15,507 $2,044,126,456 $131,820
7 Zions Bank 16,593 $1,982,086,510 $119,453
8 U.S. Bank 35,663 $1,914,171,309 $53,674
9 Wells Fargo Bank 44,861 $1,892,379,160 $42,183
10 TD Bank 21,833 $1,863,067,115 $85,333
11 Northeast Bank 17,255 $1,855,213,143 $107,517
12 KeyBank 14,791 $1,708,999,583 $115,543
13 Citizens Bank 26,544 $1,531,712,319 $57,705
14 Customers Bank 54,576 $1,405,437,610 $25,752
15 Fifth Third Bank 14,390 $1,333,769,118 $92,687

Approvals through 2/28/2021. Source: SBA

Banking KPI Insights: Year-End Metrics of Note

Executives can glean actionable insights from understanding the benchmarks and trends within key performance indicators, or KPI. Here were some of the highlights from 2020 to help you understand trends and benchmark your organization. 

Inhibited Earnings Capacity
The coronavirus pandemic, and the resulting changes in fiscal policy and economic behavior have measurably inhibited earnings capacity for most community banks. Bank balance sheets have grown principally due to government stimulus payments, limited capital investment by small and mid-sized businesses and a general flight to quality by consumers.

The fourth quarter of 2020 recorded continued strong capital levels — along with challenges in earnings growth due to historically low net interest margins. Expectations that the pandemic will persist well into 2021, assurances of continued government assistance and the continuation of low interest rates into the foreseeable future mean that change is unlikely in the coming months.

Return on Average Equity
Community bank profitability of 8.90%, in relation to average equity, was relatively stable when compared to the previous three quarters of 2020, as well as the fourth quarter of 2019. For most community banks, continued low interest rates, excess liquidity and limited loan demand all restricted profitability. In addition, cost reduction opportunities arising from technology investments and staff reductions appear to have stabilized. Loan loss provisions continued to be relatively low; credit quality remained favorable, in part due to the benefits of government stimulus.

Non-interest Income to Net Income
Non-interest income grew to 13.17% of total income during the fourth quarter of 2020, compared to an average of 11.60% for the trailing four quarters. This reflects the combination of continued downward pressure on net interest margin, which remained constant at 3.35%, and efforts to expand fee-based income, such as higher fee levels on deposit accounts. Given the Federal Reserve’s intention to keep interest rates low for the foreseeable future and the likelihood of tempered loan demand, this trend should continue throughout 2021.

Credit, Credit Quality
Credit demand for community banks continued to decline through the fourth quarter. Keeping in mind that that the second round of the Paycheck Protection Program (PPP2) didn’t launch until January 2021, the community bank space saw loan to deposit ratios decline to 74.15% at the end of 2020. This compares to 82.09% at the end of 2019, and an average of 79.4% for full-year 2020. The decline is somewhat muted by the first round of PPP (PPP1) loans issued by community banks, although the majority of PPP1 loans were issued by large banks.

Credit quality remains favorable, due to the benefits of government stimulus and limited loan demand. Nonperforming loans totaled just 0.53% of loans. Average loan loss allowance levels held steady at 1.30% of total loans at the end of 2020. In some instances, banks recaptured provisions for loan losses recognized during the first half of 2020.  We anticipate a more-normalized loan loss provision curve in 2021, subject to the duration of the pandemic, the effectiveness of government stimulus and fiscal policy.

Efficiency Ratio
Cost management continues to be a challenge. Notably, the benefits of technology investments have either been fully realized or limited due to the absence of loan demand. The operating inefficiency of branches in an increasingly virtual environment drove the largest increase in the industry’s efficiency ratio, from an average of 63.35% for the previous two quarters to 66.82% in the forth quarter of 2020. As community banks continue assessing the shift to digital banking and the emergence of nonbank alternatives, we expect more changes to branch networks and technology investments as a way to increase operating efficiency.

Merger and acquisition (M&A) insights
Certainly, 2020 represented the quietest year in recent history as to the number and size of community bank acquisitions. For the most part, both buyers and sellers paused to assess the strategic and economic value of deals, as well as to focus on the uncertainties and operational demands arising from the pandemic and the political and regulatory landscape.

We believe 2021 will represent the restart of the rapid consolidation of the community bank sector based on recent elections, the promise of an economic recovery fueled by continued government stimulus and a  successful distribution of vaccines. We believe more appealing pricing dynamics for both buyers and sellers will emerge as the economy stabilizes and small and mid-sized businesses  reopen. Lastly, the evolution of fintechs and the broader acceptance of these solutions by consumers, businesses and regulators will likely motivate community bankers to engage in targeted and strategic transactions.

Download the full KPI report
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The Coming Buyback Frenzy

Capital planning is examined as part of Bank Director’s Inspired By Acquire or Be Acquired. Click here to access the content on BankDirector.com.

The banking industry hasn’t been this well capitalized in a long time. In fact, you have to go back to the 1940s — almost 80 years ago — before you find a time in history when the tangible common equity ratio was this high, says Tom Michaud, president and CEO of investment bank Keefe, Bruyette & Woods, during a presentation for Bank Director’s Inspired By Acquire or Be Acquired platform.

That ratio for FDIC-insured banks has nearly doubled since 2008, he says, reaching 8.5% as of Sept. 30, 2020, says Michaud.

A big part of the industry’s high levels of capital goes back to the passage of the Dodd-Frank Act in 2010, the Congressional response to the financial crisis of 2008-09. Because of that law, banks must maintain new regulatory capital and liquidity ratios that vary based on their size and complexity.

During the pandemic, banks were in much better shape. You can see the impact by looking at the capital ratios of just a handful of big banks. Citigroup, for example, had a tangible common equity ratio in the third quarter of 2020 that was nearly four times what it was in 2008, Michaud says.

With a deluge of government aid and loans such as the Paycheck Protection Program, the industry’s losses during the pandemic have been minimal so far. The Federal Deposit Insurance Corp. has closed just four banks, far fewer than the deluge of failures that took place during the financial crisis. So far, financial institutions have maintained their profitability. Almost no banks that pay a dividend cut theirs last year.

Meanwhile, regulators required many of the large banks, which face extra scrutiny and stress testing compared to smaller banks, to halt share repurchases and cap dividends last year, further pumping up capital levels.

That means that banks have a lot of capital on their books. Analysts predict a wave of share repurchases in the months ahead as banks return capital to shareholders.

“The banking industry continues to make money,” said Al Laufenberg, a managing director at KBW, during another Bank Director session. “The large, publicly traded companies are coming out with statements saying, ‘We have too much capital.’”

Investors have begun to ask more questions about what banks are doing with their capital. “We see investors getting a little bit more aggressive in terms of questions,” he says. “‘What are you going to do for me?”

Bank of America Corp. already has announced a $2.9 billion share repurchase in the first quarter of 2021. In fact, KBW expects all of the nation’s universal and large regional banks to repurchase shares this year, according to research by analysts Christopher McGratty and Kelly Motta. They estimate the universal banks will buy back 7.3% of shares in 2021, while large regionals will buy back 3.5% of shares on average. On Dec. 18, 2020, the Federal Reserve announced those banks would again be allowed to buy back shares after easing earlier restrictions.

Regulators didn’t place as many restrictions during the pandemic on small- and medium-sized banks, so about one-third of them already bought their own stock in the fourth quarter of 2020, according to McGratty.

In terms of planning, banks that announce share repurchases don’t have to do them all at once, Laufenberg says. They can announce a program and then buy back stock when they determine the pricing is right.

Shareholders can benefit when banks buy back stock because that can reduce outstanding shares, increasing the value of individual shares, as long as banks don’t buy back stock when the stock is overvalued. Although bank stock prices compared to tangible book value and earnings have returned to pre-Covid levels, the KBW Regional Banking Index (KRX) has underperformed broader market indices during the past year, making an argument in favor of more repurchases.

Robert Fleetwood, a partner and co-chair of the financial institutions group at the law firm Barack Ferrazzano Kirschbaum & Nagelberg LLP, who spoke on the Bank Director session with Laufenberg, cautions bank executives to find out if their regulators require pre-approval. Every Federal Reserve region is different. Regulators want banks to have as much capital as possible, but Fleetwood says they understand that banks may be overcapitalized at the moment.

High levels of capital will help banks grow in the future, invest in technology, add loans and consolidate. For the short term, though, investors in bank stocks may be the immediate winners.