MARCH 10, 2017
The Financial and Service Opportunities of Digital Lending Technology for Community Institutions   
By Jeffrey Harper, President, BSG Financial Group

According to recent studies by both Goldman Sachs1 and Ernst & Young2, financial institutions stand to earn $30 billion in the next eight years by utilizing digital lending technology, which allows banks and credit unions to offer loans – for example, small business loans under $100,000 and consumer loans under $30,000 – online and in minutes from their website or via mobile phone. When contemplating this revenue opportunity, compare it to two decades ago, when NSF revenue tripled from $12 billion to $34 billion and interchange grew $6 billion to $18 billion between 2000 and 2010.

Online lenders like LendingClub and Prosper have capitalized on this market opportunity and have grown handsomely by offering the convenience of applying for loans digitally and getting funds quickly. Their focus on automating the lending process has helped them:

  • Outpace bank and credit union lending3

  • Capture the majority of unsecured consumer loans in 2015

  • Double their outstanding portfolio balances every year since 2000

The dramatic success of non-bank lenders, in fact, led industry advisory firm Bain & Company to say, “Banks need to accelerate investments in digital lending if they are to avoid a material decline in profits and loss in market share.” Likewise, consulting firm McKinsey & Company declared that financial institutions that do not adopt a digital lending solution could lose 60% of their retail and small business profits to non-bank entities in the next five years. 

Technology Changes Everything
With digital lending, traditional loan profitability scenarios do not apply. For the past 20 years, many community institutions stopped making these loans altogether, because the cost to underwrite and service them far outweighed the income to be earned. Despite the fact that customers needed the money, it was simply not profitable, forcing account holders to seek the funding elsewhere, such as from a credit card, an alternative lender or even a competing institution. 

Online lending technology changes the profitability scenario by streamlining the entire lending process – from application and underwriting to set up, review and renewal – via an end-to-end technology platform. Automating the lending process in this way can reduce the expense of processing and managing a loan from approximately $2,4004 to $1005 or less. These efficiencies can give an institution the opportunity, with only minimal effort, to re-capture loans previously lost to other funding sources, while improving customer service and reducing costs.

Additionally, with the right digital lending platform, the institution is able to utilize its own underwriting and risk-rating standards to manage risk and security. And because the institution controls the technology, it is able to keep all of the loans on its balance sheet as working assets, unlike partnering with fintech companies that typically retain ownership of the loans.

The financial opportunity that digital lending technology provides gets even better when you consider that in addition to garnering new loans and customers for your institution, it can also assist with managing existing loans. This added benefit is significant considering financial institutions currently hold more than $250 billion in small business debt that could easily and efficiently be renewed or refinanced using a consumer-friendly and efficient digital solution.

Digital is Key
Meeting consumers’ ever-increasing digital demands with an online lending solution just makes sense. A study by MagnifyMoney found that financial institutions with the highest digital adoption scores grew their assets 16 times faster than those less likely to adopt new digital technologies.

Further, banks that score highest in digital excellence measurements have reaped the lion’s share of financial rewards, according to BCG Perspectives in its 2016 Retail Banking Excellence (REBEX) benchmarking study. The report cited a 50% higher average pretax profit per customer than the median, while operating expenses per customer were 30% less. These impressive numbers are probably why more than 70% of financial institutions worldwide say that redesigning or enhancing the customer’s digital experience is one of their top three strategic priorities in 2017.6

Today’s consumers, especially millennials, seek easy, quick solutions. They use their phones to
accomplish the majority of their daily activities, and they will readily switch banks if they have a poor digital experience. With digital lending, your institution can reap the financial rewards of offering accountholders the ability to apply and get approved for the funds they need from their internet-enabled phone or desktop computer... anytime, any day, and all in less than three minutes.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Financial Managers Society.



4  BAI Banking Strategies (

5  R.C. Giltner & Associates, LLC

6 Digital Banking Report (

About the Author

Jeffrey Harper, President, BSG Financial Group
Jeffrey Harper brings more than 25 years of industry experience to his position as president of BSG Financial Group, where he heads up the Sales and Marketing divisions of the company.

FEBRUARY 15, 2017
Analyzing Your Institution’s Portfolio Risk Within Your ALLL  
By  Jamie Buzzerio, Sageworks

The allowance for loan and lease losses (ALLL) for financial institutions is typically viewed as a compliance requirement, with a prominence in external audits and examinations that demands that calculations and data be scrutinized to ensure accuracy and transparency. However, astute institutions should also consider evaluating how the information contained within this allowance function can be leveraged for other strategic insights. 

For example, the following four scenarios are ways that management can use existing allowance-calculation data to better understand the risk in their portfolio and provide even more risk intelligence.

Track movement of loans by segment
to identify trends in portfolio growth
Institutions can review growth patterns of the loan portfolio by looking at their segments and by reviewing their balances. If a specific segment has grown significantly, the institution can begin to identify and document the reasons for changes in loan demand and supply. 

On its own, this data may not tell the institution precisely where to focus its growth efforts, but it can certainly be a starting point in understanding where lenders are seeing the most success, or perhaps where the most time and resources are being allocated. If the results do not align with management expectations, the lending strategy may need adjustment. 

This type of analysis can also be extending to cover trends in delinquencies, restructuring of problem assets and concentrations. In combination with growth patterns, these trends show where the institution’s growth has been healthiest.

By collecting and archiving loan data each period, all of this information is available for detailed review and trend analysis. The more granular the data (i.e., monthly instead of quarterly) the faster the institution can begin to identify critical trends, and it goes without saying that the integrity and accuracy of the data are paramount. 

Measure overall asset quality
Asset quality indicators that are used in loan-level ALLL calculations can also be used as a benchmark for portfolio credit quality over time and for comparison to peer institutions. A few commonly used ratios that capture portfolio performance as it relates to the allowance include:

■ Allowance to Total Loans
■ Allowance to Net Losses
■ Allowance to Nonaccruals
■ Recoveries to Total Loans
■ Net Losses-Earnings Coverage Ratio
■ Nonaccrual Loans to Total Losses

Details from the ALLL and benchmarks like these are an important part of the management reporting process, and can provide clues to both the board and examiners regarding the health of the institution. 

During the business cycle, the collectability of certain loans may change in light of changing economic conditions. If an institution grants loan concessions without accurate exception reporting as part of ALLL, what will happen if those loans take a turn for the worse? The loss needs to be recognized immediately, as opposed to reserving specific dollar amounts over an allocated period of time. This is where the FASB’s current expected credit loss (CECL) model becomes relevant, by requiring institutions to set reserves for the full life of their loans.

Evaluate loss experience to identify trends

Begin by reviewing charge-offs based on different characteristics, such as location, NAICS, MSA, loan size, type of loan or loan officer. Because charge-offs and recoveries are tracked quarterly, if not monthly, this information is available for use in different reports. Information from the pooled loan summary can allow an institution to use these specific charge-off characteristics to examine the loan portfolio in more detail as such:

■ The location and size of charged-off loans can help determine which geographic areas may be presenting the most issues, as well as the extent of those relationships
■ Segment data can reveal if a certain concentration is causing more issues than others 
■ Loan officer information can highlight if individuals are making riskier loans and how rates are priced based on risk

Loans should also be reviewed by segmentation to determine which loans show the best source of repayment. This includes the review of workout experiences and loan liquidations, which can help in evaluating expected recoveries, as well as enhancing future lending policy and potential covenants for new loans.

Create a stress test to bolster the institution’s risk management framework and supplement ALLL
An institution estimating loss rates by pool within the allowance can use these loss rates as the framework for portfolio-level or top-down stress tests, with existing loss rates as the baseline scenario. With data from the ALLL, the institution can: 

■ Stress test the ALLL to ensure adequacy of the allowance
■ Identify key factors used for stress testing
■ Modify qualitative adjustments
■ Provide supporting documentation 
■ Expand concentration stress testing

Risk can be identified by understanding trends and shifts in loan concentrations, delinquencies and other areas. Understanding the risk in a portfolio will help the institution modify its lending strategy, whether by a shift in concentration or an overall policy change.

Loss experience and historical data that is collected as part of the ALLL can provide direction for an institution’s credit risk analysis and subsequent action plans for risk management. In addition to these specific exercises, a data-driven ALLL also improves data-collection practices at the institution, a strength that will be all the more important under the coming CECL model.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Jamie Buzzerio, Senior Risk Management Consultant, Sageworks
Jamie Buzzerio is a senior risk management consultant at Sageworks and is responsible for working with financial institutions with their ALLL and stress testing processes. Jamie has twenty years of experience in the financial industry, and has served in a VP role for several positions as an impairment manager, credit administration manager and portfolio manager.

FEBRUARY 2, 2017
FOMC opts to hold steady amid improving conditions  
By Robert B. Segal, CFA, Atlantic Capital Strategies, Inc.

Following a two-day policy meeting in Washington, Federal Reserve officials unanimously held their benchmark rate steady in a range between 0.50% and 0.75%, while noting in a statement some recent improvements in the economy.

The Fed provided little direction on when it might next raise borrowing costs, as officials debate the impacts of policy changes with the new administration. The central bank currently projects three rate hikes for 2017, though committee members differ on how proposed tax cuts and regulatory changes may boost growth and inflation.

Looking Ahead
“Measures of consumer and business sentiment have improved of late,” the Federal Open Market Committee said in its statement Wednesday. Policy makers reiterated their expectations for moderate economic growth, “some further strengthening” in the labor market and a return to 2% inflation.

The FOMC also repeated that it anticipates interest rates will rise gradually. The statement said job gains “remained solid” and the unemployment rate “stayed near its recent low,” a tweak from December’s language that the rate “has declined.”

“Inflation increased in recent quarters but is still below the committee’s two percent longer-run objective,” the Fed said. Market-based measures of inflation compensation are “still low,” the central bank said, after suggesting in December that such measures had “moved up considerably.”

The committee left unchanged its stated intention to continue reinvesting its maturing debt holdings until “normalization” of the benchmark rate is “well under way.” The Fed’s balance sheet stands at about $4.5 trillion.
Fed Chair Janet Yellen, who didn’t have a press conference scheduled after this meeting, will have the opportunity to discuss the decision further during her semiannual monetary-policy testimony to Congress in mid-February. The FOMC next meets on March 14-15.

Before the latest statement, investors saw a roughly 38% chance that the first rate increase of 2017 would come at the Fed’s March meeting, based on trading in federal funds futures. The odds rose to about 52% for the subsequent gathering in early May and 75% for mid-June. The market forecast is currently calling for two hikes in the next two years and one in 2019. This would bring the overnight rate to 1.12% for December 2017, 1.62% at year-end 2018 and 1.87% for 2019. 

Tough Decisions
With bond yields still near historic lows, investors in fixed-income securities face a dilemma. Short-term bonds offer sub-par yields, but provide reinvestment opportunities in a rising rate environment. On the other hand, longer-term bonds secure a higher yield, but present larger losses if market rates rise.
Ten-year Treasury notes currently yield about 2.50%, not a great return given the interest rate risk in holding the security over the next decade. If yields were to climb 100 basis points to 3.50%, the price would drop almost 9%.  In this scenario, a five-year Treasury issue yielding 1.9% would lose 4.6%, and a 1.2% two-year note would drop 2%.  Even if bonds are held to maturity, experiencing price losses only on paper, the investor still foregoes the opportunity to earn higher returns if yields rise. 

The opposite would occur if rates fall, resulting in a sharp rally and producing sizeable unrealized gains. If this were to happen, the investor benefits from having locked in above-market yields. The investor is faced with the challenge of managing a portfolio structured to perform in either scenario.

One solution is to create a “bond ladder.” A laddered portfolio consists of securities that mature in successive years, starting in a few years and extending out to five years or longer. Assembling a stable basket of cash flows avoids locking in all of one’s funds at “low” yields, while enabling the investor to pick up some additional income. 

The benefit of a ladder is that as rates move higher, bonds coming due in the near term can provide funds for reinvestment when the alternatives may be more attractive. Depending on the investor’s preference and individual situation, the principal can be put to work at the desired maturity. If current yields are higher than the bonds rolling off, the investor is able to increase overall returns and boost portfolio performance.

At the close of every year, it seems the market prognosticators predict higher rates for the ensuing twelve months. Heeding these warnings, many investors flock to ultra-short-term bonds, sacrificing income. According to academic studies, by investing the bulk of the portfolio in short-term, low-yield bonds, investors are exposed to a different risk over time: earning low yields. There is an opportunity cost of sitting at near zero and waiting for higher rates, as the conventional wisdom about bonds does not always play out. Just as a well-balanced portfolio consists of several types of investments, so too should it contain a well-structured schedule of maturities.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Robert B. Segal, CFA, Founder/CEO, Atlantic Capital Strategies, Inc.
Robert B. Segal, CFA is founder and chief executive officer with Atlantic Capital Strategies, Inc. Bob has been in the banking industry since 1982, having worked in several community banks with roles in mortgage banking, sales and trading, and asset liability management. He is a frequent speaker at industry events and contributes to many regional and national finance publications. His firm provides investment advisory services to community-based institutions. Bob can be reached at or 781-276-4966.

FEBRUARY 2, 2017
The Business Case for Streamlined Reconciliation   
By Eric Werab, Global Product Line Manager, Financial Control Solutions, Fiserv

How much time have you wasted attempting to manually combine spreadsheets and data from across your institution? Hours? Days? Weeks? With today’s digital resources at your fingertips, would you even consider spending hours manually searching through printed documents to ensure you have an accurate view of the balance sheet? Think about it. You don’t manually search through a catalog to find books at the library or wait two weeks to develop film from a camera. Why would you still use an outdated method for reconciliation? 

Yet more than half of North American companies surveyed in a 2016 study by the Financial Executives Research Foundation still reconcile accounts manually. The same study also uncovered the amount of time spent on this pursuit – accounting and finance managers work an average of 46 hours per week, peaking at month- and quarter-end. Respondents reported that trying to modernize systems to allow existing workers and resources to do more with less, harvest data and create efficiencies with technology are among the most common challenges facing senior-level financial executives today.

These challenges certainly come into play for community institutions. CFOs and finance professionals need to have access to a single view of an accurate and updated balance sheet at any given time. However, multiple systems and various teams managing the reconciliation process can cause delays and allow for human error across the accounting record.

Automating and streamlining the reconciliation process, on the other hand, can save valuable time and increase the likelihood that errors are identified and rectified quickly. Implementing a robust, accurate reconciliation process also ensures that organizations have the ability to stay ahead of the competition and remain compliant with industry requirements, while continuing to deliver a high level of service to customers.

So where do you start building a business case to achieve these potential benefits?

Step 1 – Determine the Total Cost of Manual Processes
The first step in implementing an automated reconciliation process is to realize the true projected cost for a manual system, which includes not only hard costs, but also the soft costs associated with maintaining the status quo. 

One of the easiest hard costs to quantify is the cost of the manual work required to compare and reconcile data from different systems, manage the exceptions and certify the results. To do so, most organizations will start by calculating the number of hours spent on reconciliation each month, time that typically includes allocations to some or all of the following activities:

■ Collecting and aggregating data from
   multiple systems
■ Preparing reconciliations
■ Matching balances and transactions
■ Managing exceptions
■ Printing reconciliations
■ Reviewing and approving reconciliations
■ Tracking approvals
■ Reporting on approvals status
■ Retrieving reconciliations for auditors

Once the total number of hours is calculated, it is multiplied by twelve to represent hours for an entire year period and multiplied by the average fully loaded cost (salary plus benefits) of a full-time-equivalent (FTE) employee working on the reconciliation and certification process. This calculates the annual hard-dollar expense (labor) of managing the current process.

After this calculation, other hard-dollar costs – including write-offs due to unresolved exceptions, annual audit fees and document storage fees – should be added in. Together, the sum gives the institution a good snapshot of the current hard costs of the process. This calculation should also include estimates of softer costs such as the cost of errors, late closings or the costs related to being out of compliance with corporate policies, industry financial standards or having to reissue financial statements to the market.

Step 2 – Outline the Benefits of Implementing an Automated Solution
Once the cost of the current approach has been fully tabulated, the next step is to understand the potential advantages of moving to a more modern, end-to-end reconciliation solution. The ability to bring transaction-level and balance-level data together in a single system allows the institution to see detailed information on why exceptions have occurred and how they can be resolved. Workflows are used to fully automate the process, including a series of automated checks that ensure organizations remain compliant with corporate and industry requirements. 

By automating the end-to-end reconciliation process, companies can quickly and cost effectively track exceptions through to resolution, and realize the following potential benefits:

■ Major increases in operational efficiency from centralizing the reconciliation process through a single service model
■ More accessible, accurate and compliant balance sheets
■ Reduced compliance and reputational risks
■ A better customer experience, thanks to an effective, real-time service whenever they demand it
■ A focus on more profitable activities throughout the organization, thanks to the time saved on closings, exception management, routine compliance and financial governance activities
■ Though harder to quantify, an increased level of confidence among staff and executives, thanks to the greater accuracy of the institution’s financial reporting

Step 3 – Choose the Right Technology
and Partner
Step 3 – Choose the Right Technology and Partner
Individual systems often contribute to disjointed reconciliation processes, which is why choosing a technology solution to combine all of them, including the general ledger system, is vital. The solution an institution chooses needs to meet the demands of providing a single version of its accounting records.

In addition, ongoing reconciliation management will require updating from the management of manual processes. Reconciliation specialists from across the business should establish a set of rules that remain consistent across all aspects of the reconciliation process, and define these rules using comprehensive process templates to ensure clarity and transparency across the entire business.  

The scope of a reconciliation system and the scalability of the model are additional factors to consider. The flexibility to meet any change in transaction size is essential, as is having the ability to easily integrate new acquisitions or business lines into the system. 

Finally, the solutions partner an institution ultimately chooses should be one that focuses on client feedback and market trends, caters to the individual challenges and needs of the institution and continues to make significant investments in its product line.

The culmination of this process should ultimately be a more efficient, accurate and standardized end-to-end reconciliation process for your institution, ensuring streamlined operational efficiency and regulatory compliance. 

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Eric Werab, Global Product Line Manager for Financial Control Solutions, Fiserv
Eric Werab is Global Product Line Manager for Financial Control Solutions at Fiserv. He works with global clients to understand their internal control needs and directs Fiserv strategy for reconciliation and financial control solutions to meet these needs.

DECEMBER 15, 2016
No Surprise: FOMC Makes Long-anticipated Rate Move, Hints at More to Come  
By Robert B. Segal, CFA, Atlantic Capital Strategies, Inc.

As expected, the Federal Reserve raised its benchmark short-term interest rate for the first time in a year, pushing up the federal funds rate by a quarter percentage point to between 0.50% and 0.75%. Fed officials said an improving economy was ready for higher borrowing costs, pointing to “solid” job gains, as well as rising inflation and consumer spending.

“The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2% inflation,” the Federal Open Market Committee said in a statement. In new language in its statement, the Fed said the rate increase came “in view of realized and expected labor market conditions and inflation,” a sign officials see the labor market as close to, or at, full employment.

In a press conference following the announcement, Fed Chair Janet Yellen said the decision to raise rates “is a vote of confidence in the economy,” noting that she doesn’t see the central bank as behind the curve. She added that policy continues to be supportive to a moderate degree and inflation is still operating below the Fed’s 2% objective. 

The Fed’s economic projections for the coming years were generally rosier than the last batch in September, with inflation expected to rise from 1.5% in 2016 to 1.9% in 2017 and to its target of 2% by 2018. Officials also see the jobless rate falling to 4.5% next year and remaining there through 2019, while expecting the economy to expand at a median annual pace of 1.9% this year and 2.1% in 2017, a slight improvement from the September outlook.

The Fed continues to expect “gradual” rate increases, the statement said, although forecasts suggest it sees rates rising faster next year than previously thought. Officials anticipate the median fed funds rate to be 1.4% by the end of 2017, according to the projection of 17 officials. By their estimates, the fed funds rate would reach 2.1% at the end of 2018 and 2.9% in 2019. That implies three quarter-percentage-point interest rate increases over each of the next three years – a faster pace than officials projected in September, when they only saw two rate increases next year.

The market forecast is calling for two hikes for the next two years and one in 2019, which would bring the overnight rate to 1.12% for December 2017, 1.62% at year-end 2018 and 1.87% for 2019. Further out on the curve, the benchmark 10-year Treasury note traded recently at 2.5%, compared with 2.3% at the end of last year; similar figures for the 5-year note are 2.0% and 1.8%, respectively.

In this environment, many bank treasurers are contemplating the optimal strategy for deploying assets, whether to put on longer-term fixed-rate investments which pay a higher coupon or add floating-rate instruments which would benefit if rates rise. They are also thinking about the cheapest way to borrow over the long haul.

For example, an investment officer may be considering two investment options: a five-year fixed-rate note yielding 2.5% or a similar term floating-rate bond priced at 90-Day LIBOR (0.96%) plus 60 basis points, for a current yield of 1.56%. If the market forecast is correct, the yield for the floating-rate bond will increase 50 basis points over the next two years, and by 25 basis points the following year, reaching 2.81% by December 2018. By contrast, the fixed-rate option will have yielded a constant 2.5% for the same time frame. Assuming an investment of $1 million, the fixed-rate bond provides interest income of $75,000 over the three-year time horizon, compared with $64,300 for the “floater.”

A similar analysis can be used for wholesale borrowings. Short-term funding (one week) from typical wholesale sources was recently quoted at 70 basis points. Again assuming the market forecast, this rate would edge up in 25-basis-point increments every December, while the cost for fixed-rate five-year funding from these same sources is about 2.2%. Therefore, the expense for borrowing $1 million on a short-term basis for the next three years would be as follows: $9,950 for 2017, $14,950 for 2018 and $18,700 for 2019. The amount of interest expense totals $43,600, compared with $66,000 for the fixed-rate advance, for a savings of $22,400.

Most institutions still need to generate interest income, and a large allocation to floating-rate assets could impact earnings. Even though the yield curve has flattened, fixed-rate assets should still provide higher levels of current income than floating-rate alternatives for the foreseeable future. On the other side of the balance sheet, locking in term funding appears expensive at this time, especially when every dollar of net interest income is precious. Of course, every institution should consider its asset-liability position when making these decisions and bank treasurers should continue to maintain robust risk management practices, making efforts to keep interest rate risk exposure at reasonable levels.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Robert B. Segal, CFA, Founder/CEO, Atlantic Capital Strategies, Inc.
Robert B. Segal, CFA is founder and chief executive officer with Atlantic Capital Strategies, Inc. Bob has been in the banking industry since 1982, having worked in several community banks with roles in mortgage banking, sales and trading, and asset liability management. He is a frequent speaker at industry events and contributes to many regional and national finance publications. His firm provides investment advisory services to community-based institutions. Bob can be reached at or 781-276-4966.

DECEMBER 13, 2016
FMS Quick Poll: Biggest Challenge in 2017 
By Financial Managers Society

As the New Year approaches, many FMS members are likely grappling with one or more specific challenges facing their institution in 2017. And if their situations are anything like the more than 130 members who participated in our recent Quick Poll, chances are the single biggest challenge they have in mind is somehow tied to the quest for higher margins and additional income.   

Of the 132 respondents in the poll – 113 from banks and 19 from credit unions – a whopping 47% saw the task of increasing margins and generating income as number one on their to-do list for 2017. In a distant second place (and, in all likelihood, closely aligned with margin concerns anyway) was interest rate risk and uncertainty, checking in as the biggest challenge for 14% of poll respondents. Compliance and regulatory concerns, always a perennial favorite, logged a respectable 11%, while increased competition from both traditional and non-bank entities, cybersecurity issues and the cost and pace of technology advancements rounded out the major categories at 9%, 6% and 5%, respectively.    

FMS Quick Poll

Responses were fairly consistent between both banks and credit unions, as well as across all asset levels, with a few notable exceptions. For example, increased competition seemed to be a bigger concern among credit unions, with 16% of those respondents identifying it as the top challenge, compared to just 9% of banks. On the other hand, credit unions don’t appear to view technology demands or cybersecurity threats as a major concern, with none of the 19 respondents identifying either category as their top challenge for the year ahead. 

In terms of asset size, meanwhile, responses were once again fairly uniform, although perhaps not surprisingly compliance and regulatory demands represent a much more formidable challenge for the smallest institutions, with 24% of those in the sub-$250 million crowd tabbing regulatory burden as their number one concern for 2017 (compared to 11% for all respondents). Also, interest rate risk and uncertainty was seen as a bigger challenge among those institutions in the $250-$499 million and $500 million-$1 billion ranges at 18% and 20%, respectively, than to those on the lower (sub-$250 million) and higher (greater than $1 billion) ends of the scale, at only 9% each.      

Of course, not every survey participant saw his or her greatest challenge among the six outlined in the Quick Poll.  Among the 8% of respondents who chose to think outside the box and select “other,” some of the additional challenges they expect to face heading into 2017 include:

◾ Merger integration 
◾ Succession planning
◾ Expense containment
◾ Organic growth
◾ Branch structure rationalization
◾ Deposits and funding

In addition to identifying their greatest challenge, many participants took the time to explain why they opted for the choice they did, and this is where the responses in each category took on some added color. Among the more illuminating comments were the following: 

“Trying to place a bet in the budget on the way long rates will go as post-election noise quiets down is a guess at best. We were optimistic with the Fed move last year and budgeted for a modest increase in rates in '16. We know how that story played out. As a result, tight margins are still going to be a challenge heading into '17.”
CFO, $813 million bank

“I could have easily chosen the quest for higher margins and additional income or the increased competition from bank and non-bank entities, but the resources we now commit to compliance and regulatory demands continue to be our biggest challenge.”
CFO, $406 million bank

“The spread continues to be a challenge, especially with the potential for a rising-rate environment coupled with the cost and pace of technology advances and compliance and regulatory demands.”
CFO, $215 million credit union

“We’ve had tremendous loan growth and anticipate the same for 2017, but we have not had the same growth in core deposits. We will be looking for creative deposit-gathering initiatives and using wholesale funding sources more than we have in the past.” 
CFO and SVP, $605 million bank

“It is becoming difficult to compete just by growing organically. In order to grow, we will have to acquire a bank.”
EVP, COO and CFO, $278 million bank 

“Mitigating cybersecurity issues is a constant battle and you never know if you’ve covered all of your bases, so you need to just keep throwing resources at the problem and keep your fingers crossed that it is enough.”
SVP and CFO, $951 million bank

“I really wanted a box for ‘all of the above.’"
CFO, $1 billion bank

Thanks again to everyone who participated in our latest Quick Poll.

OCTOBER 26, 2016
Three Approaches to Small Business Lending that Drive Growth
By Mary Ellen Biery, Research Specialist, Sageworks

Business lending has been an important source of growth for banks and credit unions since the financial crisis, and it will continue to be a critical driver in the quarters ahead. In a September 2016 survey of bankers, 81% indicated that CRE and C&I will be their focus for growth.

Given the current market’s pressure to ‘grow or go,’ many banks will look toward loan growth, which is seen by many banks as a way to scale, helping them outpace rising costs of compliance while expanding their reach into their communities. Financial institutions effectively growing their business loan portfolios are tapping into an underutilized opportunity for loan growth – loans to smaller businesses – and are implementing changes that transform the customer experience.

Loans to operating businesses have historically tended to flow toward larger institutions. But financial institutions focused solely on large commercial loans are missing an immense opportunity to grow the loan portfolio and retain or attract customers. Large enterprises make up less than 1% of the nearly 29 million businesses in the U.S. Most businesses are actually sole proprietorships or small businesses.

“Small businesses don’t want to go to online lenders, but it’s easier for many of them and they often can get the money quickly,” says Peter Brown, a senior consultant at Sageworks. “There’s a huge opportunity because those small businesses need funding, perhaps more than many other businesses.”

Common Approaches Driving Growth
Institutions already growing their commercial loan portfolios profitably are doing so by taking action to upend some of the traditional pain points – for the borrower and the lender – related to business lending. These three approaches, often driven by technology, can offer a better customer experience.

1. Speed of application
Technology is helping institutions make the application process faster and easier for borrowers while streamlining the underwriting process for the financial institution. For example, file-hosting technology allows applicants to share electronic files of supporting documentation for loan applications, and electronic signatures also move the process along more quickly. A new technology for banks and credit unions can automatically import financial data from electronic tax returns directly into the loan application. This saves the borrower from time-consuming and error-prone data entry while simultaneously transferring the necessary information into the bank’s system for credit analysis, loan administration and life-of-loan management.

2. Faster decisions and transparency
The search costs involved in small business lending are high for both borrowers and lenders. In recent years, financial institutions have streamlined loan approval processes by implementing technology that automates credit analysis, decisioning and the annual updates to financial statements of current borrowers. Even if the application process has been streamlined as described above, the decisioning stages can also be expedited to increase turnaround times for borrowers.

With loan decisioning technology, the institution can choose how much of the process to automate while still maintaining and supporting the human element provided by experienced analysts. For example, with the right technology and process in place, lenders can be responsible for much of the application process, and with that information in the system technology can make a recommendation for approval, rejection or further review. For smaller exposure loans, these efficiency gains mean the institution’s trained analysts are focused on the loans or borrowers that most demand their attention, and business borrowers benefit from faster loan decisions and a more transparent process.

3. Competitive rates
Pricing a loan to match a competitor’s rate may win the new business, but financial institutions understand that doing so can come at a huge cost if the institution doesn’t take into account the risk level and whether the loan will meet the institution’s profitability goals. Technology makes lending operations more efficient and scalable and can provide greater insight into which changes to rates, fees or terms are advantageous to both the borrower and lender.

Financial institutions growing their commercial portfolios profitably use technology to provide superior customer experiences while fundamentally changing the risks and costs associated with lending to businesses. These institutions that have the ability to underwrite smaller loans to businesses efficiently and accurately stand to tap into important growth markets while more effectively meeting the needs of current members and clients.

Technology in these cases doesn’t replace the relationship that a financial institution has with a business borrower; rather, the goal is to replace the administrative touches. In doing so, lenders, relationship managers and portfolio managers can spend more time talking to customers about their needs rather than the administrative requirements for the institution.

After all, the customer doesn’t care about the institution’s administrative requirements – that small business just wants its money.

1 “Sageworks Summit Poll: CRE loans top focus in loan portfolio”, 10/4/2016.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Mary Ellen Biery, Research Specialist, Sageworks
Mary Ellen Biery is a research specialist at Sageworks, where she produces accounting and banking content for the company’s blogs and websites, as well as for other outlets. She is a veteran financial reporter whose work has appeared in The Wall Street Journal and on Dow Jones Newswires,,, and other sites.

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