Streamlining Systems


How software automation can and shouldn’t change business lending

By Howard Schneider

We don’t want to automate too much,” says Jon Aarsvold, senior vice president and commercial finance risk manager at Bell State Bank & Trust, a $3.1 billion-asset community bank in Fargo, N.D. “Then we’d turn into a big regional bank.”

Maintaining “the personal touch” when working with business customers is important to community banks, Aarsvold explains, and it can make them “hesitant to centralize” their lending process. Software automation also can be challenging because for commercial bankers “every deal is fairly unique,” he adds.

Yet Bell State Bank is four months into the process of selecting a commercial loan software processing system. Aarsvold expects whatever system the bank selects to generate efficiencies without disrupting customer relationships.

At first, Bell State Bank investigated the possibility of developing a commercial lending system in-house. But Aarsvold says the decision quickly was made to look at vendors offering flexible systems that let community banks alter the software to fit their particular operational needs. He anticipates such software to provide three benefits:

Improved data integrity. Inputting loan information just once will prevent errors from creeping in over time. Pipeline reporting and portfolio analytics are easier to perform when loans are in a database, rather than paper files.

Fast loan processing. For instance, information on other loans a potential borrower already has with the bank will be pulled automatically and inserted in the loan presentation. Missing documents also will be highlighted during loan processing to help ensure that closing occurs on time.

Easier loan maintenance. Once loans are issued and on the books, automation should remind community banks when new financial statements need to be gathered from borrowers, or when collateral appraisals should be updated.

Manage the Process

Most of Bell State Bank’s commercial lending practices won’t change due to software automation, Aarsvold emphasizes. Loan committees will continue to make credit decisions, along with structuring and pricing deals. But maintaining the bank’s $2.7 billion commercial loan portfolio requires making 2,000 credit decisions annually, he estimates. Automation should simplify this process by establishing unique workflows for each loan product the bank offers.

Bell State Bank is focusing on automating its back office because those operations already are centralized. Rolling out a new origination system across a branch network presents more challenges to get technology and staff working together.

“We don’t want to automate too much. Then we’d turn into a big regional bank.”
—Jon Aarsvold, Bell State Bank & Trust

Community banks tend to use automation more in retail lending, because most credit card or mortgage applications tend to be underwritten and processed similarly, Aarsvold points out. Business lending has more variables, however. Legal entities ranging from sole proprietors to Subchapter C and S corporations are involved. Collateral varies for each deal, and loans are set up differently depending on borrower needs.

Once Bell State Bank selects a commercial lending software system, Aarsvold expects six months will be required to get the system up and running. Smaller community banks selecting off-the-shelf lending software should have shorter implementation periods.

With the system installed, Bell State Bank’s managers should be able to easily examine both individual loans and their entire portfolio. But adding automation to commercial lending doesn’t have to encompass an end-to-end solution. For some community banks, processing bottlenecks can be alleviated with simpler systems that perform a single task. Imaging software can give branches desktop access to all loan files, for example.

New Loan Products

Commercial lending software should also make it easier for community banks to offer unique products. The First National Bank of Long Island, a $2.8 billion-asset community bank in Glen Head, N.Y., is relying on automation to roll out a new business loan through its 40-plus branches. Small businesses with up to $2 million in annual sales can borrow as much as $250,000 with a personally guaranteed loan from the bank, says Richard Kirk, an executive vice president for the bank. Medical practices are a prime candidate for this new product, he notes.

“Automation is the only thing that’s going to make us more efficient.”
—Richard Kick, The First National Bank of Long Island

For these particular lower-dollar commercial loans, the bank is using software to analyze applicants’ financial data to reach credit decisions. Loan officers aren’t necessary for these particular loans, which typically are originated by assistant branch managers. Customers can choose whether they opt for credit lines, term loans, or a hybrid of the two, Kick says. Loan approvals are based on FICO scores, and decisions are reached “same day or next day,” he adds.

Kick says quick decisions are a prime selling point of The First National Bank for these $250,000 loans, and automation helps ensure approvals are timely and consistent. Offering a “uniform customer experience” across a branch network is another big plus a software-driven approach can provide.

Kick acknowledges these loans have “empowered branches” by allowing them to make fast credit decisions to some of their best customers. Yet managers also know all loan decisions follow underwriting guidelines established in the software.

After 18 months with its new commercial lending software, The First National Bank of Long Island has $20 million in commitments under the innovative loan program, according to Kick. He says the software is used to originate consumer and home equity loans as well.

“Automation,” Kick contends, “is the only thing that’s going to make us more efficient.”

Howard Schneider is a financial writer in California.