By employing high- and low-tech solutions, community banks can boost their commercial and industrial loan profitability.
By Beth Mattson-Teig
Community bankers are finding that realizing better commercial and industrial (C&I) loan profitability involves using a combination of both new technology and traditional practices.
“C&I lending is this shiny object that I think a lot of community banks want,” says Drew Saito, a senior vice president at $680 million-asset First Green Bank in Orlando, Fla. While some banks are looking to technology as a quick, turnkey solution to increase C&I loan production and improve profitability, he says, “I think it’s a careful balance of the right tools … and good old roll-up-your-sleeves work.” Investing in both technology and experienced people is a long-term game plan to improve efficiency and profitability.
On the tech side, community banks are finding more tools at their fingertips that can increase efficiencies throughout the entire loan process. They range from custom solutions to off-the-shelf software that includes online loan application platforms, approval and documentation software, and CRM systems designed to assist in developing new business.
“Smaller banks like ours now have the ability to compete [for C&I business] with the largest banks in America and worldwide, and that is because technology has evened the playing field,” says John M. Tolomer, president and CEO of The Westchester Bank, an $800 million-asset community bank based in White Plains, N.Y. “Many of the banks of our size are able to meet the credit needs but also handle the non-credit needs, such as cash management and scanning technology.” As a result, C&I customers are more apt to do business with a small bank because they receive more personal service, along with access to the same products and services larger banks offer.
Tech solutions can improve both loan production and loan management. Commercial loan operating systems essentially create a loan-processing engine that automates each step of the loan process, taking an online application through underwriting and funding. Loan-management tools perform tasks such as renewals, collateral evaluation and covenant monitoring. “Over the past five to six years, we have seen a lot of interest from the community banking sector in how to create efficiencies and increase profitability [throughout the entire lending process],” says Patrick True, senior risk manager for commercial lending solutions at ProfitStars, a software and technology provider.
The real value of using tech solutions for most community banks is that they create workflow efficiencies in the loan process and provide better access to supporting data that allows lenders to make decisions faster, says Joseph Murphy, Jr., president and CEO of Country Bank, a $675 million-asset community bank based in New York. Country Bank is currently evaluating one software tool that would allow its lenders to feed tax returns directly into a system that automatically drops the data into spreadsheets for underwriting and cash-flow analysis, eliminating the time-consuming process of manually entering that data.
For many banks, the end goal is to generate savings by reducing the amount of time it takes employees—such as the credit administrator, loan officer and senior lender who approves the loan—to handle an application and monitor a loan once it is on the books. “If we can shave some time off for each of their roles, then we can create some efficiencies, and that is a big part of where that time and dollar savings comes from,” True says.
The amount of savings a bank can generate depends on the size of the loan. A recent PayNet study found that it typically costs between $3,000 and $4,000 to onboard, originate and fund a $100,000 loan for the first year. The average net interest margin is 3.7 percent, which puts the costs of generating those loans at about break even for the first year, True notes. “If we can reduce the cost by 30 to 50 percent, then we feel like we are making big gains for the bank during the first year, which then carries on into future years,” he says.
Technology is giving community bankers more options to enhance existing C&I lending practices, and there is more innovation ahead. In fact, 2018 could be a pivotal year in fintech, because different technologies are coming together to create an end-to-end, full-suite approach in which the entire commercial lending process can be managed through one system. Banks will also be able to rely on systems to more efficiently pull information from disparate databases, allowing lenders to more quickly and easily access all of the data and documents they need to underwrite and monitor a commercial loan. “That is where I think we are going to see even more significant savings in the future,” True says.
One piece of advice for community banks is to make sure loan officers and others who are using the tools provide input on which provider, platform or service to utilize. “It’s the rank-and-file bank employee who is ultimately using the software platform,” Saito says. “So, it’s extremely important to get their buy-in early.”
Some ways to do that effectively are to involve employees early in the process—during the testing and procurement of software and technology solutions and through to final rollout. Saito recommends that new technology and processes are vetted by representatives from each part of the bank, including a loan officer, credit administrator, loan closer, and operations and management staff.
Along with new technology, community banks are continuing to invest time and money in people, processes and training to improve best practices. The tech tools are a little like a new car, Saito notes. “There are a lot of bells and whistles, but if you are still a bad driver, all of those buttons won’t do anything,” he says.
According to Saito, there are several deficiencies community banks suffer from in originating and managing C&I loans that have nothing to do with technology.
Addressing those deficiencies helps to boost loan profitability. For example, lenders need to understand the different sales cycle that exists with C&I loans versus commercial real estate loans, as well as loan pricing and how to develop a good portfolio of that business.
C&I lending is different than commercial real estate lending and requires a different skillset when it comes to credit underwriting and loan documentation. Generally speaking, commercial real estate borrowers are transaction-oriented and often work with multiple lenders. In contrast, C&I customers tend to work with a single lender and often focus on long-term relationships. So, the sales cycle may be longer and rely more on cultivating those relationships, Saito notes. A strong C&I community bank will also have a credit administration team that is well versed in C&I lending, which involves a different set of collateral analysis and underwriting metrics.
In the case of The Westchester Bank, it provides C&I loans to many service businesses that have lines of credit, which puts more emphasis on underwriting receivables, as opposed to inventory, when making credit assessments. The bank uses both tools and people to analyze those receivable bases. For example, the bank does collateral audits when appropriate and relies on RMA industry comparisons on most credit metrics. The collateral auditor reviews the receivables to determine dilution and the booking of revenues, which gives a strong analysis of the quality of the company’s receivables, Tolomer notes.
One of the key elements is assessing the quality of the receivables, the business, the business strategy and the creditworthiness of the owner, Tolomer says. “We are fortunate in that we have a credit department of trained professionals who have spent a fair amount of time in the credit arena and credit analysis,” he says. “We also are very fortunate in that we have been able to attract commercial lenders who have underwritten deals and understand small- and medium-size business owners in our market.”
Beth Mattson-Teig is a writer in Minnesota.