I have a few thoughts rattling around in my head as we enter the final quarter of 2016 and start looking ahead to 2017. This quarterly company newsletter is a platform for me personally to share some of those thoughts from time to time. I write this quarterly CEO article for the benefit of our existing customers, and for the benefit of those people and community financial institutions that are still learning about Suntell and the Square 1 Credit Suite.
The 20 Year Evolution of Suntell
In August, we celebrated our 20 year anniversary of Suntell by sharing and reminiscing about our evolution over those 20 years in how we conduct business and interact with our customers. How we sell, train, and operate internally has all changed dramatically for the better since 1996. The implementation of technology applications within our business has improved our level and quality of our service to our customers while holding down or reducing costs. Just in the last five years, our annual total operating costs are down 38% while total revenues have increased 27% in that same period of time. Those gains on both the revenue and cost side of our P&L have dramatically improved our company’s net profit margins. Just as we use software applications to benefit from operational efficiencies and enhance our level of customer service and delivery, our nearly 200 customers are using the Suntell Square 1 Credit Suite software platform to achieve similar results leading to cost reductions and improved delivery of service to their customers.
The Background and Case for Commercial Lending Software
This next topic is an extension of my previous comments on the case for using software to streamline and improve your internal efficiencies leading to a reduction in total costs and improved service to your customers. I am going to move that case and discussion to a focus on the use of commercial lending software to achieve the same benefits and results.
In 1996, after spending 15 years in commercial, agricultural, and correspondent banking, I decided to solve a problem in the process of underwriting, analyzing, tracking, originating, and servicing a commercial loan portfolio. That problem was the sheer amount of redundancy necessary when entering data each time a loan was renewed or originated combined with the repetitive and cumbersome task of data retrieval on a periodic basis for weekly or monthly reporting to various loan committees and the Board. New business development took a back seat to making sure all of the required forms, worksheets and, reporting was completed on our existing commercial loan portfolio on a daily basis. An army of secretaries and loan support staff members were employed to complete the various credit memorandums, worksheets, and forms. I founded Suntell because quite simply I was tired of being a ‘Sr. VP of Worksheets and Forms Administration and Completion’. A customer’s information would be replicated a minimum of five times through the process of origination, underwriting, loan document preparation, core system booking, and tickler creation.
I envisioned a system that would have the ability to reduce the redundancy from five to one. The first version developed to partially meet this vision was the Suntell Loan Management System or as we called it LMS. Twenty years later, LMS has evolved beyond commercial and agricultural lending and portfolio management to incorporate document imaging, extensive core and loan document interfacing, and a host of other features into the present day Square 1 Credit Suite. The early vision and goal of entering customer data one time has been achieved and operational efficiencies are now being realized by just under 200 community financial institutions across the U.S. today.
Something Else You Should Know About Suntell
Besides the initial vision of improving workflow efficiency in the commercial lending world, when we formed Suntell, we made a conscience decision to focus all of our efforts and attention in working with community based financial institutions. We did this to ensure that the integrity of the Square 1 Credit Suite would always reflect the needs of our community financial institution customers and not solely the needs of one or two very large regional or national banks. Workflow efficiency was the primary driver in the development of the Square 1 Credit Suite, but it was not the only driver. The secondary driver, but of equal importance, was improving credit risk decision making and management which almost always leads to stronger asset quality and fewer problem loans.
Because commercial lending is the primary driver of earnings in community financial institutions, then conversely, problem loans and assets are the largest contributor to poor earnings. When you can combine both improved internal workflow efficiency and stronger credit risk management, you receive a ‘double bonus’ impact on institution’s profitability. I continue to be very involved in the realm of community bank consulting with emphasis on asset quality and credit/loan administration policies and procedures. Our software is reflective of my background in both commercial lending and ongoing involvement in commercial and agricultural lending consulting. This background and the feedback from our existing customers has resulted in the Square 1 Credit Suite product features available today.
Historical Slow Rate of Adoption of Commercial Lending Software
As previously stated, ‘When you can combine both improved internal workflow efficiency and stronger credit risk management, you receive a ‘double bonus’ impact on an institution’s profitability’. Obviously, every financial institution in the US that originates commercial loans has implemented an internal software application or system to realize this ‘double bonus’ leading to improved profitability, right? You would be wrong.
Community financial institutions have been slow to adopt systems such as the Square 1 Credit suite or other competing systems on the market. In fact, in the year 2016, six of ten prospective customers we talk to daily continue to use nonintegrated, stand-alone software solutions or manual worksheets and forms much like I used in 1996. That leads me to believe that across the commercial lending universe, well over half to three quarters of the institutions have not invested in the opportunity to realize the ‘double bonus’ previously described.
This leads to the question: – Why not? Investing in core accounting and mission critical technology for networks, hardware, etc. usually takes front seat in an institution’s annual technology budget. Investing in software to automate consumer and mortgage lending is much more universally adopted since they are underwritten and processed similarly. However, when it comes to commercial lending, automation is not widely accepted. Reason being that commercial lending has many more variables: legal entities range from sole proprietors to Sub C and S corporations, collateral differs, loan terms vary widely due to bank policy and customer needs, and each industry has its own metrics and peer standards. One of the reasons that community financial institutions excel in commercial and small business lending is the personal touch and relationships formed with their business customers. Because of the large number of variables to account for and the desire to maintain customer relationships, the adoption rate has been slow for commercial lending applications, despite the ‘double bonus’ opportunity.
I am not naive in believing that you cannot achieve superior asset quality and earnings unless you are using integrated commercial lending software, because you certainly can and many institutions are. At the foundation, it takes strong credit policies combined with strong loan and credit administration and strong credit decision making to achieve superior asset quality and earnings. What I am simply making the case for is that the increased adoption and utilization of integrated commercial loan software will provide added incremental asset quality and profit results to whatever you are already achieving with several additional benefits. Including, stronger loan growth by having resources more focused on business development rather than filling out forms and worksheets all day, as though it’s still 1996.
But Don’t Over Automate Commercial Lending
Our mission in the next 10 to 20 years is to have all community financial institutions invest, utilize and benefit from an integrated commercial lending software in order to maximize the ‘double bonus’. Just as I outlined the case for utilization of commercial lending software to realize operational efficiencies, there is also a delicate balance as to how much to automate commercial lending. As I have seen institutions using the same tools that I used as a banker in 1996, I am also seeing the over automation of commercial lending. I am not opposed to the automation of small business lending programs, however, the vast majority of commercial lending is highly variable and will always require the personal touch of a credit analyst and commercial loan officer to fully understand the needs and the risks involved in lending to any one particular business customer. The highly automated commercial lending systems that have emerged in some limited cases, in which all data is entered, analyzed, and presented to a loan committee for a credit decision with little to no human intervention or analysis is problematic in my opinion.
As previously mentioned, community financial institutions are strong at competing in business and commercial lending due to the personal relationships and understanding of each business’s unique credit needs and custom credit terms. At Suntell, we believe the Square 1 Credit Suite provides the right balance of automation and integration to achieve the ‘double bonus’ benefits, while maintaining and supporting the personal relationship, analysis, and understanding of the unique needs of each business customer.
I hope this article is helpful and informative as you seek to strike the right balance of commercial loan automation and plan your future investment in systems such as the Square 1 Credit Suite.