I am writing this as 2016 draws to a close. It’s a time we take stock of the year in our rear view mirror and look forward to the one just ahead of us. After having passed our 20 year company anniversary in August, our focus is squarely on the future, but with our history and experience as a guide to where we plan to go and what will do and not do.
The new year is shaping up to be a very exciting year for us as we plan our next Square 1 Credit Suite release in early 2017. This release will incorporate a large number of important enhancements and upgrades surrounding our financial and credit analysis systems in the Square 1 Credit Suite. In addition, we recently rolled out an option to deliver the Square 1 Credit Suite software in the ‘Cloud’ in partnership with Google Cloud Compute. This delivery option makes Suntell unique in the market in our ability to support and deliver in both traditional software and cloud platform delivery. It is important to Suntell that we continue to invest and deliver our solutions to meet the needs of our customers and the ever changing technology landscape.
I have never been great at predictions but I always try to forecast what I think will occur or the key trends to watch in the coming year as it impacts community financial institutions and commercial lending (Commercial lending to included C&I, CRE & Ag loans).
We all know that the Fed has signaled its plan to increase rates at least 3 times in 2017 or around a total of 75 basis points. This trend toward increasing borrowing rates will be a positive impact on earnings as yields adjust upward, however analysis needs to include impact on debt service coverage, valuations and LTV, etc. and its impact on risk exposure. Transaction stress testing as supported in the Square 1 Credit Suite will be important to include in your analysis to review credit risk in a rising rate environment.
I discussed in an earlier newsletter article in late 2015 about the rise of alternative lending from nontraditional business lending sources such as OnDeck, Lending Club, Kabbage, LendVantage, Prosper, Kickstarter, etc. I see the rise of online and marketing of alternative lending for business loans to continue to rise at an accelerated pace in 2017, creating greater pressure or competition for commercial loans. The appropriate response to this rising pressure from non bank lenders should be for traditional community financial institutions to make it a top priority in 2017 to invest in integrated technology solutions that will speed up time from application to decision and minimize paper documents in the process.
I am not a strong proponent of a completely automated analysis and decision making for commercial lending, however, the time gap between application and decision or committee approval must be substantially reduced in order to compete more effectively with non-bank lenders. They deploy online marketing and technology to compete for a great share of the commercial loan market by providing a process and delivery that is less painful and less time consuming.
The majority of traditional commercial lenders have not invested in the integrated technology necessary to compete effectively in today’s market. I am continually amazed, even appalled some times, at the lack of investment in the internal engines and technology by traditional commercial lenders that support both greater workflow efficiency and credit risk management for their commercial loan portfolios. If you open the hood under a majority of community financial institutions commercial lending departments and inventory the systems to manage commercial lending, loan operations, and credit administration, you will find a number of manual, home grown or non integrated solutions. This fractured internal systems model will simply not be a model in which you can continue to compete effectively for commercial loans in 2017 and beyond.
Suntell users already know this. For those customers, my challenge to each of you for 2017 is to review your utilization and implementation of all that the Square 1 Credit Suite contains to ensure you are capitalizing on each workflow enhancement opportunity that is available. This will help ensure your ability to compete timely for all commercial lending opportunities in the future while appropriately assessing and underwriting credit risk. We have a number of training options to help in the process of system assessment and utilization ranging from annual user conferences to weekly ‘Lunch & Learn’ sessions.
For those that are still on the fence or taking a wait and see approach, I encourage you to prioritize this investment in 2017. The current patchwork of systems and band aid approach to commercial lending is being exposed by the non traditional sources of commercial and business loans. Without commercial loans, how much money would your institutions be earning this year? My guess would be zero. While many will attempt to quantify the ROI with lengthy analysis of such a project and delay implementation for fear of change, costs, etc., to me it’s a clear a no brainer. I felt so strong about this in 1996; I started a company to address this. Today, it is now more important than ever given the rising competition for commercial loans, the profit center of your financial institution. 2017 is the year to get committed.
In closing, the new administration in Washington beginning next year provides hope of some regulatory relief to financial institutions. If this happens, maybe more focus can be shifted from the cost and attention for compliance within your institution and a greater priority in improving your delivery, risk management and processes for commercial lending. Much attention is also being paid to the June 2016 FASB changes on ALLL and CECL (Current Expected Credit Loss). While it’s important to begin a strategy to become compliant, compliance is not until 2021 and it appears that early compliance and adoption is discouraged until that time based on my assessment of the regulatory Q&A FIL addressing CECL. This should provide a meaningful window to address the following key priorities in 2017 as a recap:
- Rising Rate Environment in 2017 – Document stress testing in your credit analysis.
- Rising Competition from Non Traditional Lenders – Compete with implementation of integrated commercial lending and document workflow solutions.
- Make 2017 the year you invest in an integrated commercial loan solution – the window of opportunity is now with expectation of reductions in compliance and regulatory burden and the extended window for which ALLL (CECL) compliance is to be implemented and reported.
Have a wonderful and prosperous 2017!