While lots of banks talk about culture and innovation, few can execute. If you are looking to capture the mindset of what a culturally strong and innovate bank looks like, listen to the 30-minute interview with Jill Castilla, the CEO of Citizens Bank of Edmond. Jill talks about experimentation, marketing, the customer experience, the meetings they have to facilitate culture / new ideas, what they are doing in the age of Covid-19, and what the future looks like for the banking customer. See how innovation doesn’t always mean technology and doesn’t have to be expensive.
Based on our observations, we estimate that somewhere between 20% and 25% of community banks have adopted a policy requiring minimum yield or credit spreads for their newly originated commercial loans. The strategy requiring minimum commercial credit spreads may be well-intentioned, but the results for banks may be less than optimal.
Chances are, even if you limited your Paycheck Protection Program (PPP) origination to just customers, you still have some fraud. If you took on new customers, you likely have between 5% and 10% fraud, even with a medium level of screening. According to an Aite Group survey done in June, financial institutions are only catching 1% of their total applications with fraud. This difference matters as the SBA will likely want to see you conducted some level of due diligence to prevent fraud.
Uncertainty creates significant challenges for business managers, and while variability in outcomes is a business constant, the degree of uncertainty during a pandemic is extraordinary. Therefore, how do community banks distill today’s interest rate forecasts and position their loan portfolio for optimal performance? Choosing the duration of your loan portfolio isn’t a passive decision. Banks can play an active roll in structuring their loans to achieve both the optimal duration for the borrower as well as for the bank.
It was only two years ago when we were in the golden age of banking. The ten-year treasury was above 3%, loan growth was strong, funding cost was low, and credit quality was near its high - if not at record highs for some banks. Fast forward today, and you have a 0.67% ten-year, a large chunk of your balance sheet in forbearance, deteriorating credit quality, and margins near record lows. There are some obvious things that you should be doing to ensure you can survive in the long run.
As any lean six sigma practitioner will tell you, banks need to continuously define problems, measure against benchmarks, analyze, improve, and control their PPP Forgiveness application process. With a couple of thousand applications processed over the past five weeks, we are improving our process daily. In this article, we focus on the back end of our forgiveness manufacturing process and discuss SBA rejection rates. Getting an application rejected by the SBA adds 15 to 30 minutes of time to each application as bankers need to go back and solve defects.
The economic consequences of Covid-19 have altered average credit quality and created a flat and shallow yield curve. Community banks are working diligently to support their local communities and survive in these challenging times. One tool that many community banks have utilized in this business environment is a loan-level hedging product.