OFFICIAL PUBLICATION OF THE PENNSYLVANIA ASSOCIATION OF COMMUNITY BANKERS

Pub. 2 2020 | Issue 11

untapped-opportunity

Untapped Opportunity: One Way to Drive Income and Diversify Your Portfolio

By Kathleen Connellan, Bankers Healthcare Group

After navigating many challenges in the last six months, banks are in a unique position to capitalize on strategic opportunities that will benefit them now–and in the long run.

Over the past months, the COVID-19 pandemic has caused a number of challenges for banks across the country. At the onset of the economic shutdown, community banks became a lifeline for small businesses, providing over half of all PPP loans in the second round of funding.(1)

Banks also experienced an increase in the number of current loan holders inquiring about loan modifications or deferment periods to keep more cash-on-hand, with many agreeing to assist those in need. Just as quickly, interest rates dropped, causing the net interest margin to be the lowest ever recorded by the FDIC(2).

Anticipating a second wave of economic impact due to the pandemic, the Federal Reserve is expecting to keep interest rates near zero, and consumers are saving more than ever before—leading to a record $2.4 billion in deposits over the last six months.(3)

Creating Partnerships Within the Industry

Low lending margins, paired with a surplus of cash, have driven many banks to seek out new income opportunities or try to diversify their portfolio to drive their bottom line. Treasury yields on federal bonds are at an all-time low of 0.08% on a one-month note, compared to 1.53% in January.(4) Combined with a lack of variety in loan requests coming in, banks could be at a disadvantage rounding out 2020.

One way to overcome this—and achieve your revenue goals for the year—is to form strategic relationships with credible partners in the industry. Not only does this provide you access to quality loans with high yields, but it also allows you to quickly strengthen your loan portfolio to meet your bank’s criteria. It also allows you to streamline the underwriting process without having to hire or reallocate resources within your bank.

While partnering with alternative lenders has its advantages, it’s important to note that each one will impact your business differently. To choose the right partner for your bank, here are the top qualities to vet for:

  1. Track record of success

    You want a financial partner who can endure changes in the market and can originate quality loans for your portfolio at any time. Put your mind at ease by working with a lender who has a record of successfully navigating economic downturns and is agile enough to adjust its business model to meet your needs year after year without fail.

  2. Focus on quantitative analytics

    Utilizing data to make lending decisions is common practice today, but not every lender has built proprietary quantitative analysis models to uncover variables that predict risk. A partner who dives deep into the analytics can make better predictions when originating loans, resulting in a stronger return on the portfolio you purchase.

  3. Origination expertise

    Being well-known in the industry doesn’t necessarily mean you’ll attract the highest quality borrower – unless you serve a niche industry and invest in marketing. Partners who execute innovative, highly targeted campaigns across every channel and are extremely selective in who they lend to offer a unique advantage in the marketplace. This ultimately creates a better loan offering for your bank.

  4. Streamlined process

    Few things are as time-consuming as evaluating credit files. Choose a financial partner who offers consistent loan packages so you can analyze files quickly and make informed purchasing decisions with ease.

  5. Innovative technology; concierge service

    Banks are synonymous with customer service. The right partner brings innovative technology to your institution but equally understands the importance of having live financing specialists available to help your borrowers.
    Community banks were deeply impacted by the pandemic and will likely continue to be for months or even years to come. Those who seek out partners to help offset the challenges in the market and find new growth opportunities, will see greater success as we close out the year and start planning for a prosperous 2021.

References
(1) Coronavirus Response. (2020, May 04). Retrieved 2020, from https://www.icba.org/newsroom/Crisis-Preparedness/coronavirus-response/2020/05/04/community-banks-make-more-than-half-of-ppp-2.0-loans-sba
(2,3) FDIC. (2020, August 25). FDIC-Insured Institutions Reported Lower Profitability but Strong Liquidity and Higher Capital Levels in Second Quarter 2020 [Press release]. Retrieved 2020, from https://www.fdic.gov/news/press-releases/2020/pr20095.html
(4) Daily Treasury Yield Curve Rates. (2020). Retrieved 2020, from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2020.

Kathleen Connellan, Bankers Healthcare Group

This story appears in Issue 11 2020 of the Hometown Banker Magazine.

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