Community ’ Big Opportunity With Digital Lending · Annual revenue is $75,000+ Personal credit...

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R. C. Giltner Services

Senior LenderSpring, 2016

Robert C. GiltnerR.C. Giltner Services, Inc.

[email protected]

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Community Banks’ Big OpportunityWith Digital Lending

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Contents

1. Introduction

2. Defining “digital lending.”

3. The Small Business and Consumer Digital Lending Market Opportunity

4. Digital Lending Demonstration and Tool Kit.

5. Your Digital Lending Opportunity

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1. Introduction

Digital, marketplace and online/mobile lending are hot topics.

The press documents the growing list of non-bank players…

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1. Introduction

Digital, marketplace and online/mobile lending are hot topics..

…and industry experts identify risks to banks…

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Digital, marketplace and online/mobile lending are hot topics.

…with industry shows discussing the choices before us.

BAI – Your Digital Lending Strategy for Small Business

Retail Banking – Your Strategy with Marketplace Lending

CBA - Non Bank Digital Lenders – Buy, Build, Partner or Ignore

ICBA – Your Digital Lending Strategy

ABA Community Banking Conference– Tradition and Tech –Marketplace Lenders

SNL – Compete or Collaborate

1. Introduction

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…also raising regulatory concerns.

• Third Party Risk• Compliance Risk• Transaction Risk• Servicing Risk• Liquidity Risk

• Regulators actively following alternative online lending space.• Understand opportunity of advances of technology.• Partnerships may expand access to credit.• Third party risks.• Vendor risks.• Compliance risks.• Underwriting and origination risks..

1. Introduction

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1. Introduction

Community banks report streamlining and re-vamping their small business and consumer loan processes.

• First National Bank of Central Texas arming bankers with iPads so that they can open accounts for small business customers on the road.

• Univest targets small business with a technology project that allowed for significantly quicker credit decisions and loan funding in just a couple of days.

• Banks learn to love consumer lending as Citizens Financial in Providence, R.I. pushes into unsecured lending and online lending.

• Georgia Bank & Trust automates lending execution of documents and decreases of loan processes.

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• What is online digital and mobile lending technology, how does it work, and why has it burst into the marketplace?

• What are the benefits, revenues, efficiency opportunities and risks for community banks with online digital lending?

• Is the underwriting and delivery of loans sound and proven?

• Can community banks implement digital lending online with complete data security and compliance, from e-sign and ALLL to loan monitoring and BSA/CIP?

• How should community banks evaluate partnering vs platforms you control over customer relationships, loans, underwriting and compliance?

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1. Introduction

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• Marketplace Lending

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The pairing borrowers and lenders (historically “peers” but now institutional investors) through the use of an online platform without a traditional bank intermediary.

Terms Definition

• Alternative Lending Underwriting and delivering loans outside traditional “bank” “debt capacity” and “coverage ratio” underwriting and pricing.

• Digital/Online Lending The turn-key application, processing, set up and delivery of loans often to a specific market segment where complexity is low and offering completion in minutes with funding in in a day or two.

To answer these questions, lets define terms.

1. Introduction

• Lending Automation Automated loan processing platforms that may include online applications, e-sign, cloud operations, enhanced processes or data capture.

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“Digital lending” marketplace allows FIs to profitably and efficiently serve key market segments previously poorly served by our existing processes and systems.

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Market Segment Rev Size Current Cmty FI Position

• SMB Loans <$100k $ 30B Down $5B Since 2010; Inefficient service delivery; Low penetrationof checking customers.

• Consumer Loans <$5k $ 90B 5% of Market; Down from 64% in 1984. Low penetration of checkingcustomers.

• LMI Household Loans $ 40B Earn $12 Billion in NSF Fees from 25% of customers; No service for 45% wanting <$1,000 loans.

Source: FDIC, Credit Cards.com, CFSI, Our Analysis

1. Introduction

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Banks Partnering with Digital Online Lenders/Platforms• Lending Club Bank Newport, Titan Bank, Opus Bank

• OnDeck JPMorgan, BVVA

• Fundation Regions

• Biz2Credit Key Bank/Savoy Bank

• R.C. Giltner Centier, FMB Bank, Kentucky BankSource: Published Reports

1. Introduction

FIs implementing the “digital lending technology” in the press today are primarily targeting market segments previously underserved.

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- Small Business<$100k -Mass Consumer -LMI Consumer

Low High

Low

Control -Underwriting

-Compliance

-Security High-Relationships

Revenue/Efficiency Impact

• Online digital lending technology is critical to community banks to protect, grow and efficiently serve relationships.

• Community banks should choose adding technology platforms totally under their control rather than non-bank partnerships.

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Digital Lending:Partner or Your Control and Brand?

Source: Published Reports

1. Introduction - Recommendation

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Specifically, we recommend that you:

A. Match the scope of digital lending technology to specific market segments, such as micro business and consumer lending.

B. Incorporate the technology into your own systems and process to own the customer relationship and balances.

C. Leverage your existing customer relationships.

1. Introduction

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We want to review our analysis in the following order.

2. Defining “digital lending.” 3. The Small Business and Consumer Digital Lending Market

Opportunity4. Digital Lending Demonstration and Tool Kit.

a) Underwritingb) Data Securityc) Complianced) Loan Operations


1. Introduction

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The lending process has long been well-defined with existing systems.

2. Defining Digital Lending

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What has changed is the lending eco-system and environment as a result of broadband mobile internet access and cloud technologies.

R.C. Giltner ServicesGrowing Your RevenueCloud and mobile

technology has changed:

• Broad, immediate access to accounts, credit reports, and other internet-linked information.

• Methods for searching, shopping, and signing.

• Methods of serving, delivering and managing relationships.


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Example Lending Segments

Business:• Commercial Loans• CRE Loans• Small Business Loans• A/R Financing• Credit Card Financing

Consumer:• Direct – Retail• Auto• Indirect Auto• Home Equity• Mortgage• Credit Card

New digital technologies affect lending technology and processes differently by segment.


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Community and regional banks are already investing in digital technology to serve some segments, such as residential mortgage lending.


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And others are already enhancing technology for more complex business loans and consumer loans.


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However, legacy processes were built to handle any and all loan complexity levels.

Sample Bank


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“Digital online lenders” are focusing primarily on smaller, simper loans and structures that promote service in “minutes” with funding in a day or two.


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Costs of technology applied to specific segments can be 60% less with reduced complexity.

• “Business” lending training.• Borrower multiple appointments.• Multiple years of tax returns/stmts.• Business plan.• Credit staff analysis.• Credit review (like larger credit).• Paper document preparation.• Meeting for execution.• Paper document filing and mgmt.• Recurring account management.

“Community Banks Need Sleeker Approach to Small Bus. Lending”*

*American Banker, February 26, 2015


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Current “Automation” and Tools (Baker Hill Bank2Business, CRIF,

Precision Lender)

Digital “Automation”

Analysis of the difference in loan automation today and “Digital” automation for a targeted market segment.

• Customer/loan officer processes still weeks-officer monitoring.

• Customer self-service process and automated monitoring.

• Targeted segment of businesses with specific limited size, complexity, and risk.

• Captures application data; customer gathers docs; compliance.

• Leverage customer data immediately available and accessible in minutes; compliance.

• Using business scoring. • Sound underwriting with simplified, appropriate financial analysis.• Automates manipulation of the

data (integrated financial statement analysis).

• All automated analysis and decision-ing.

• Paper execution processing.• No paper; e signature.

• Process to serve all small businesses.


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Underwriting can still be sound with less expensive processes for smaller loans and pricing for different risk levels.

Source: FDCI


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Why are non-bank digital lenders primarily focused on:

– Small business lending under $100k, averaging $15k.

– Personal loans under $35k, averaging $4,000.


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Community banks (banks under $10 Billion) not large banks have be the primary lenders to small business (loans under $1MM).

3. The Small Business and Consumer Opportunity

Source: FDIC

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However, even Community Banks have reduced their lending to the small business market in the last five years while growing larger loans.

Source: Billions, FDIC


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Banks have less than 10% of the loans under $100k to businesses, with credit cards dominating this market.

Source: Billions, FDIC, FED Survey of Small Business


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Over two-thirds of small businesses now use a business credit card, two to three times the amount that use a bank loan. This also drive spending on credit cards three times that of business debit cards.


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Half of the business credit card owners carry a balance.

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Yet, loans under $100k are over half of business loans made, and are not profitable for banks with current underwriting and delivery.


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Half of all small businesses borrow less than $20k. Some banks, particularly the largest banks, are willing to give up this segment to marketplace partners just as they have given small business loans to Community Banks.

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Sample Small Business Types• Beauty Shop• Small Law Office• HVAC• Plumbing Contractor• Building products• Fencing• Cleaning Services• Appraisers• Manufacturers Rep

46%

Source: Our Client Analysis


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Community banks have deposit but no loan relationships with these customers, with the majority of their business checking accounts having no loan relationship.

Source: Our Analysis


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Community banks have largely given up the consumer lending market in the last 30 years to credit cards.


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Legacy lending practices by Community Banks cannot be profitable with “credit card” size loans.


Source: “Evaluating Consumer Loans,” Koch, Thompson Learning

Average Credit Card Balance

$5,821

Source: Credit Cards.com

Loan Size 5,448$ Spread & Fees 481$ Cost & Losses 449$ Net 32$

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Automated digital lending technology can deliver and manage business and consumer loans for less than $200 changing competitive economics.


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Digital technology provides full automation and monitoring of business and consumer efficiently driving new revenue.


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Penetrating just 12% of your checking base with automated, simple digital lending drives significant new revenue.

Business and ConsumerBusiness Consumer Profit Contribution (000)

5,000 750 213$ 10,000 1,500 427$ 25,000 3,750 1,069$ 50,000 7,500 2,138$ 75,000 11,250 3,207$

100,000 15,000 4,227$

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Small Business and Consumer Digital Lending


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4. Digital Lending Demonstration – Lending Club

Partner

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ELIGIBILITY CRITERIA Annual revenue is $75,000+ Personal credit score of 600 2 years in business

Time: Pre-qualification can take as little as five minutes. If you pre-qualify, you must gather and submit supporting documents. Subsequent funding takes about a week.

Documents needed:o Most recent three months of business

bank account statementso IRS Form 4506-T, which authorizes

Lending Club to obtain your business’s tax transcripts from the IRS

o Previous years’ business tax return

Partner

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Lending Club Funding Options at a Glance

Loan Type: Line of Credit or Term Loan

Cost (Business): 8% - 32%

Loan Amount: $5,000 to $300,000

Funded Borrower: Personal FICO 70011 Years in BusinessAverage sales: $1.1 million

Partner

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4. Digital Lending Demonstration – Lending ClubPartner

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Anything over $100k requires collateral with UCC-1 Lien.


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Partner

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Partner

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• Lending Club now performs a final review of your application.

• If the company can verify your information and believes you’re able to repay the loan or credit line, it will offer you funding.

• If you accept, Lending Club will make a hard inquiry on your credit report.


15 Minutes

• Once approved documents are provided for e-sign.

Partner

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4. Digital Lending Demonstration – Kabbage

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4. Digital Lending Demonstration – Kabbage

Instant underwriting with internet account links.

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Small Business Line of Credit

4. 4. Digital Lending Demonstration and Tool KitBuild Build Your Brand. Your Loans, Your Underwriting, Your Control

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Consumer Line of Credit (requires a credit report)

4. 4. Digital Lending Demonstration and Tool KitBuild Your Brand. Your Loans, Your Underwriting, Your Control

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Marketing leverages digital technology you have now. Nothing is required in branches.

4. Digital Lending Demonstration and Tool KitBuild Your Brand. Your Loans, Your Underwriting, Your Control

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We provide sales processes in our technology, marketing templates and support and digital tracking.

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Sales

Marketing


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Demo of Our Cloud-Based, Digital Loan Technology Platforms

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A sample small business automated credit scoring model is shown below and all settings are up to you. Technology can continue to monitor credit score, (e.g. tax liens) and deposits.

Sample Small Business Online Underwriting Loan Value Model Credit Line $1,500 to $50,000 Maximum (All Settings Up To You)

Underwriting protects against cannibalizing overdraft fees.

a) Underwriting

Factor A B CMinimum Criteria:

1 Guarantor Credit Score 670-699 700-750 750+2 Max No of Day Late 30 3 5 53 No of Day Late 60 1 1 14 Age of Business Checking 1 Year 1 Year 1 Year5 Max # of NSF Last 12 Months 10 10 10

Loan Available6 % of Sustained Monthly Dep 50% 75% 100%

Terms7 Repaymemt 5% of Bal + Int 5% of Bal + Int 5% of Bal + Int8 APR 18% 15% 9%

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We provide full underwriting model documentation for model scope, model governance, control and validation. We use proven credit reporting enhanced by checking deposit information to achieve a 4% loss ratio.

a) Underwriting

One Part of Our UnderwritingDefault Risk Based on Credit Score Only

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Sample Credit Score 700-750 and Deposit Underwriting.

a) Underwriting with Digital Lending

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Automated systems automatically grade and monitor credit grade quarterly looking at cash flow and pulled credit information.

Sustained deposit activity Max number of days late 30 past 12 monthsPass 1 1 750 +Pass 2 2 700 749Pass 3 3 670 699Watch 4 650 669 Below 3,000 2Special mention 5 640 649 3Substandard 6 - 639 Greater than 3Loss 7

Credit Score RangeCredit grading

Automated Credit Grading and Monitoring

a) Underwriting

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• ALLL

• Model Governance

• Loan Risk Rating and Monitoring

• Business Loan Agreement and Guaranty

a) Underwriting

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b) Compliance We are not “alternative online lender” but your “in-house” digital platform for loans you underwrite and own:

• Follow full “banking” loan underwriting practices,

• Full “bank” compliance with loans just like your paper loans today.

• Automate the application, set up, delivery and monitoring through the cloud securely with no paper generated with documented email verification and pdf acceptance.

FED to Banks: Online Lenders May Endanger You

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• We have no significant customer identifying information (Tax ID, Acct #s) outside your fire wall.

• We provide full SOC2/Type2 and SSAE16 data security documentation.

• We provide FFIEC and other regulatory compliance documentation for our data security.

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c) Data Security

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• LOCs are manually loaded directly onto the core.

• Key data is presented in the Action Center of our Manage website.

• The Booking Processor to enter into the core fields to establish the new account.

• Estimated time to book a new LOC on = 12 minutes.

• Project 2 hours per week for the 22 LOCs projected to be originated, generating $2 million in net revenue per year.

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d) Data Operations

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Fields Key Data Fields to Update on IBSCore(Auto-Populate Some Fields via Product Set Up )

Data in Action Center of “Manage” Site

d) Data Operations

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Activity archives are provided for cold storage showing e-sign documentation, choices and history.

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d) Data Operations

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• All loan documents are also provided for your cold storage.

d) Data Operations

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Specifically, we recommend that you:

A. Match the scope of digital lending technology to specific market segments, such as micro business and consumer lending.

B. Incorporate the technology into your own systems and process to own the customer relationship and balances.

C. Leverage your existing customer relationships.


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- Small Business<$100k -Mass Consumer -LMI Consumer

Low High

Low

Control -Underwriting

-Compliance

-Security High-Relationships

Revenue/Efficiency Impact

• Online digital lending technology is critical to community banks to protect, grow and efficiently serve relationships.

• Community banks should choose adding technology platforms totally under their control rather than non-bank partnerships.

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Digital Lending:Partner or Your Control and Brand?

Source: Published Reports


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Digital Lending Cost Saving and Revenue Growth

Current Program

Digital Program

Yield 8% 14%Average Loan $15,000 $15,000Fees $100 $500Gross Revenue $1,300 $2,600Annual Costs (2,400)$ (550)$ Loan Losses 1% (150)$ 3.8% (570)$

Net Contribution (1,250)$ 1,480$ Volume as (% of loans # 2% 15%

Source: Annual Costs Come From the Published Study by PayNet and Charles Wendel of FIC Advisors.

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Penetrating just 12% of your checking base with automated, simple digital lending drives significant new revenue.

Business and ConsumerBusiness Consumer Profit Contribution (000)

5,000 750 213$ 10,000 1,500 427$ 25,000 3,750 1,069$ 50,000 7,500 2,138$ 75,000 11,250 3,207$

100,000 15,000 4,227$

Checking

Small Business and Consumer Digital Lending


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