We sent out a survey to several thousand community bankers across the country to understand bankers’ concerns, challenges, and opportunities in the current business environment.  We feel that organizing an exchange of ideas and sharing of strategies is beneficial to many bankers. We also offered resources (videos, white papers, policies, marketing material, online proposal generators, and calculators) to help bankers obtain information based on their specific survey responses.  The survey only took five minutes and consisted of five questions. We want to thank the many bankers that participated in the survey, and you should have now received the survey results and resource materials. If you are one of the bankers that did not participate in the survey, you may still do so now by going HERE.  We want to highlight the findings of our survey and the top challenges and opportunities that community bankers face today.

The Impact of Covid-19

The number one concern for bankers is the impact of Covid-19 on credit quality and loan provisioning.  Bankers are yearning for tools that allow them to track the medical effect of the virus because it directly translates to business activity, then cash flow, and then, ultimately, credit quality.  In our resource center, we discussed how to track real-time foot traffic and how it translates to net absorption, net deliveries, and vacancy rates for different markets and different real estate categories.  Now is the prime time for all banks to obtain a risk-adjusted return on capital (RAROC) loan model that incorporates the probability of default, loss given default, and specific risk presented by Covid-19 for different industries.  Currently, most RAROC models are predicting spikes in defaults and potentially a second spike if and when government support is retracted.


The second most significant concern for bankers is how to generate profits in a challenging credit and interest rate environment.  The following ideas were shared and explained through videos, pricing tools, and calculators:

Fee Income: Fee income is crucial when the yield curve is low and flat.  Bankers discussed how to generate 1% to 2% upfront fee income on commercial loans, and be able to take all fees earned into income immediately.

Adjusting For Loan size: In this market, bankers need to find the sweet spot for community banks where the loan revenue is meaningful, but competition for the business is lower. Pricing needs to be adjusted for not just loan size but expected outstanding balance. The smaller the loan, the more pricing needs to increase to compensate for origination costs.

Prepayment speeds: In this market, rapid prepayments is one of the most significant obstacles to loan profitability. Any banker can find their competition’s loans using UCC filings or services such as S&P, Corelogic, CoStar, or similar services. From there, smart bankers are going after any quality loan without prepayment provisions. From the survey, bankers discussed how to identify sticky loans, how to cross-sell sticky commercial products, how to protect the loans you have, and how to sell prepayment provisions acceptable to borrowers that help retain earning assets.

Cross-sell opportunities: Cross-selling other products such as lockbox, cash sweep, loan sweep, payroll, corporate cards or other services can enhance commercial relationship profitability.  Bankers talked about which credits provide top cross-sell opportunities.

Credit quality: Higher credit quality leads to lower credit cost, but also lower yield.  There is a range of optimal credit quality for community banks that maximizes ROE.

Yield Management: Bankers discussed strategies to help increase yield in today’s challenging environment.  We shared strategies on modifying existing loans to prevent prepayments, refinancing existing credits to obtain higher yield and more fee income.  We also discussed pricing on the yield curve to maximize return for the next two years. Commercial credit spreads started out at an average of 2.26% back in early March, jumped to 5.25%, and have now come back to around 2.75%. As credit quality dispersion has widened by more than five times, accurate pricing has never been more critical. With a potential credit crisis looming, bankers need to be rock-sure of their pricing strategies and credit view.

Managing Clients’ Expectation

Community bankers are frustrated by borrowers’ demand for low coupon commercial loans, long-term fixed-rate demand, and the flat yield curve that is exerting pressure on NIM.  Bankers shared commercial loan averages throughout the country, such as loan size, spread, fees, DSCR, and LTVs.  Bankers discussed ways of pricing on the curve to obtain an optimal return for the bank and still satisfy borrower demand.  We also witnessed various loan structuring strategies that are popular in the market today and how to implement them at community banks.  Finally, there was a substantial amount of material and discussion about prepayment provisions, how to explain them to borrowers, and what prepayment types borrowers are currently accepting in the market.

Differentiating Your Bank

Not all 5,000 or so community banks in the country can be providers of superior service.  However, many community banks have competitive advantages and are able to differentiate their services when they compete against credit unions, conduit lenders, insurance companies, and government agencies.  Bankers shared the four attributes of responsiveness, influence, flexibility, and continuity.  Properly defined, and implemented, these four attributes can help community bankers compete and win better credit and more profitable business.  This differentiation strategy is not complicated and can be applied in almost all community banks. Still, it only leads to success if embraced by the entire executive team and instilled and embraced by customer-facing employees.


If you have not taken our survey, but would like to, and then receive the information other bankers have shared, please do so HERE.  If instead, you would like to share ideas with us directly, please respond to this blog.  We find that community bankers have some great ideas that have helped them succeed, the challenge is sharing ideas across markets – many bankers are not attending conferences and convention where this sharing can take place, and some bankers are reluctant to disclose strategies to competitors.  The survey and followup exchange of ideas and strategies is beneficial to all community bankers.

Tags: Published: 08/11/20 by Chris Nichols