Chief Investment Officer
Commercial Loan Automation
growing your c&i portfolio
The lending business is getting tougher, as regulatory concerns over and scrutiny of Commercial R eal Estate lending, coupled with considerable market softening, are shifting many banks' emphasis away from CRE and onto C&I lending. This is a difficult transition, and some thoughts of how to ease the pain are outlined below.
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Growing Your C&I Portfolio
Loan growth hasn't been a major issue banks have faced in the past three years. Nationwide, bank loans have grown this year alone 9-10% (annualized), and demand remains robust. The real challenge is to control which loans are growing: Commercial Real Estate or C&I portfolios?
Some banks have been successful in weaning their loan officers off the CRE addiction and moving into the more challenging environment of effective C&I lending. Several elements have facilitated this difficult transition, and many are listed below. They should help you make the tough transition from a CRE bank to a C&I, full relationship institution, and, in the process, also help ease the funding crunch so many banks are experiencing through better means than "hot money" traps.
Awareness. Executive management shared with the various sales forces the balance sheet and income statement needs of the bank. Management explained how every credit-worthy C&I loan is worth much more than CRE loans to the analyst community and, often, to the bank's NIM. Many of these loans, while much smaller than the average CRE deal, are self-funded, unlike most CRE loans. Management also shared how true relationship-based commercial loans create more franchise value than CRE and other loan types. Loan officers, many of whom are also stock-option holders, react well to understanding how they could personally contribute to the increase in their bank's stock price and current income by growing solid, relationship-driven loans and deposits.
Changing the sales process. Many banks have excellent commercial lending teams. However, they are often not required to produce significant volumes of new business, but rather maintain past portfolios or grow them incrementally. Instituting weekly or even daily sales meetings of the lending sales team will achieve greater call intensity. Expectations will change and, with them, activity levels. Loans officers have been known to start calling five-fold more prospects each day, setting more appointments and following through faster. Further, revising the pipeline report to include anticipated short-term closes, say within the week, purges the report of wishful thinking transactions that often never materialize, and creates a true understanding of the loans-in-process.
Shortening the sales cycle. The typical sales cycle in lending is between 100-150 days. Methodical analysis can identify where the cycle can be shortened, thereby booking the loan sooner. For example, when loan documents are due, they can be hand-delivered to the borrower and thereby take the conversation to the next level, rather than be sent out and follow with a phone call a few days later. There are plenty of opportunities to slice time out of the cycle while improving customer service by being more responsive and faster than others in the market.
Monitoring and holding people accountable. Many excellent banks have lending staffs that combine excellent credit skills and good controls with a thorough understanding of the bank's balance sheet and income needs. Such banks' credit teams will not be tempted to make a loan that doesn't fit the banks' conservative lending culture, since they know those chickens will surely come back home to roost. At the same time, good lenders are creative enough to find ways to meet credit-worthy clients' needs. Team sales meetings help enforce accountability and build ownership, as everyone shares results and pipelines, without exception. A s suggested above, it is helpful to also shorten the accountability period to one week. When you ask your people to predict each month what they will be funding the following month, the results are often expected low closings next week, yet high closings next month. This happens in pipeline meetings month in and month out. By inspecting the results weekly, lenders realize that management will hold them accountable for a solid and real pipeline, and that they will be accountable for their own predictions. While 100% accuracy can't be achieved, predictions' margin of error will be hugely reduced when the time-frame for predictions and accountability is only a week.
Building relationships. Community banks typically have a strong competitive advantage by turning around loan decisions faster than their larger competitors. In return, they need to have the courage to ask for the entire relationship, loans and deposits both. Strong SuperCommunity banks find most of their loans to be self-funded, and loan relationships more stable and longer term than other banks enjoy. Supporting this approach with better relationship-based pricing and incentives that are truly aligned with shareholder value will facilitate the transition from a loan officer to a relationship manager among the rank and file.
Incentives. Lender incentives are a hot topic these days, with so much money on the table for lenders who are willing to switch from one bank to another. Restricted stock and stock options are now a commonplace reward for outstanding lenders, and the stakes are getting higher every day. Yet the average percentage of incentive compensation available to many lenders does not exceed 30%, and many banks still cap their incentive compensation. Incentives should be commensurate with contribution, and preferably also offer both team and bank-wide components. Successful loan growth is directly related to strong incentives, and, in a counter-intuitive way, often is not associated with originating bad loans in the long run.
Further, incentives are too often poorly aligned with shareholder needs. Many banks still pay for volume vs. value, and do not differentiate in their incentives between CRE dollars and C&I dollars, or between loans that have a high cross-sell ratio with them vs. those one-off loans, nor do many incentive plans differentiate between loans that come with deposits vs. those that don't. The lack of a relationship profitability system often gets in the way of effectively rewarding relationship builders vs. pure loan officers, but technological challenges should not stand in the way of aligning incentives with shareholder interests.
Selling a full product line. Many banks lead with the loan on the commercial side, yet it is a fact that many more businesses need deposit and cash management services much more frequently than they need credit products. Leading with deposits is an effective strategy for many, and achieves the "first in mind" status we all covet. Accepting the lender's responsibility for selling a complete product line, including cash management, sweep accounts, remote deposit capture and other appropriate products is relevant not only to relationship building and longevity but also to long growth and the bank's bottom line.
Moving up-market to compete with larger banks. A SuperCommunity bank has a competitive advantage relative to larger institutions. It can offer local decision making, faster turnaround times and a community orientation with larger institutions find difficult to duplicate. Leveraging these assets toward expanding lending activities to the space right under the majors is an effective strategy for loan growth for many, although some of the mega-banks have improved their execution in the middle and sub-middle markets.
Pricing. Differentiating between C&I loans and CRE loans in terms of pricing, as well as self-funded loans and cross-sold customers vs. transaction-type deals, can help motivate the sales force to do what's right both for the customer and the bank.
Cross-functional team structure. Successful relationship building banks have often established calling teams that are comprised of professionals from various lines of business across the bank, such as lending, treasury management, insurance services, wealth management, retail and others. The teams have a structured meeting and cross-pollination process, including an expectation of frequent lead sharing. The team structure not only brings to bear the full range of bank solutions to the customer's financial needs, but also enhances the familiarity of all team members with each other's product lines, and builds trust and credibility among the team members. It's an effective process to diversify loan portfolios while building deeper customer relationships.
Aligning your credit process with the shift. Many a Chief Credit Officer feel that CRE lending is the most secure type of commercial loan. Consequently, their approach to cash flow lending is much more conservative. A shift in the bank's lending priorities need to take place at the underwriting table and credit committees as well, to avoid a disconnect between the lenders' marching orders and their ability to pass new loans through the credit process.
Ultimately, the key to success is believing that leapfrog performance is possible and required, following by increasing activities to match the desired results and building both upsides and downsides to support the expectation. Once the team accepts that the big, hairy, audacious goals are within reach, they can figure out what needs to be done to achieve them, and then do it.
Success breeds success and high morale. Some question whether daily sales meetings and intense accountability create morale problems. I find that it has, in fact, the opposite effect. Winning is exciting, and breaking new grounds is even more exciting still. Tight accountability creates more winners as it causes behavior change, and, with it, the sense of accomplishment and capability that so many successful people strive to experience.