For most of the nation’s 8,000 banks, the future lies in business banking – not retail. While it’s true that national banks are consolidating up retail market share, small and mid-sized banks are thriving with their commercial and small business niches.
Here’s proof: during 2001, banks in the $1 – $10 billion asset range had the best ROA, ROE and efficiency ratios of any size institutions. The stocks of players like Greater Bay Bancorp, Southwest Bank of Texas, Sterling and City National prove that the commercial niche is alive and kicking, blowing away the shareholder returns of giants.
As one executive of a $3 billion holding company recently bragged to me, “We’re a refugee center for bankers who still care about the customer.”
However, this simple calculus of “they screw up and we don’t” will not guarantee shareholder returns forever. To keep the commercial niche vibrant, banks will have to manage a careful balancing act with the gunslingers of our industry – the commercial lenders.
Here’s the problem. Banks are in fierce competition to attract and retain top-notch commercial lenders. At the same time, it’s clear that the commercial lender’s world must be forced to radically change. The industry is waking up to the fact that lending spreads alone won’t pay the bills anymore. Pricing is too competitive, and making money with more credit risk is a lousy temptation. Leading banks now realize that deposit growth and fee income are equally if not more important than loan generation.
To push this diversification, commercial “lenders” are being ordered to morph into new, improved commercial “bankers.” These are not the stiff credit guys your parents had to deal with. No way! These next generation bankers are skilled generalists who can provide a wide array of credit, deposit, cash management and wealth management services.
I’m in complete, unabashed agreement with this strategy. Unfortunately, implementing this transformation in the real world is fraught with hiccups. Management needs to ensure we don’t mess up this cultural transition of commercial lenders, or else we risk biting the hand that feeds.
Banks that fail to make this transition will issue decrees from the executive suites that read as follows: “All you antiquated, change-resistant credit officers must obediently fill out your 11-page call sheets and meet our sales quotas or face death by bunga bunga.”
The banks that succeed will realize this transition is going to take careful planning and humility. They will define success as building an organization where good commercial bankers love to work. These banks will always be paranoid that success and growth might breed an environment that ultimately drives good bankers away, and they will be determined not to let big-bank history repeat itself.
How do we build this organization? The best exercise for management is to sit in the desk of that commercial banker and think about how life should unfold in the future. Here’s what successful commercial niche players will do:
#1: Leverage support staff
There is no such thing as a super-banker. There are only bankers who are smart enough to surround themselves with a network of specialists who can help them succeed. Next to any successful commercial banker you’ll find a cracker-jack loan assistant. This is not a secretary – this is a pro with great credit, deposit, documentation and customer service skills. Sitting nearby you’ll find a credit analyst whiz. Not a one-dimensional number cruncher, but a rising star who thinks one step ahead for the lender, helps manage the portfolio, and builds expertise by going on joint calls. In the banker’s email inbox, you’ll find active deal collaboration with buddies in cash management, trust and insurance.
#2: Deal decisively with small loans
The next generation commercial banker will not be dinking around with that $165,000 loan renewal. Despite any emotional attachment to the borrower, that loan will have sailed through a no-brainer underwriting process and will be serviced centrally. Juniors may handle this deal, but the commercial banker is on to bigger and more profitable things.
#3: Shun a one-size-fits-all approach
Commercial banks that succeed will build their plays around their players. Not all units will look the same. One group may have three commercial bankers and a loan assistant. Another may have one commercial banker, a portfolio manager and three loan assistants. These teams won’t expect each individual to be a rainmaker, a number cruncher and a workout specialist. Instead, they organically match up in a combination that works. The key here will be to have objective measurements of revenues and expenses so that management can allow any flavor that’s profitable.
#4: Make sales tracking simple
Today’s sales tracking systems frustrate the heck out of commercial lenders. While there is no panacea for this concern, management will issue a simple mandate to the technology and operations folks: Make sales tracking and reporting take less than 10% of an officer’s time.
#5: Crank up the intranet resources
For more than 400 years, commercial lenders have been promised automated systems that will integrate information and eliminate burdensome manual tasks – no luck yet. Future leaders will create Web-based portals for commercial bankers that provide information about sales, deal flow, industry data and prospects. The intranet should also provide knowledge management capabilities to archive credit write-ups, network lenders by areas of expertise, and track customer contact across all business units.
#6: Appreciate the “L” word
Lending is a very serious business, but let me use a cushy word: LEARNING. Banks that dominate the commercial niche will compete by stuffing the fertile brains of their bankers. They will invest the time for bankers to better understand tax laws, investment strategies, cash management products and new technology. Imagine a culture where bankers meet for beers to be trained on portfolio theory and asset allocation; where the weekly loan committee features a lender reviewing best practices in high tech lending; where mixers are constantly held between bankers and CPAs, attorneys, business owners and real estate professionals to keep a pulse on risks and opportunities in the market. Sounds fun.
#7: Measure each banker as a profit center
Redesigning new incentive plans is one of the hardest tasks in transitioning commercial lenders. We want them to sell, but not at the expense of making crummy loans. Today, banks are experimenting with all types of goal-based and volume-based structures. These will all be problematic until banks settle on treating lenders or lending teams as individual profit centers. Each team will be tracked on interest income, cost of funds, credit risk charges, fee income and operating expenses. Sure, any profitability analysis will spur debate about accuracy, but that’s the point. Are we giving lenders incentives to balance loan growth with yield and asset quality? To focus on larger deals with lower servicing costs? To enhance relationship profitability with deposits and fee income? The only way to balance all these things is through the income statement.
#8: Make some bankers rich
Successful commercial banks will recognize that top-notch bankers generate 5 – 10 times the profits of mediocre bankers. They’ll dump the “everybody gets a 5% bonus” mentality for plans that have big winners and big losers. When the best commercial bankers have compensation that rivals executive management, the next generation bank will have arrived.
We’ve come a long way from the days of analyzing cash flow and browsing through the latest receivable aging. Commercial lenders are having a lot of change heaved their way. Wise management teams will be careful about this change and find that sweet spot between resistance and mindless sales babble to make the transition successful.
-spw