“Working capital… current ratio… debt coverage… UCC-3… “
Ahhh, the classic sounds of commercial credit. For the past 40 years, the vast majority of a bank’s power base has been centered in the hands of commercial loan officers. In the old days, it was simple. Want a future in banking? Get credit trained! Want to earn respect? Build a portfolio! Want to be tossed on the street? Make a big, bad, non-performing loan.
But now the winds have shifted – these days banking is about a lot more than credit. (see “Takin’ Care of Business“) Retail bankers have gained clout by pounding out the checking and debit fees. Trust and wealth management are viewed as the darlings of future revenue growth. Heck, even the technology and mortgage folks have a seat at the table now.
Who Am I?
As banks broaden their strategic focus, commercial lenders are being asked to assume a “multiple personality disorder.” The mandate is pretty tough:
1) Get out there and sell, sell, sell, and
2) be a total financial advisor to your clients, and
3) understand more complex non-credit products, but
4) don’t blow it – maintain asset quality at all costs!
Today banks are struggling with just how to manage this multiple personality disorder. Most have moved toward specialization between sales and risk management activities. Some banks have split their lending forces into “hunters and skinners.” Under this model, the extroverts go out and find deals while the introverts stay home to analyze and manage them. Not a bad idea, but more and more, the “hunter/skinner” mentality is leading to a growing dysfunction in banking.
As our lending forces split into two specialized camps, each one begins to amplify their traits. The sales folks become more rabid and the credit group basically runs from anything that smells of risk. As opposed to balance and diverse thinking, we get a war between left and right, us and them. Neither side seems to feel like bankers anymore.
One Chief Credit Officer recently confided to me, “These loan officers are so focused on their incentive plans that they throw any deal my way, even if it’s pure garbage.”
At the same time, a regional banker lamented, “Those bankers with the poorest track record of finding deals and customers often become regulators and credit people.”
Is this division growing in your bank? Are front-line officers too focused on sales growth vs. quality credits? Is the credit function beating up and re-underwriting every deal to the point where approval time is too slow and the message to the market is inconsistent?
With all its complexity, I hope that commercial credit does not end up looking like the highly centralized consumer and mortgage loan businesses. It just doesn’t fit. Instead, GonzoBankers should get on with the challenge of reinventing commercial credit.
How do we build this new environment? It won’t be easy, but let me make some initial suggestions by painting a picture of commercial credit at our dream future institution, the Gonzo National Bank, or “GNB” for short.
Our imaginary Gonzo National has some hard driving lenders. On average, they each manage more than $30 million in credits and are expected to grow their portfolios $5 million to $10 million each year. Instead of shunning the traditional credit discipline, GNB actually leverages credit skills in its sales. For instance, as opposed to viewing cash flow analysis as some mundane task, GNB views cash flow analysis as the cornerstone of financial planning for its commercial customers. With this financial picture, GNB bankers help their borrowers do the right thing, whether or not that means throwing credit their way. The GNB bankers get trained like crazy to be better advisors. For salary increases and advancement, they are required to be certified with written tests in cash management, trust, investment and insurance solutions.
As opposed to incentive plans based on loan growth, GNB loan officers are paid a percentage of the quarterly profits that their customers generate, whether from loans, deposits or fee based services. This has required the bank to invest heavily in customer information and profitability systems, but it’s been worth it. Loan officers at GNB build a long-term book of business that focuses on quality of earnings instead of quantity of credits. Because their incentives force them to balance spread, risk, volume and fees, lenders no longer harp about the need for cheaper loan pricing. Instead, they’re worried about collecting fees, retaining good borrowers, and funding their portfolios with cheaper deposits.
At GNB, the credit department debates actively without antagonizing. No bureaucrats here – the department was structured to be smart, tough and responsive. This group has formal service levels established with the lenders for turning deals around (24 hours on small business and 48 hours on commercial credits). The analysis and write-up requirements for loan approval have been scaled to the risk and size of each deal. No more half-inch-thick files to renew a $150,000 credit. That old Credit Policy Manual has been replaced with the “Credit Central” portal on GNB’s intranet that provides tools, industry data, research links and best practice write-ups for loan officers to leverage. Through a fairly simple data mart, the GNB Credit Department dazzles the auditors, regulators and senior management with its loan portfolio analytics. Any slice or dice of the portfolio can be generated in minutes.
Unlike the green-eyeshade naysayer, GNB’s Chief Credit Officer is viewed as the “Yoda” of lending and the architect of the bank’s credit culture. Each year, the Chief Credit Officer holds a “Credit Strategy” session with the lending force to discuss economic trends, portfolio conditions, less desirable credits, and emerging niche opportunities. Through ongoing seminars and special presentations at loan committee, the Chief Credit Officer stays passionately focused on building the credit skills in the Gonzo organization.
The lenders at GNB are so damn productive because of the leverage the team around them provides. One of the ongoing controversies in credit is the role and reporting relationship of Credit Analysts. Are they centralized or decentralized? Gonzo National Bank has basically split the baby on this issue. Credit Analysts report functionally to the Credit Department, but they are located in the field at a ratio of one analyst for every 5 – 6 lenders. While these analysts love interacting with lenders and customers, they literally bleed the bank’s credit policy – and they turn any analysis request around in 48 hours or less.
At GNB, the traditional “loan secretaries” have taken on a professional role akin to paralegals in a law firm. These individuals are the glue that holds the Commercial Banking group together. While loan document preparation, exception tracking and file administration have been moved to the back office, the “Para-Lenders” focus on two things:
1. Enhancing and growing commercial customer relationships
2. Making their lenders as productive as possible
Because they have the most day-to-day contact with borrowers, Para-Lenders cross-sell cash management products and handle the personal banking needs of business owners and their families. When it’s time for loan renewal, Para-Lenders prepare most of the package so that little time is wasted updating pertinent information. GNB replaced expensive lender time with Para-Lender time at one-third of the cost. To keep the entire team focused and aligned, Para-Lenders are paid according to the same profitability incentive structure as the lenders.
Although Gonzo National has reduced credit and compliance risk by centralizing certain back office functions, it remains a service-driven organization. The “Commercial Services” group lives and dies by internal service levels. While they can be pretty tough on compliance and documentation, they also have the skills and orientation to deal directly with commercial customers in resolving payment issues or keeping files current. To build strong bonds with the front line, the commercial back office is divided into teams that support specific geographies and lenders in the field. Once a month, Para-Lenders and Commercial Services hold a conference call at GNB to work out any service delivery or procedural issues.
Recruiting and retaining quality commercial lenders and support staff has been a challenge for every bank. Over time, GNB found that this issue became less difficult the more it invested in training, systems and incentives to reinvent the commercial function. Talent began to realize that GNB was not building the stressful sales vs. credit structure associated with most banks. Bankers began flocking to the place where they could feel like professionals again.
Commercial lending stands at a crossroads today. It is not clear if it’s going to survive as a noble profession or if it will be commoditized into mindless deal chasing and rigid deal declining.
At most banks, the commercial group makes up only about 10% of the total headcount in the organization but can contribute at times as much as 50 percent of a bank’s profits.
So GonzoBankers, ask yourself how much your bank resembles Gonzo National today and whether you’re moving fast enough to modernize commercial credit.