As a long time reader and first time contributor, I am excited to be a part of the Cornerstone Team and a GonzoBanker! My passionate goal as part of the Gonzo team is to shake up one of the remaining segments in lending that has yet to go through a significant transformation: Commercial Lending.
It is quite ironic that the business line that typically drives a disproportionate share of profits in mid-size and community banks has some of the most arcane and fragmented processes. As banks look to a new period of growth, it will be important to take a grenade to most existing commercial lending processes. Today, bankers find themselves in an environment where commercial loan growth is outstripping other type of loans. The environment is getting more heated, but once a quality borrower makes a request for a loan it seems everybody is making a bid. As a result, margins are razor thin for any new request and bankers don’t want to be the last minute Kmart Blue Light Special as a competitive strategy.
In such a fiercely competitive environment, GonzoBankers must:
- Protect and retain the bank’s existing customer base;
- Beat the streets and cast a wide net to get to know as many prospects as possible; and
- Be prepared to immediately “slide down the fire pole” once a new request comes in.
GonzoBankers need to ask themselves a brutal question: how deal ready is our organization? Our armed forces are always training in an effort to be “combat ready”; athletes are constantly practicing and training to be “game ready.” The question I have for commercial lenders is this: Are you ready to beat your competitors to a customer with a well analyzed, structured new deal?
The best way to understand what qualifies a bank as ‘‘deal ready” is to put forth the improbable but enviable scenario in which every single one of the bank’s clients and prospects makes a request for a new loan at the same time. After you have calmed yourself after the panic attack this scenario creates (or finished calculating your incentive pay), you have to ask yourself:
- Do I have the information I need? Have I begun to organize information or will I be starting from scratch?
- Will I be cramming all night to get this deal through our process or just reviewing what I have planned?
- How would I prioritize my new and bursting pipeline?
Let’s review three criteria that make a deal-ready bank.
#1: Deal-Ready Banks Organize Information to Gain Speed
It is relatively easy for a bank to prioritize its existing client base. Clients can be ranked by risk rating, dollars outstanding, exceptions and financial covenants. But such ranking is set up to help with the existing credit relationship. Our scenario isn’t talking about existing credit but rather a new request for credit. New requests from an existing client still require the details around use of funds, overall repayment capacity, collateral coverage, industry outlook and the like. For existing clients, deal-ready banks have refreshed these items and can jump right into the credit write-up.
For prospects, the information requirements will typically be much larger but the scenario does pose the question, “Is there information that I could gather now that would make it easier to process a new request?” Bankers tend to go through the motions to make the appointments, meet with the prospects and generate the call memo but neglect the pursuit of information that could make the bank more responsive down the road. Obviously collecting information from a prospect is more difficult when there is no formal request, but just because it is difficult doesn’t mean it should be avoided. As a wise man with legs crossed on a hill once said, “If it were easy, everyone would be doing it and no one would be making any money at it.” The business owner needs to view a prospective banker as a trusted advisor with value to add if information is shared. GonzoBankers know how to demonstrate their expertise and knowledge in the industry; provide value during interaction with business owners and be constantly working to get the information needed to make prospect as deal-ready as possible.
#2: Deal-Ready Banks Don’t Cram – They Plan
Remembering back to high school and college, most students attended class, took notes, collected handouts and occasionally did the assignments. When it was exam time, these students loved to cram! They quickly re-read an assigned book, frantically looked over notes and hoped they had the information needed to properly study for the exam. Then there were others that gathered the same information but regularly reviewed the notes throughout the semester, did practice tests and the like. When exam time came for these students, the process was fairly smooth. They did a final review of the material and typically did much better on the exam than those that crammed.
Let’s assume a student has all the information he needs. Is he cramming or reviewing? What does the information you have collected look like?
Is it like this (cramming)?
Or this (reviewing)?
It’s important for bankers to ask if information about prospects has been reviewed and captured in a form that is either ready to go into a credit write-up or can be systematically imported into the final approval document. If a lender looks at collected information on a regular basis as pieces to the credit approval document, how would that change the way data is captured?
Bankers should change their approach from data gathering using the traditional call memos, pipeline reports and basic financial spreads to capturing the same information with an eye toward completing the credit approval document. For example, instead of a lender’s call memo containing a summary of what was covered during the meeting, it could contain the following:
- Meeting attendees
- Purpose of the meeting
- Information collected (list of documents)
- “Deal-Ready” Level
From this point a banker would capture the information in a format that supports the approval document. The discussion the banker had with the owner regarding the update to the business operations/background would turn into an update to the business background section in the approval document. New key employee? Add the key employee information to the management section of the approval document. New financial information? Add the narrative around the financial performance to the appropriate section of the approval document, have the analyst spread the financial statements and update the business debt service numbers. These types of habits allow a banker to capture information in a manner that would make the client/prospect more deal ready. The higher percentage of clients and prospects that are deal ready, the faster the banker can respond should the credit request stampede ever occur.
#3: Deal-Ready Banks Have Clear Methods of Prioritization
While bankers would obviously love to be able to approve, win and fund every single request that their clients/prospects make, the reality is that financial institutions often experience bubbles when the combination of new requests and renewal requirements overwhelm reasonable capacity. When this happens, bankers face the need to prioritize requests in a manner that allows them to maximize the benefit to both the banker and the financial institution he serves.
When I was a commercial lender at Bank One, we had a list of “Values in Commercial Lending.” Just like the Golden Rule is meant to be the universal rule in how to interact with others, the first value in the list was the universal one of “Soundness, Profitability and Growth, in that order.” Using this as our prioritization method, you can see how the more “deal ready” you are the better prepared you’ll be to properly prioritize the wave of opportunities that come your way.
The prioritization process should start much earlier than when a request is submitted by the borrower. As bankers continue to maintain each existing client or develop a prospect to be in a deal-ready state, you can be continually assessing and prioritizing by determining:
- Does this client/prospect still present an acceptable level of credit risk?
- Is the existing/proposed relationship sufficiently profitable?
- Does this existing/proposed relationship present an appropriate level of growth opportunities?
The tough part of this type of prioritization is when you find out that marquee business in your community is not the big relationship opportunity you really want. Whatever the reason, the more objective a bank is in this prioritization process, the better off it will be in its overall production results. Many banks use summary or “pre-flight” memos early in the loan process to quickly assess the potential of more gray area deals. This ensures precious credit resources are not being wasted on deals that don’t have a good chance making it to booking.
The economic engine is running in the United States but we as commercial lenders are still waiting for an expansion to take hold and start driving the demand for credit. While we wait, are you going to stay with the status quo or are you going to start to push to make your clients and prospects more deal ready?
Are your commercial lending practices costing you deals?
Is your only competitive advantage price? Are you chasing the same small group of commercial clients that every other bank is chasing?
Cornerstone Advisors can help you shake up commercial banking at your bank. Contact us today and we’ll talk.