What Banks Can Learn from OceanFirst’s Loan Sale

As the coronavirus continues to whipsaw the economy, when will bank asset quality begin to crack and losses start to materialize?

One bank, at least, has decided not to wait for that day to arrive.

OceanFirst Financial Corp., a $12 billion institution based in Red Bank, New Jersey, accelerated the resolution of some of its credit losses by selling an $81 million in higher-risk commercial loans with forbearance exposure in late September and October. All of the loans had an underlying, systemic weakness that the bank believed would persist after the coronavirus pandemic subsided.

The sales included $30 million in New York exposure and $51 million in New Jersey and Pennsylvania, executives said. Hotel exposure made up $15 million, $12 million was related to restaurant and food and over $4 million was in gym and fitness exposure. The bank recorded a $14 million mark on the loans, which it took as a charge to third quarter earnings.

The bank also decided to sell its loans associated with the Small Business Administration’s Paycheck Protection Program during the quarter. These sales, along with additional provisioning, contributed to a net loss in the third quarter of $6 million, or 10 cents per diluted share.

First Loss is the Best Loss
Banks of all sizes are weighing their options for dealing with trouble credits, and what a credit workout will cost them in time, staffing and expenses, Greenland says.

“The friction of handling non-performing loans at a bank is huge. It’s not what banks are meant to do,” he says. “Most of the choices a bank has right now are working it out, selling it or owning the real estate.”

OceanFirst Chairman and CEO Christopher Maher says that proactively identifying and recognizing credit risk leads to smaller losses and faster recoveries. According to Maher, OceanFirst sold loans in 2007 and recovered around 70 cents on the dollar; in a year, those assets traded closer to 40 cents.

“Many bankers will say that your first loss is your best loss,” he says. “If you’re early to do something, you will get a good recovery; if you hem and haw and wait, the numbers don’t get better.”

Maher acknowledges that the ultimate recovery rates on the sold loans may have been higher if the bank had held onto them. But that recovery could take years, consuming valuable time and attention to deal with the questionable credit quality.

“There’s a finality that comes with the disposition. We were very conscious that had we merely kept these on the books, established a risk pool and taken a reserve for the $14 million — that may have proven to earn us more money in the long run. But it may also have led to several quarters of discussions about valuations with a lot of stakeholders … explaining why you thought a fitness center or a hotel property was actually valued where you think it is,” he said during the bank’s third-quarter earnings call. “This way, we get the final disposition. We know exactly what the answer is. We can be certain that we took those risks off the balance sheet.”

Strike While the Iron is Hot
Interest in distressed assets is high right now. Kingsley Greenland, CEO of loan marketplace DebtX, says that many of interested buyers using his platform had proactively raised funds in 2019 in advance of a mild downturn and are now sitting on “dry powder.” Prospective buyers are visiting the site more frequency, and both the number of buyers that enter into a nondisclosure agreement to conduct due diligence on an asset and the number of bids are up.

Throughout 2020, DebtX has seen a number of sellers listing hotel loans and now labor-intensive small business loans; Greenland expects retail and office commercial real estate loans to appear in greater numbers in 2021.

OceanFirst managed the sale of its New York portfolio alone, capitalizing on a group of real estate investors who specialize in the city and in those types of assets. It used investment bank Piper Sandler to manage the sale of the $51 million pool of loans covering New Jersey and Pennsylvania, since the bidder base consisted of institutional credit fund buyers looking for distressed loan notes. He says working with a partner helped when it came to assembling the data rooms and legal agreements.

“We made the decision that if there are buyers, we can get good recoveries now,” he says. “There will be the same buyers next year, but there will be more loan sales and they will not be at the [price] we got.”

Back to (Growing the) Business
Maher said the sale “liberated” resources the bank could use as it refocuses on growing profits by rebuilding its net interest margin and boosting operating margins. The two blocks of loan sales lowered its loan-to-deposit ratio to under 90% and generated $388 million in cash proceeds that the bank could deploy toward capital management actions that include repurchases and acquisitions. It also makes it easier to navigate conversations with regulators and prospective sellers that they have a handle on their credit risk.

“Putting this behind us allows us to potentially have stronger and more stable earnings in 2021, which should hopefully translate into a better stock multiple,” he says. “As we transition to next year, investors in general are not going to want to hear about credit surprise and provisions.”

The Board’s Blessing is Important
Maher says credit mitigation work can be tough for bankers, who pride themselves on their close relationships with borrowers and their ability to make good loans. That can make them feel vulnerable when credit quality turns, complicating efforts to resolve credit in a timely fashion, or lead to holding onto troubled loans longer than is prudent.

“The admission that a loan may be troubled is hard. It feels like a personal failure,” Maher says, adding that he has experience with this as a commercial lender. “There’s always this hope that if I give it a little more time, it’ll be OK and I won’t have this black mark or this failure.”

The board has an important role to play in these moments, diffusing emotions and helping management look ahead. Boards should make it clear that they don’t want to cast blame on the previous decisions to extend these loans, but instead focus on decisions that will strengthen the bank moving forward.

“The board plays a role here. If management feels vulnerable or that they’re going to be criticized, then they’re going to be less likely to do it,” Maher says. “I think often, the board/management interaction can perpetuate this failure to just deal with it.”

The Trouble That Johnny Allison Sees

Johnny Allison, chairman and chief executive officer at Home Bancshares in Conway, Arkansas, prides himself on running a very conservative institution with a strong credit culture. And Allison has not liked some of the behavior he has witnessed in other bankers, who are slashing their loan rates and loosening terms and conditions to win business in a highly competitive commercial loan market.

Allison says those chickens will come home to roost when the market eventually turns, and many of those underpriced and poorly structured loans go bad.

“Now is a dangerous time to be in banking, in my opinion. It is a scary time because our people want to match what somebody else did,” said Allison during an extensive interview with Bank Director Editor in Chief Jack Milligan for a profile in the 1st quarter issue of Bank Director magazine. (You can read the story, “Will Opportunity Strike Again for Johnny Allison?” by clicking here.)

Allison feels strongly enough about the credit quality at $15 billion asset Home that he’s willing to sacrifice loan growth, even if it hurts his stock price. In the following excerpt, Allison — whose blunt and colorful talk has become his trademark — opens up about the challenge of maintaining underwriting discipline in a highly competitive market.

The Q&A has been edited for brevity, clarity and flow.

BD: You said some very powerful things in your third quarter earnings call. And you said it in sort of the Johnny Allison way, which makes it fun and entertaining. But you were fairly blunt about the fact that you see stupid people doing stupid things. That has to have an impact on your performance in 2019. You’re letting certain kinds of loans run off because you don’t like the terms and conditions and the pricing. That impacts your growth, which then impacts your stock price. That has to be a difficult choice to make.
JA: It’s extremely tough, because my people in the field are seeing dumb stuff being done. “Well, so and so did this, or so and so did that, and, Johnny, they gave him three-and-a-half fixed for 10 [years], and interest only, and nonrecourse.” I mean, there will be a day of reckoning on those kinds of bad decisions, in my opinion. Am I going to write at three and a quarter [percent] fixed for 10 to 15 years? I’m not going to do that. Do I not think I’ll have a better opportunity coming next year to where I haven’t spent that money, and I spend it next year? So, my attitude is [to] take what they give us. Stay close to your customers, support your customers. It is extremely tough. It is one tough job keeping the company disciplined. Don’t let it get off the tracks. We’re known as a company that runs a good net interest margin. We’re known as a company that has good asset quality, that runs a good ship.

BD: If you were more aggressive on loan growth, if you were willing to play the same game that other banks were playing and not worry about the future so much, would your stock price be higher today?
JA: We don’t believe that. If I loan you $100 and I charge you 6%, or I loan you $100 and I charge you 3%, you’ve got to do twice as many loans just to keep up with me. And there’s a limit to how much you can loan, right? We got $11 billion worth of loans. We’re about 97% loan-to-deposit [ratio]. Could we go up to 100%? Sure. We were at [100%] over six years ago. The examiners fuss at you a little bit. But we’ve got lots of capital. So, we kind of run in those areas close to 100% loan to deposit. But we’ve got $2.7 billion worth of capital, so we can rely on that. Plus, the company makes a lot of money.

BD: You said in the earnings call that you were building up the bank’s capital because you didn’t quite know where the world was going, or you weren’t quite certain about the future. So, how do you see the future?
JA: I’m very positive with the future, except the fact I keep hearing these naysayers on and on. We’re optimistic people. I’m rocking with the profitability of this company, and [people] tell me the world’s coming to an end. Then the [bank’s] examiner came in during [the] third quarter and said, “The world’s coming to an end, Johnny. Get ready. Be prepared. Get your reserves [up].” We didn’t ever see it. It didn’t happen. Could somebody be right? Could there be a hiccup coming? Let me say this, and I said it on the call, banks are in the best financial condition that they’ve ever been in.

Someone said, “Boy, you give the regulators credit for that.” I said, “Regulators had nothing to do with it. Absolutely nothing to do with it.” What did it was [the financial crisis in] ’08, ’09, and those people who wanted to survive, and those people who wanted to keep their companies and don’t want to cycle through that again. What’s happening is, the shadow banking system is coming into the [market], and they’re taking our loans. How many [loan] funds are out there? They all think they’re lenders. Every one of them think they’re lenders. And they’re coming into the bank space. Where we’re at 57% loan to value, they’re going to 95% loan to value.

There’s the next blow up, and that’ll hurt us. We’re going to get splashed with it. We’re not going to get all the paint, but we’re going to get splashed with that.

That’s the next problem coming, these shadow bankers, the people chasing yield. REITs. Oh, God. REITs. I’m in at $150,000 a key in Key West, Florida, with a guest house owner who is a fabulous operator. We financed her for years and years, and she’s built this great program with these guest houses. She sold it to an REIT for $500,000 a key. Now, let me tell you something, you can’t have an airplane late getting into Key West. There can never be a wreck on [U.S. Highway 1]. And there can never be another hurricane. Everything has to be hitting on all cylinders and be perfect to make that work. That’s kind of scary to me. We’ve seen several of these REITs coming [in with] so much money. They won’t give any money back to the investors. They won’t say, “We failed.” Instead, they’ll go invest that money. And they’re just stretching that damn rubber band as far as they can stretch it, and I think some of those rubber bands are going to pop.

[Editor’s note: An REIT, or real estate investment trust, owns and often operates income-generating real estate.]

So, I think that’s the danger. I don’t think it’s the normal course of business. I think those things are the danger. And when it slows down a little bit like it did, these bankers panic. They just panic. “What can we do to keep your business? What can we do?” They just lay down and play dead. “What can I do? What can I do? Two and a half? Okay, okay, okay. We’ll do [loans at] two and a half [percent].” We just got back from a conference, and they’re talking in the twos. Bankers are talking in the twos. I don’t even know what a three looks like, and I sure don’t know what a two looks like. So, I can’t imagine that kind of stupidity.

BD: So, where are we in the credit cycle?
JA: Well, two schools of thought. One, that we’re in a ten-year cycle, and it’s time for a downturn.

BD: Just because it’s time.
JA: Just because it’s time. Johnny’s thought is that we were in an eight-year cycle with [President Barack] Obama, and he didn’t do one thing to help business. Absolutely zero things to help any kind of business at all. Didn’t know what he was doing. Nice guy. Be a great guy to drink beer with. Had no clue. And then here comes [President Donald] Trump. So, did the cycle die with Obama and start with Trump? That’s my theory. My theory is that [the Obama] cycle died, and we’re in the Trump cycle. Now, if we have a downturn, if something happens somewhere, he’s going to do everything he can to get reelected, right? So, he’s going to try to keep this economy rolling. But if we have a downturn, it’s not going to be anything like ’08, ’09.

The regulators blame construction for the [financial crisis]. It wasn’t construction that caused the crash. It was the lenders and the developers that caused the crash, because nobody put any money in a deal. Nobody had any equity in a deal. I remember many times, my CEO, I’d say, “See if you can get us 10%.” No. [The customer] got it done for 100% financing. If you want the deal, they give it to you. But it’s 100% financing. There wasn’t any money in the deal. There was no money in those deals, and when the music stopped, they just pitched the keys to the bankers, and here went the liquidation process. I was involved in it, too. I did some of it myself. So, I’m not the brilliant banker that skated that. I was involved in it. Not proud of that, but I learned from that lesson. I learned from that lesson.

Now is a dangerous time to be in banking, in my opinion. It is a scary time, because our people want to match what somebody else did. That’s my toughest job. And a lot of them think I’m an ass because I hold so tight to that. Now, let me tell you. This is my largest asset. This is my baby in lots of respects. I have lots of my employees that are vested in this company. I have lots of shareholders, local Arkansas shareholders that are vested. We have created more millionaires in Arkansas than J.B. Hunt [Transport Services], or Walmart, or Tyson Foods. Individual millionaires, because they believed in us and invested with us, and I am very proud of that.

What’s Changed In Business Lending



In today’s fast-moving world, business leaders expect quick decisions, and forward-thinking banks are speeding up the loan process to serve clients in less than three minutes. So what’s changed — and what hasn’t changed — in commercial lending? In this video, Bill Phelan of PayNet explains that relationships still drive business banking and shares how the development of those relationships has changed. He also provides an update on Main Street credit trends.

  • How Banks Are Enhancing Credit Processes
  • New Ways to Build Relationships
  • Small Business Credit Trends

The Modern Roadmap To Gold



Today, data helps competitive banks identify key targets and make smarter—and quicker—loan decisions. In this video, Bill Phelan, president of PayNet, explains how data analysis is shifting loan decisioning, and how banks can survive and thrive through the next credit crisis. He also shares his outlook for business lending, and believes that Main Street America is still looking for capital to grow and improve their businesses.

  • Using Data to Make More Profitable Loan Decisions
  • How Credit Risks Analysis is Changing
  • Preparing for the Next Downturn
  • The Outlook for Business Lending

To Better Understand Bank Real Estate Credit Concentrations, Give Your Portfolio a Workout


stress-test-4-19-17.pngBy now, the vast majority of banks with credit concentrations in excess of the 2006 Interagency Regulatory Guidance have discussed this with regulators during periodic reviews. To underscore the importance of this to the regulators, a reminder was sent by the Federal Reserve in December of 2015 about commercial real estate (CRE) concentrations. The guidance calls for further supervisory analysis if:

  1. loans for construction, land, and land development (CLD) represent 100 percent or more of the institution’s total risk-based capital, or
  2. total non-owner-occupied CRE loans (including CLD loans), as defined, represent 300 percent or more of the institution’s total risk-based capital, and further, that the institution’s non-owner occupied CRE loan portfolio has increased by 50 percent or more during the previous 36 months.

While the immediate consequence of exceeding these levels is for “further supervisory analysis,’’ what the regulators are really saying is that financial institutions “should have risk-management practices commensurate with the level and nature of their CRE concentration risk.” And it’s hard to argue with that considering that, of the banks that met or exceeded both concentration levels in 2007, 22.9 percent failed during the credit crisis and only .5 percent of the banks that were below both levels failed.

So the big question is: How to mitigate the risk? Just like the idea of having to fit into a bathing suit this summer can be motivation to exercise, the answer is to give your loan portfolio a workout.

And in this context, that workout should consist of stress testing designed to inform and complement your concentration limits. In other words, the limits you set for your bank should not exist in a vacuum or be made up from scratch, they need to be connected to your risk management approach and more specifically, your risk-based capital under stress. What’s necessary is to take your portfolio, simulate a credit crisis, and look at the impact on risk-based capital. How do your concentration limits impact the results?

For our larger customers, we find that a migration-based approach works best because the probability of default and loss given default calculations can come from their own portfolio and they can be used to project forward in a stress scenario (1 in 10 or 1 in 25-year event, for example). For our smaller banks or banks that do not have the historical data available, we use risk proxies and our own index data to help supplement the inevitable holes in data. Remember, the goal is to understand how the combination of concentrations and stress impacts your capital in a data-driven and defensible way.

Additionally, the data repository created from the collection of the regulatory flat files (the only standardized output from bank core systems) can be used for a variety of purposes. This data store can also be used to create tools for ongoing monitoring and management of concentrations that can include drill down capabilities for analysis of concentrations by industry, FFIEC Code, product/purpose/type codes, loan officer, industry and geography (including mapping), and many others. The results of loan review can even be tied in. The net result is a tool that provides significant insight into your portfolio and is a data-driven road map to your conversation with your regulators. It also demonstrates a bank’s commitment to developing and using objective analytics, which is precisely the goal of the regulators. They want banks to move past the days of reliance on “gut feel” and embrace a more regimented risk management process.

When the segmentation and data gathering is done well, you are well positioned to drive your portfolio through all sorts of different workouts. The data can be used for current allowance for loan and lease losses, stress testing, portfolio segmentation, merger scenarios and current expected credit loss (CECL) calculations, as well as providing rational, objective reasons why concentration limits should be altered.

And just like exercise, this work can be done with a personal trainer, or on your own. All you need is a well thought out plan and the discipline to work on it every day as part of an overall program designed for credit risk health.

Five Steps to Improve Your Commercial Loan Origination


origination-3-17-17.pngToday’s business borrowers demand a lot more than just good rates. They expect to communicate with their lender via a variety of channels at a time that suits them. They are too busy running their own businesses to prepare thick files of financial information. And they want to deal with partners whom they regard as having a modern, world-class business model and technology stack.

Luckily, a new generation of automated loan origination technology can help community banks meet this challenge with greater efficiency and better customer service. Here are five steps to improve your loan origination process to meet the expectations of the new breed of borrowers.

1. Leverage new tech to boost efficiency.
Today’s credit origination software can integrate a bank’s customer relationship management (CRM) database with limit and exposure reporting in addition to spreading, risk rating, facility structuring, collateral management, and covenant monitoring. This streamlining can cut the time to fund a loan by as much as 30 percent to 40 percent, enhancing client service.

2. Raise the bar on transparency and consistency.
Many banks still employ manual processes and spreadsheets that result in inconsistent underwriting and lack of transparency. Modern loan origination systems standardize underwriting by putting consistent data on a common platform, where it’s available to staff who need it. The system also records each step in the lending process and generates an audit trail to facilitate compliance and internal audits.

3. Get the most out of your risk data.
Financial institutions generate vast amounts of client data, but most are not very good at managing it. How banks create, store, and make use of data, in particular risk data, will become more important with the advent of new regulation such as the Basel Committee on Banking Supervision’s risk data and reporting rule 239. Traditional issues such as duplicated, erroneous, and dirty data will all need to be addressed systematically to meet these new standards.

4. Make better decisions with a single source of truth.
The inability to identify risk concentrations for related borrowers was responsible for heavy losses during the financial crisis. Even today many banks still track positions with manually updated spreadsheets or adding up numbers from multiple systems. Having a 360-degree view of the credit relationship creates a golden record of client data under more accountable ownership.

5. Improve service and compete more effectively.
The success of so-called marketplace lenders is largely due to customer service models built on new technology and faster response times. Banks can improve service and competitiveness by harnessing the efficiency gains of a modern origination system. Faster response times yield not just greater efficiency but higher win rates too.

To download the full whitepaper, click here.

Is Your Bank’s Loan Review Good Enough?


lending-2-27-17.pngFor almost three decades, regulators have mandated independent loan review of commercial loans. So what could be needed to improve this time-tested concept? Well, for one, like all other aspects of banking, loan review must evolve and modernize to retain its effectiveness. This is more pertinent given that, statistically speaking, we may be in the fourth quarter of the credit cycle, which could be problematic as loan officers may pursue growth at the expense of loan quality. Also, there’s a growing dependence on loan review to facilitate accurate portfolio credit marks in mergers and acquisitions. Many loan reviews, whether in-house or externally contracted, remain too subjective, too random, are outdated technologically, lack collaborative processes, and, perhaps most importantly in the modern era, lack holistic linkage to the more quantitative and dynamic macro aspect of portfolio risk management.

So, for a board of directors, this may be a good time to assess your bank’s loan review processes. Here are some timely tips to push this evolution along:

  • Remember credit quality assessments—including those of regulators—typically are trailing, not leading indicators. There’s a perception that community banks have been beaten up enough over the past few years and that some of the regulatory credit dogs have been called off; thus, be vigilant to dated reports indicating stable credit quality. Additionally, historical loan performance indicates loans made at the end of credit cycles are sometimes made for the purpose of enhancing growth, and have proven to be more problematic.
  • Embrace updated—and secure—technologies to enable remote reviews and eliminate travel expenses. With the availability of imaged loan files, loan review can be done remotely; however, it must be done securely. Too many contract reviewers are putting banks at risk using their own porous laptops.
  • Ensure more file coverage and promote more collaboration within the bank’s risk management forces. Remember that loan review’s primary mission is to validate original underwriting, post-booking servicing, adherence to policies and ultimate agreement with risk grading—not to re-underwrite each sampled loan. An effective reviewer must always be willing to defend his or her work in a collaborative, non-defensive manner.
  • Be aware that industry-wide commercial real estate concentrations have recovered and now exceed pre-crisis levels. Given that highly correlated loan types exacerbated bank failures during the financial crisis, and that higher interest rates will likely put pressure on income properties, loan reviews should go well beyond the blunt concentration percentages by using smart sampling techniques. Peeling the onion on loan subset growth and performances will be critical in defending against and mitigating any significant concentrated exposures.
  • Explore hybrid loan review approaches. Even larger banks with internal loan review staffs are supplementing their work with external groups in order to effect efficiencies, broader coverages, and validations of their own findings. On the other hand, smaller banks relying exclusively on out-sourced loan review vendors should employ credit function policing arms to quick-strike areas of concern. Being totally dependent on a semi-annual loan review is akin to the fire department being open only a couple of weeks a year.
  • Understand the relationships among documentation exceptions, weaker risk grades and larger credit losses. Test technical documentation (capacity to borrow/collateral conveyance) proportionate to the weakness of the risk grade. After all, a lot of weakly documented loans go through the system unnoticed until a credit default occurs.
  • Go deeper than fee comparisons. While it’s understandable to consider fee structures when deciding on a loan review vendor, take the added steps of discussing loan review protocols and requiring examples of deliverables. All too many vendors provide only simplified spreadsheets and write-ups only of criticized-classified loans, in many cases, re-inventorying what the bank already knows. An effective loan review warns of problems about to happen; it doesn’t rehash those already acknowledged. Also, be mindful of the contractor: employee ratio as employee-based firms tend to offer more consistency and quality control.
  • Make loan review a viable bridge between the traditional, transactional analysis and aggregate, macro-portfolio risk management. While you can’t ignore the former, where it all begins, modern portfolio management requires a more quantitative and credible assessment of the latter, the sum of the parts. Thus, loan review emerges from an isolated, one-off engagement to a dynamic informer of all aspects of managing a bank’s credit quality.

Five Ways to Improve Your Bank’s Commercial Lending Department


commercial-lending-5-27-16.pngWhen running a business, one of the most important things an owner needs is access to capital. Unfortunately, getting their hands on that much needed capital is never easy, quick or painless. In fact, it’s quite the opposite. But the experience doesn’t have to be all bad. If you are a lender, consider these five steps to stand out from your competitors.

Be Convenient
For people who own or run a business, many times it is their passion (or their obsession) and most spend 60 plus hours a week tirelessly working on making that business a success. The last thing they have time for in the middle of the day is to run to the bank to talk about their borrowing needs. Provide your business customers with a way to explore and even apply for a loan outside of the scope of normal bank hours and in a way that leverages technology as a productivity enabler. In this instant online access world, banks need to provide their customers convenience, and technology is essential to that.

Be Fast
When the need for capital arises, most business owners needed it “yesterday” rather that “six to eight weeks from now.” Let’s face it, in the world of banking, we’re always thorough, but we’re not always quick. The time to process most loans, from application to funding, can take a very long time. One of the biggest negative influencers on the customer experience is the frustration borrowers have to deal with as the lending process drags on. Through automation, banks can streamline lending processes without compromising their credit requirements. Leverage technology by integrating resources for data collection, underwriting, collection of the required documentation as well as closing and funding.

Be Easy to Work With
It takes a lot of time and energy just to complete a loan application. And it’s by no means over once the business owner gets approved. Streamline and automate your application loan processing workflows as much as possible to eliminate tedious re-keying of the same data over and over again, or requiring applicants to fill out or review elements of the application that don’t apply to them. Provide a way for clients to get the bank what it needs, including bank statements, tax returns, financials etc., in a simple, automated and timely way by integrating technology where possible.

Be Aware of the Big Picture
Business owners are coming to you for more than just a loan. They want help running their business and welcome any advice or value-added information the bank provides. Know that the loan is only one part of the picture. Understand what the capital means to the business. What does the new piece of machinery mean for the long and short term of the company’s performance? How will the extra employees impact the growth of the company? How does what you are doing for the business enhance both the business and personal side of the relationship? To really be a trusted advisor, ask questions that focus on the benefits the business will realize from engaging with the bank. Create a loan process that allows bankers to focus their time on helping customers. Bankers should be building relationships, cross-solving, and maximizing the bank’s share of wallet instead of spending their time spreading numbers and chasing down documents.

Be Prepared
Study after study has proven the the main difference between a top performing sales person and an average producer is the amount of time they spend “preparing” for a conversation with a business owner. The more prepared a banker is, the better the customer experience. Being prepared means doing your homework and understanding the business, the industry, the business owner, and the local economy, for starters. The more prepared a banker is, the more help they can provide and the more value they will bring to the relationship.

With every bank knocking at the doors of the same businesses, competition for quality customers has never been more intense. Follow these five simple steps to set the customer experience your bank delivers above all the rest.

Community Banks Collaborate on C&I Lending


lending-12-23-15.pngThe traditional community banking model, while still viable, is being challenged because of economic, competitive, technological and regulatory forces—many of which are beyond the control of any individual community bank. The largest banks have used their massive size, product set, and more recently, technology, to make dramatic gains in market share at the expense of community banks. I believe that progressive community banks should be considering new ways of doing business, especially in regards to their lending strategies.

Community banks do many things far better than their larger competitors, while enjoying a degree of trust and resiliency that the megabanks may never achieve. But those big banks boast something the community banks, standing alone, cannot match: the scale to operate the lending platforms which are now necessary in most lines of business—including commercial & industrial (C&I) lending. Many American businesses now require loan amounts of $50 million or more, a loan size that typically defines the low end of the “middle market.” Those loans required by middle market borrowers, companies providing goods and services serving a wide range of industries, far exceed the individual lending capacity of the typical community bank. The teams required to source, screen, underwrite and manage these larger loans are typically out of reach for a community bank.

To date, those megabank advantages have clearly outweighed the strengths of community banking in C&I lending. Without the ability to deliver many of the commercial loans that middle market businesses require, community banks are stuck in a quandary in which they often have to turn away customers with successful, growing businesses. The numbers are clear: In 1990, community banks with under $10 billion in assets accounted for over one-third of C&I loans held on the balance sheets of banks. By the end of 2014, community banks’ share of the C&I market has dropped to just over 15 percent of the market. The continuation of this trend will likely limit the profitability and growth of community banks as well as their ability to positively affect their communities in other lines of business. Equally important, it also subjects those banks to less diversified loan portfolios and the risk associated with loan concentrations, particularly in commercial real estate.

While each community bank may individually struggle to match the scale of the mega-banks, it is important to keep in mind that the biggest banks are saddled with their own challenges such as bureaucracy, legacy systems, resistance to change, customer fatigue and burdensome regulatory oversight.

Community banks, but for their individual lack of scale, ought to be well positioned to capitalize on these opportunities and to outcompete the megabanks. The innovation required for community banks to break this logjam—to free them to focus on their strengths—is here, and its essence is this: community banks no longer need to stand alone.

They can prosper by working together, particularly in gaining access to middle market lending. Community banks do have the scale enjoyed by the biggest banks, they just don’t have it on their own. Together, community banks hold $2.3 trillion in assets—13 percent of the assets held by US banks, and just shy of the assets of JPMorgan Chase & Co., the largest US bank. The question is how to leverage that scale while preserving the individuality, proximity to the customer and legendary service that contribute to their unique value.

Community banks should consider joining together in alliances or cooperatives in order to gain access to C&I loans, including diversified sectors such as manufacturing, healthcare, technology, and business services. In addition to using such partnerships to successfully source these loans on a national basis, other benefits such as diversification (size, geography, and industry type), access to larger customers, and combined expertise in underwriting and loan management can be achieved. One such cooperative, BancAlliance, consists of over 200 community bank members and has sourced over $2 billion in such loans.

Through partnerships such as these, community banks can succeed in delivering loans to job-creating middle market businesses throughout our country at a reasonable cost to each community bank, while adding to their net interest margin and diversifying their balance sheet.