• Consolidate existing portfolios

• Eliminate mediocre and poor performers; top grade employees, particularly relationship managers (RMs)

• Reduce or eliminate regional or local organizations and their management

• Streamline processes; standardize procedures; eliminate exceptions to policy

• Reprice aggressively

• Increase segmentation emphasis

We will review each of these opportunities to discuss the benefits and some of the risks to lenders pursuing these areas.

* Consolidate existing portfolios. In our view, the account loads of most commercial bankers, whether small business, middle market or corporate, are too low. While best practices are dangerous to apply without customizing them to a particular institution, small business bankers can usually handle hundreds of accounts, low-end middle market bankers can manage 40-50 or more, and RMs handling larger accounts can manage 25+ accounts depending upon the complexity and intensity of those accounts. In addition, each of these bankers will be marketing/selling to prospects as well as maintaining current relationships.

With many lenders deemphasizing active marketing, the opportunity to consolidate portfolios and eliminate some bankers now presents itself and should be taken advantage of. Of course, more time may be required to monitor the current portfolio but this can be more effectively and efficiently accomplished by personnel with true risk management expertise.
* Eliminate mediocre and poor performers; top grade employees, particularly relationship managers (RMs). Commercial banks are often paternalistic places that are slow to push out sub-par performers. In years past, we heard some managers say that they would retain mediocre players because of concern that better employees would be hard to attract; basically, these managers followed “the devil you know is better than the devil you don’t” theory. Now, however, the dislocation in the industry brings with it the opportunity to find stronger employees.

Top grading employees needs to become a standard across the industry. The bottom ten or twenty percent of employees should be targets for replacement. Frankly, the reclamation/ retraining process that many banks pursue is expensive, time consuming, and usually fails.

* Reduce or eliminate regional or local organizations and their management. Many organizations operate with duplicative regional or local organizations. This may include operations personnel, credit underwriters, sales staff, and, most costly, local management. Senior management often views a local organization as a way to be more responsive to diverse geographic requirements, an important input into the credit decision process, and a revenue-producing differentiator. In the current volatile operating environment, the value of duplicative support and sales areas needs to be examined very closely. Some local presence may still be important, but for the foreseeable future the local focus could be in risk management rather than sales activities. Certainly if a lender’s loan appetite has been reduced, the regional structure is also a candidate for reduction.

Rethinking this area can free up significant dollars and also increase consistency of approach across a lender’s footprint.
 
* Eliminate exceptions to policy; standardize procedures; streamline processes. More times than not, exceptions to credit policies end in tears. Frequently these exceptions are tied to a line-of-business manager trying to satisfy a request from a regional/local manager. The local banker says he knows the potential borrower and his reputation, etc. However, if the loan goes bad, it is the line-of-business manager and the bank left holding the bag.

While a year or more ago was the time to eliminate exceptions to policy, the old adage “better late than never” still applies. Along with exception elimination, lenders need to ensure they standardize processes across the company (thereby saving money), and streamline processes related to loans and related areas.

In particular, compliance and regulatory activities merit review. While lenders need to be sensitive to these areas, in some cases, a belt and suspenders approach has evolved, lumbering bankers with too many compliance-related activities and significantly increasing the cost of portfolio management. While opportunities in this area exist, management needs to apply a scalpel, not a hacksaw, in looking for savings.

* Reprice aggressively. The current economy provides lenders with a significant, perhaps once in a generation, opportunity to increase pricing. And, while many lenders are repricing loans upwards and increasing fees, few lenders are achieving the level of improvement available to them. Allowing RMs to take the lead on this effort without the direct involvement and close supervision of senior management is a mistake. RMs will often go for a 50 basis point increase when a 100 BP increase or more is doable.

In this environment, few customers will walk across the street to get a lower rate. Most understand, maybe for the first time, the value that their banking relationship provides them. They also understand that they need to pay for that relationship. Banks need to become less diffident in their pricing; they need to understand that for many borrowers lending is no longer the commodity product that it was a year or more ago.

* Increase segmentation emphasis. Over the next few years, virtually every lender will be more selective. Constraints on funding and capital mean that lenders need to use their ammunition more selectively than in the past. The banks that develop strong segmentation schemes based on industry and/or geography and/or products and/or other factors will be able to deploy their capital more successfully than those that continue with a vanilla marketing emphasis. We have promoted the importance of segmentation for years; now, it appears to be mandated by market forces.

Concluding Thoughts

Unprecedented volatility will provide unprecedented opportunity, at least for some institutions. Assuming risk management issues are under control (admittedly a big assumption), cost reduction, process realignment, repricing, and segmentation can position a lender for success now and for many years ahead.