Improving the efficiencies of delivering service to your lending customers

RMA Journal, The,  Feb, 2005  by Kathleen M. Beans

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Improving efficiencies is key for financial institutions that want to better serve their small business and middle-market customers--and do it more economically. Underwriting, monitoring, and collections are the primary areas where institutions can improve efficiencies regardless of their size or reliance on credit scoring, says Charles B. Wendel, president of Financial Institutions Consulting, Inc.

Wendel moderated a recent RMA audioconference discussion on improving the efficiencies of delivering service to lending customers. Participating were Richard B. Barton, EVP and CCO, Banner Bank, Walla Walla, Washington; Roger S. Busse, CCO, Pacific Continental Bank, Eugene, Oregon; and Mark H. Weber, SVP and director of Commercial Credit Services with PNC Bank, Philadelphia, Pennsylvania. Each discussed how their banks improve efficiencies in underwriting, monitoring, and collections. They also addressed efficiencies related to staffing, staff development, and training.

Underwriting

Pacific Continental Bank. Standardizing the underwriting process is critical to achieving efficiency, agreed the panelists. Pacific Continental Bank, which does not use credit scoring, standardized its underwriting process into a singular credit display format, unifying its terminology, cash flow methodology, and risk-rating process.

The bank trained its lenders about what needed to be included in that display. "It created a judgmental assistant for us by providing standard cash flow tools that enable lenders to use a standard or adjusted UCA cash flow or fixed-charge coverage, depending on the size of the credit," said Chief Credit Officer Roger Busse.

Pacific Continental Bank, a 30-year-old institution based in Eugene, Oregon, analyzes the expectations for its various commercial real estate loans. "By standardizing our underwriting, we increased our efficiency dramatically and reduced the size of our displays from 15 pages to six or seven," said Busse.

The structure of the display focuses on specific items. "Before we had a standardized cash flow methodology and a standardized collateral section, we drove everything to the risk rating," he explained. "There was a lot of meandering through various elements of the balance sheet and income statement. The financial analysis was not controlled well; we simply were unable to pare down the verbiage in the collateral section, so we focused on the nature of the collateral."

Pacific Continental Bank reaped efficiencies in its one-over-one approval process as a result of standardizing the underwriting process. "Everyone now understood the key criteria for the approval process. In dealing with customers, we then were able to specifically ask for what we needed to get the decision quickly," said Busse. The bank also holds seminars for clients to explain "how we analyze their business, why we need what we need, and what it tells them from an early-warning perspective about their own business. And so, they also reap great benefit from the exchange of information."

Busse noted that, in the past year, Pacific Continental Bank, which is publicly traded on NASDAQ, has achieved growth of more than 30%, primarily in commercial real estate (60%) and commercial and industrial (40%). Recent performances continue to be strong, with a net interest margin of about 5.8%, ROA of 1.8%, and ROE of 18%.

"C&I-community-based businesses are a smaller percentage of our production. Although we can make loans up to $9 million, we prefer to make loans in the range of $250,000 to $3 million. Those segments allow us to act as consultants with business owners. We can be partners who provide financial guidance and tools. We've grown through word of mouth."

Banner Bank. When Rick Barton joined Banner Bank about 30 months ago, it was a loose collection of five banks that had been acquired by the parent headquartered in Walla Walla. "There was no consistency in the way the credit side of the business was conducted," he said. "My first day on the job, I went to the loan approval committee meeting, where credits were presented in several different formats."

One of the first things he did was create a standard loan policy for the bank and a standard credit memorandum. "We changed the credit presentation from a long bulky historical document into a transactional approval document. It presents a core argument about why each loan should be approved. Anybody who reads the credit request should be able to understand the recommendation in terms of the identified risks and the mitigation of those risks. Having a consistent process throughout the organization is the first big step in creating efficiency in the delivery of credit products." Banner Bank also split transactions into under $250,000 and over $250,000 and created a streamlined credit memorandum for the under-$250,000 category.

"Our branches generally deliver a full line of credit products," said Barton. "We also have a specialty-lending unit that focuses on middle-market credits in the $3 million to $20 million range. A separate real estate banking group has a totally centralized underwriting system."