With regulatory scrutiny growing over commercial real estate concentration in loan portfolios, some banks are attempting to branch out into commercial and industrial lending. While diversification can be positive, experts encouraged bankers to remain cautious about expanding into new areas of lending. Experts shared their views during a general session on the third and last day of the Acquire or Be Acquired seminar this week in Phoenix.
“You really need to understand it,” said Teslar Software CEO and Founder Joe Ehrhardt about redirecting resources to C&I lending from CRE lending. “C&I is very different from CRE because the collateral is different. With CRE, there is the real estate; with C&I, it’s not that simple.
“Before making such a move, it is very important to have good processes in place,” he urged.
RSM US Risk Consulting Partner John Behringer elaborated on the need for good processes. “You can’t rely on technology to fix bad processes,” he said. A big part of a good process is monitoring, Behringer said.
Ehrhardt said a good process should include a written record of when covenants on a particular loan are met. “You should record how the borrower met the covenant so you can track trends,” he said. Behringer added that consistency in the data collection process will make the data much more useful in the long run.
Mac Thompson, founder and president of software company White Clay, encouraged banks who want to shift the emphasis in their lending to start prior to a crisis. “Put muscle memory in place now,” Thompson said about new processes. “Don’t wait until you need to change the bank’s culture due to the economy.”
A bank’s lending focus should reflect its mission, the experts agreed. “Figure out what kind of bank you want to be, both for the sake of your customers and your shareholders,” commented Thompson. Furthermore, Thompson said community bankers need to be more proactive about what they do. “We can’t just be guarding the furniture,” he said, noting that the market is changing. Thompson implied one tactic with this question: “How many people in your branch have talked to every small business within a half-mile radius?”
Despite differences across the industry, Ehrhardt said banks fall into one of two categories: growth oriented or dividends for the grandchildren. “We need to know which one you are. Each is a different risk profile,” he said.
Thompson stressed that bankers need to “get their data right. This will help you understand your customer, and understand their behavior.”