Why Your Best Lenders Matter More Than You Know

January 13, 2016 Dallas Wells

 

The banking industry is facing a crisis in the coming years.

Wait! Don’t leave just yet. I promise this isn’t blog post 10,001 about how banks are in the process of being “Uber-ized” by tech startups. I’m talking about an entirely different problem.

This problem is largely self-inflicted, but it also should be solvable if we tackle it the right way. The big crisis? Banks are short on lending talent (see here for details), and the shortfall is about to get much larger as the boomer generation retires with very few qualified replacements in sight.

Why is this so important?

A great lender can have a superhero-level impact on a bank’s balance sheet.

Every bank I’ve ever worked with has a huge variance in the level of lender production. The distribution typically looks like a power law curve, where there are a few big producers, a few laggards, and then the majority of lenders fall in the middle as “average.” While this is true of sales production in most industries, it is especially important in banks. All of those deals live on the balance sheet, and their makeup dictates the bank’s profitability and risk profile for years to come. Given that dynamic, the top lenders in a bank have a massive impact on the institution’s performance.

Let’s start by defining “massive impact.” To get to that number, we have to first identify the top producers, or “Alpha Lenders” as we call them. There are lots of ways we could define Alpha Lender, but when gauging impact, we wanted to keep it simple and use portfolio size as the determining factor. The average portfolio size is obviously different depending on the bank, as differing strategies create different loan mixes and organizational structures. So we used a measure of a lender’s portfolio size relative to the other portfolios within their own bank. We expected top-heavy production, but frankly, the degree of that top heaviness was surprising.

In most of our client banks, the top 20% of commercial lenders produce about 60% of the total commercial portfolio. But, the really impressive part is that they not only produce more volume, they also produce more profitable deals as measured by risk adjusted ROE.

Take a look at this bank, a PrecisionLender client, which has close to 200 commercial lenders. We divided their lenders into deciles by volume, and then compared the top few groups:

LenderROEChart2

LoanVolumeChart

How do we find or grow that kind of talent? And then there’s the question that keeps CEOs up at night: What happens if/when they leave? The Top 20 lenders have a median portfolio size of $139 million, and generate median ROEs of 13.2%. Lenders 41 through 60 (solidly in the middle of the curve) have a median portfolio size of $26 million and median ROEs of 8.11%. That top group is allocating a giant chunk of the bank’s capital, and is doing it more profitably than all of the other lenders. Wouldn’t it be great to have more of those?

Answering those questions should be a top priority for bank management teams. The ones that get it right will be the big winners in the coming years. Those that don’t? My guess is their banks get added to the growing M&A stats, as they will have little choice but to sell before they lose too much ground.

Stay tuned for more on what traits those great lenders share, and we’ll explore some thoughts on how to start home growing the next generation of stars.

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