Financial Crisis First-Timers and Difficult Workout Conversations

June 15, 2020 Jim Young

The current financial crisis has revealed some weak points on bank portfolios, and in their talent rosters. What do past struggles to hire commercial relationship manager talent mean now for banks? What's it like for RMs going through their first crisis? And what sort of banker is needed to handle the difficult workout conversations that are becoming more commonplace?

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Transcript:

Jim Young: Hi and welcome to The Purposeful Banker. A podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm Jim Young, director of content at PrecisionLender, joined again today by Dallas Wells, our EVP of strategy. And today's topic was inspired by a recent newsletter I received from the good folks over at BankDirector. If you don't subscribe to their newsletter, I'd suggest you do. And they had an article within the newsletter titled, Trial By Fire. And it's about folks on the front lines of commercial banks during the COVID crisis, the relationship managers.
 
And Dallas, feel free to either back me up here or basically back away and pretend like you don't know me, but I feel like I've been so immersed in this whole thing with the various programs that PPP and Main Street Lending and talking about the levels of risk on bank portfolios and liquidity, etc. That I honestly hadn't really stopped to say, I wonder what it's like for RMs who were basically living this financial crisis every hour of every workday. What about you?
 
Dallas Wells: Well, we get quite a bit of both here at PrecisionLender. So we tend to work a lot with the management teams in setting up strategies and in some of that stuff that you've been involved with of what are the markets doing? How are we reacting to it? What should the strategy be? And how do we get those strategies rolled out? And especially of course, over the last couple of months, dealing with the government programs and trying to put processes and tools in place. But we've also got thousands of relationship managers that use our tool to price their deals and structure their deals.
 
And so we have a fair amount of regular discourse with them in just helping them put together some of those deals. So our support team does a lot of that. And you can certainly hear the tone change, earlier this spring, things shifted obviously instantly like they never have before and the questions start to change. And I'd say the summary version of that shift is it goes from, how can I possibly find a way to get this deal done? Can you help me figure out a way to make it work? To, am I sure I want to do this deal? Am I doing something stupid? That's the shift that's happened. And we hear that, it's different versions of the same conversation at both the management level and for the relationship manager.
 
So some of both and it's been a trying time for both.
 
Jim Young: Yeah. Let's back up for a second and go again to this piece called Trial By Fire. And in it, it's largely an interview with Jeff Rose with Iowa-based Ambank and in it, they write about the credit training programs for lenders have quote, "All but disappeared." And then they quote Rose saying, "We have to throw somebody in, let them get their feet wet, mentor and train them." So basically again, trial by fire. And so I had multiple questions that came out of this. The first one is, does their comment, which is a pretty big statement that credit training programs have all but disappeared. Does that mesh with what you see and hear from banks when you talk to them?
 
Dallas Wells: That's definitely the case. So most banks used to have a pretty formal training program where you would hire generally right out of school, a crop of credit analysts. And they would do that job for a couple of years and then come to a fork in the road where they either stayed on the credit track or a larger percentage of them then went into a junior lender role. So everybody got the same kind of formal credit training as a background. And it was expected that you would hire an annual group of these analysts. And there would be three buckets that they would sort into, which would be credit, lender, or not going to be at the bank anymore.
 
And it was a way to always be bringing in new talent and training and it worked, but it was obviously one of the early things to get cut as banks, they really had to start trying to get efficient. And as you've seen the assets per employee numbers climb so dramatically over the last couple of decades in banking, it's from things like that where there's just not that luxury of having that many warm bodies in place. So I actually went through one of these programs. I was probably one of the final groups to go through at the particular bank I was at. And I'd say the interesting thing is, you do get formal training on how to go about evaluating credit.
 
That doesn't mean that it prepares you for the kind of situation that we're in now. I don't know that there's a way around the trial by fire. You have to go through one of these to truly understand it. And there's no amount of academic book exercises you could do, I think, to really understand and prepare for it.
 
Jim Young: That's a good point. I was curious if you could imagine though, I realized this is sort of a singular event, but at the same time, if you were a commercial lender or RM right now and you didn't have that base of training, what it would be like right now?
 
Dallas Wells: The training still happens today. It's just much more of a shadowing learn on the job kind of training. And so not everybody comes from the same foundational basis of understanding. And I think there's a natural tension within a bank between the credit side and the production side that's a healthy, natural friction between those two groups. And so when you're hired into the lending group and you only see it from that side of the fence, so to speak, the impetus, if you're hired in good times is always on growth. And so I think the difference is that even in good times, if you were hired into the credit group, the focus is still on risk.
 
The pendulum changes a little bit about how much focus and how cautious we are and in a way how much power credit has in the decision to book business or not. But that perspective matters. And so coming into one of these with nothing but the focus to grow your book and that growth, not at all costs, but at all reasonable costs, mandate, that's got to be jarring for somebody who this is their very first crisis and they've only come up through the production side of the shop.
 
Jim Young: And so one of the other things that was, again, part of the context of this interview with Jeff Rose, and it was within the BankDirector Annual Compensation Survey in which again, they know that banks are having a hard time finding enough commercial lending talent. And I'm wondering, I mean, I think the obvious shortcut sort of thing with this is, hey, we'll just hire experienced commercial lenders away from other banks. So we got guys in here who're season people who have lived through previous financial crisis, et cetera. The training and all that sort of stuff, we don't have to do and just plug them in and they go, of course, every bank has that strategy.
 
So those people become like gold. And then I guess the alternative is, do you go and try to mind the younger ranks and again, bring them up to speed, but then you're competing with a generation that doesn't maybe view banking in the same way as our generation did and Silicon Valley and software companies are competing with them for talent. I guess I'm wondering if you put yourself in the shoes of someone like Jeff, what is your strategy on maintaining and growing commercial lending talent at your bank?
 
Dallas Wells: Well, that's, in some ways, kind of an existential question for the industry, because that compensation survey you talk about, that has been the top need identified by banks for however many years we've been following that survey. And I think that has been the most noticeable outcome from that decision to cut those training programs is there is no builtin pipeline of new talent into the business. And so what that's caused is the average age of commercial lenders has skewed older and older. And that's just because there's not that younger group coming in all the time like there used to be, not the same numbers. So what do you do about that today?
 
I think we have seen some banks do, not formal credit training programs, but try to get more intentional about, we always bring in some new talent into the business. And you're right, the competition there is different than it used to be. It's different across the board in any finance business, used to finance jobs where the place everybody wanted to be. The top graduates out of every school, they wanted to go into finance somehow somewhere. And that has shifted to tech jobs somehow somewhere. And so the competition has gotten pretty tough for that young talent, nothing like a recession to help solve that maybe, but this is the struggle of, this is a long term issue to have to deal with.
 
You have to put one of these programs in place and you're not going to start generating benefits from it for several years. That's a hard thing to do when it feels like every single year is a budget crunch. And you're having to find something to cut. It's hard to add in something like that that's going to have such a long payoff to it. But I think there are some banks that are starting to invest in that. And I think that's the only long-term answer. In the short term, what we've seen is banks get a little more creative about where they find this talent. And so they're bringing in, identifying the common traits among good solid bankers. And there has to be some analytical ability, but there also has to be some sales ability.
 
And so that combination of traits exist out there in lots of places outside of banking. And so that's where banks have gone to find it. And they basically figure, if you have those two things, we can teach the rest, we can teach the mechanics of it, but they've had to get more creative about that. So there's no silver bullet, but I think that you do have to take a longer view to things like cultivating talent. There's just no way around that. And you can't continue to starve the business of especially good, productive, reliable commercial lending talent. It's the top need over and over.
 
Jim Young: Okay. Now let's circle back. And I realize I've created a two part divergent conversation in this podcast. One is this sort of larger view of commercial lending, talent, and development. The other one is the specific issue right now, which is a crop of young, relatively inexperienced commercial lenders going through their first financial crisis. And I'm wondering if you can go back to your experiences and I'm not sure which financial crisis you want to focus on, but what's your first one you dealt with was, and if you were having a beer with a lender who's doing it now, what advice you would share for them?
 
Dallas Wells: Good question. So the very first recession that I dealt with in this business was coming out of the 2001 recession, but I was new enough and coming in at the tail end that it didn't register with me that was just how the business worked. The only effect I saw was interest rates. So we have been in this three, going on four decade now, downward trend in interest rates. But that point after the '01 recession was the first time where the fed aggressively cut rates enough to where banks had some deals on their books that had structures of like prime minus three or prime minus four in some cases, and they didn't have floors on them. Why would you, those things were put on the books when prime was 12, right?
 
So we saw some of those deals actually starting to adjust down to where they had 1% or in some cases, 0% net rates to the customer. And so it was the first time we started seeing some of those effects and that then impacted a lot of things going forward about how you actually think about, we can't just look at this narrow range of stuff because that's the way it's always been. We need to instead look at all possibilities because markets are volatile and unpredictable. And we never thought that there would be this zero interest rate world, but here we are. So that was the only takeaway I had from that one.
 
The first real one that I went through was 2008. So that was the one where I got to feel firsthand, a couple of deals that I put on the books at a bank go south. So that's back to the, you can learn about the math of it, you can understand what a deal in default looks like, but that's a different thing than the visceral reaction you have to one that you painstakingly chased and closed and have worked with through the years and you've built close relationships and it's a business owner, you know, them, you know their family, you've gotten to be a part of their business life anyway. And then the deal goes bad. And now you have very much an adversarial reaction as you try to collect and they try to survive.
 
There's no doubt that going through one of these and having to help work out some bad credits changes the way you approach the business going forward. It becomes less about just math and you actually start to see some of the human side of when you stress test a deal in your credit write up, okay, what does that actually mean? And I think it makes you more cautious and a little more conservative. So the advice I would have for somebody going through their first one is, first of all, buckle up. These things are rough, they're unpleasant. But second of all, this too shall pass and you will become a better banker, a better lender because of this and a better partner for your borrowers as well.
 
Part of what I felt there was this personal responsibility. "Hey, I'm the one that loaned you three million bucks and now you're filing bankruptcy." So that's not a thing I want to have a part in again. And so as much as I love to grow my book by that three million bucks, I want to be really certain that it's the best thing for the bank and it's the best thing for you. So buckle up, but this too shall pass. And then just soak it all in. Learn the things that you wish you'd done differently, there will be a bunch of them. Even if you don't have deals go bad, you'll have some that you're concerned about. Those are the things that you can learn from next time.
 
Every crisis is different, but defaults largely end up happening the same way. And those are the things that you can just get better from.
 
Jim Young: I'm curious about what a workout discussion is like and how that is different from your typical commercial loan negotiation. And when I was thinking about it strictly from my liberal arts background thing, it was sort of like my first thought was, wow, you really need to come into this with some empathy, because you're dealing with people who are struggling in a very human situation. And then I oscillate between that and what you really need to just compartmentalize your emotions here because you've got some hard decisions and you can't get emotional about something when the numbers are telling you something different.
 
And so I'm wondering again, as a lender or RM, what face do you put on or how do you approach that?
 
Dallas Wells: Well, what you learn going through some of these is that there are some bankers who just can't do workouts. They're just not good at them. It's not a matter of, they don't have the skills or the knowledge or couldn't acquire those. It does take a certain disposition to be able to handle them.
 
So how are they different? Everything about them is different. And the core question is, the bank has to decide, and yes, there's decisions about what's right for the business. But ultimately, the bank has to decide, do we feel like we should help keep this thing alive?
 
Because the bank ultimately has that power to say, "We could come up with a way to buy you another six months, another 12 months. Do we do that or do we just tear this thing down and try to collect what we can?" But of course, keeping something alive means you are putting more money into it even if it's just, the clock keeps running, the vig keeps cumulating. Giving somebody time, there's no such thing as free time when you're talking about debt transaction. So that's the hardest part is figuring out, are we still partnering and trying to make this work? Or are we now officially filing lawsuits and we're foreclosing and maybe coming after the personal guarantee and your house, and all kinds of things that the bank probably has the legal right to do?
 
But that means you just killed a business and the employees no longer have jobs. And obviously there's all the personal follow on effects for that borrower. So you do have to make some black and white decisions at some point on that. That's why a lot of banks have a workout specialist. And especially in the larger banks, there's a group that handles these. And so the RM that owns the relationship and originated the deal will be involved. How involved is going to be different bank to bank. Sometimes it's just, hey, you need to just give us information and background and make sure that we're talking to the right players, if otherwise you're out of this.
 
And sometimes you're right there and may be even leading the discussions, but you have a workout specialist, they're riding shotgun with you. So that will be dependent on the bank, on the banker, on the relationship.
 
But there are people who are workout specialists and it's an interesting job because you'll go many years where you look, we've just come out of a decade plus of good times. There weren't a lot of deals to work out, wasn't a lot to do. But then all of a sudden, you're working nights and weekends and its feet to the fire and all hands on deck.
 
And you're trying to add new people that have this kind of unique skill set and the disposition to do it right and do it well. But you got to scrounge him up from, "Well, let's look at who did we work with 10 years ago that was good at this." Because it's been a while. So it's an interesting part of the business that is very cyclical. And it becomes really important in times like this. And I can tell you, those groups are busy right now. They already have their plates full.
 
Jim Young: And finally stepping back out of this to that current context where we were talking about the ongoing seemingly endless struggle to hire a commercial lending talent. I mean, I get the whole tech sort of competition thing. I understand that sort of thing, but we're also now talking about massive jobless rates in this country. And maybe this is a short-term sort of thing this would change, but it still surprises me sometimes that it seems to be so difficult to hire folks into what I would say, if we're going to throw massive overarching labels is a pretty good paying white collar job. And then I guess, is it banks need to learn how to market themselves better or what?
 
Dallas Wells: I think that's part of it. I think also the path to that position, to that high paying job is, it takes a while and the route there isn't always that high paying. So you got to put in your time and prior to this crisis, we were looking at unemployment rates, sub five. So the ability to just go get people and have them sign up for, hey, as long as you stick around for a decade, decade and a half, you'll be golden. That's a tough sell when there are there alternatives out there, not just tech companies, but plenty of those too where it's like, tell you what, you put in your time for six months and you'll be in a good spot. You can see why that's a tough sell.
 
And banks also have a reputation issue with some younger groups. This is not my opinion, this is survey data and in discussions with bankers. It's hard to get new talent in at times because banks are seen as conservative, as slow moving, not big adopters of new technology.
And also there's no way of getting around the bad reputation that banks got through the last financial crisis. There was a whole, I don't want to say a whole generation, but there's a good swath of a generation there that sees banks as evil and they want to have no part of being in that business. So I think it's a lot of different factors there that are changing.
 
I think the industry has a better reputation certainly now from the financial crisis. And also banks do spend a ton of money on technology. And when you actually get inside of them and you compare them to most businesses, it's pretty impressive the systems that they have and what they've built, and they are figuring out that the conservative, put in your time, you got to wait your turn kind of culture has been harming them. And so a lot of them have actively done some stuff about that. When I was young and getting into banking, I was given some opportunities at a younger age than most. So I would sit in a lot of meetings where I was the youngest person in the room by 25 years.
 
So I'd be in my mid-20s and everybody else there was in their late 50s or 60s. And the rooms I'm in now are much more diverse by all measures of diversity, including by age. So I see that banks have made progress here. And so I think things are moving in the right direction and that there are good opportunities for young people coming into the business now.
 
Jim Young: Got you. And I guess along those lines, without going one more time back to our conversation about the workout sort of stuff, I wonder to what extent nowadays banks are conscious of, I guess what I would call bedside manner in those discussions in the sense like you can deliver information about this is happening, this is not going to work, that sort of thing in one way, and then get a completely different reaction from your client based simply on how you say that. And I wonder to what extent banks are conscious of that as a, honestly, an attribute right now.
 
Dallas Wells: Well, in workout situations, I don't know that that applies. I don't know that there's a nice way to say we're taking your real estate from you. Now the conversations leading up to that, I think that's a lot of where, as I was talking about, some people are good at workouts and some aren't. There comes a time where you have to get really firm with borrowers at some point. A workout is not something that you come in on a Thursday and all is well, and then on a Friday, you're working it out. Now that occasionally happens, but that is very much the exception to the rule. Generally, it's a slow deterioration and it's a kind of a downward spiral of there start being violations of covenants and they're five days late on their payment and then they're 15 days late.
 
Then they catch back up and then a revolving line of credit starts to get maxed out. So there's all these things that happen over time. And at some point, there has to be a serious, and sometimes a harsh discussion about the way this relationship is working needs to change. And a lot of times businesses are making decisions, juggling priorities. And if they've got a really friendly banker who says, "Oh shucks, it's okay. You're 15 days late, if it's 20, we won't get too upset." The nice guy will get paid last. That's just the reality when these things get ugly is they will put off what they can put off. And so to get to the front of the line, sometimes you get to rattle cages a little bit.
 
So the bedside manner thing is obviously there's lines that you shouldn't cross and can't cross, but there's also just not exactly a super friendly way of going about it.
 
Jim Young: Got you. Well, it's going to be an ongoing scenario that the banks are going to be going through over the weeks and months. And so it will be interesting to see how-
 
Dallas Wells: This one's a lot different. We've talked a lot about bankers who have been there, done that and have a couple of these crises under their belt. Everyone is different, and every crisis is different. The root of it is different. But I said earlier, generally defaults are kind of, they are what they are. That's not the case this time. This one really is different from prior ones in that you have some really healthy, solid customers in your portfolio that the revenue just turned off and it will turn back on. But you have to make that call before you can see the evidence of, is it going to turn back on or not?
 
So that's why we're seeing banks with 25% of their portfolios in forbearance of some kind. Well, you sure hope the 25% aren't actually in trouble. That it's a temporary issue and you help them through it. And then you get to the other side and all is well. But some portion of that 25% is just gone. Those businesses are not going to come back. And so being able to make that call and the art of this that we've talked about of knowing when to pull the plug and how to interact with those borrowers and where to draw that line, there's more variables to this one that we've never seen before that's going to be really interesting to see how it all plays out.
 
And some banks are going to pull this off better than others. And so to see who's able to do that and what the longer term effects of it are, I think that's what we have in front of us for the next few months.
 
Jim Young: All right. Well, that'll do it for this week's show. Dallas, thanks again for coming on and offering your perspective.
 
Dallas Wells: Yep. Thanks, Jim.
 
Jim Young: And thanks so much for listening. And now for a few friendly reminders, if you want to listen to more of our podcast, check out more of our content. Visit the resource page at precisionlender.com or head over to our homepage to learn more about the company behind this content. Again, if you've got ideas or feedback or thoughts for future shows, feel free to email me at J-Y-O-U-N-G@precisionlender.com. And that email address will be in the show notes as well. And if you like what you've been hearing, please make sure to subscribe to the feed in iTunes, Google Play, or Stitcher. Love to get ratings and feedback on those platforms.
Until next time, this is Jim Young and Dallas Wells. You've been listening to Purposeful Banker.

About the Author

Jim Young

Jim Young, Director of Communications at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender he manages the many ways in which the company shares its philosophy on banking and the power of relationships Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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