The Deals You Don’t Do

Sometimes, the best deals are the ones you don’t make. In this episode, Todd Classen from Moody’s Analytics shares a personal story of how a banker saved his family farm by refusing his father a loan.

Podcast Transcript

Dallas Wells: Hi and welcome to The Purposeful Banker Podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today’s best bankers. I’m your host Dallas Wells, thank you for joining us. The title of today’s episode is called, sometimes the best deals are the ones you don’t make. It features Todd Classen, Director Solutions Specialist at Moody’s Analytics. We’ll get into Todd’s current position at Moody’s and what he does a little bit later in the podcast. We’re going to start with his connection to this topic, which actually goes back to a story that he told at our BankOnPurpose conference back in April. Todd first all welcome to the show.

Todd Classen: Thank you.

Dallas Wells: Todd do you mind to start by retelling that story? It goes back, way back, to some of your background. Tell the story that you told during the panel discussion at BankOnPurpose.

Todd Classen: Sure Dallas. For me it was what I really learned about this story and pieced it all together I guess if you will, was when I was in transition of careers. At BankOnPurpose we were talking about the purposes that we all serve and how it ties into banking. For me I was looking for a job change, wanting to figure out where we were headed, where I was headed, looking at that. I spent some time talking with my dad, and I was looking at the bank industry in a software company that was related to the banking industry. He told me a story about how we basically ended up with our family farm in the way that we did. It tied back to a community banker that in 79 I think it was, basically told him no to a couple of deals. My dad had walked in the door and wanted to purchase some more land, purchase a new tractor, get a new truck, a grain truck and a new pick up, and such. The guy sat across the table from him and told him no.

The banker had given my father some alternatives, a local dealer and others to work with for a used tractor and a used pick up, and we did not buy the land. As time progressed, I’m a young kid at this point so I didn’t follow all this at the time, as time progressed the early ’80s rolled around and we had neighbors that were losing their farm, or because of money issues were having all kinds of challenges. Some of them divorced and such. He really saw how hard it was on a lot of those families. In 87 we paid off the family farm. This is a few years back, looking at this, talking with my dad. He said, “That guy sitting across the table from us became one my key advisors and really advised me on making a decision that ultimately helped us pay off and have our family farm.”

For me when I was looking at career change and such, you started to see the value of the community banker sitting across the table and then helping other members of the community. He sent some business to a couple local dealerships, but he really also helped save our family farm and became a trusted advisor to my family. As we started to look at my career change and my background being in technology and different things like that, I wanted to make a contribution in that same direction. The way that I felt that I could do that was working with a software company that also helped to provide tools and technology to those community banks so that they could serve the next generation of small business, farmers and stuff, and the community and the same community organizations, just like somebody had helped serve my family and ultimately help us get to where we are today.

Dallas Wells: Yeah, really trying to enable those banks to hold true to those values that they’ve had for a long time and make some big impacts, just like they did to your family.

Todd Classen: Absolutely.

Dallas Wells: Yeah. At the time, and this is something that still happens, we still hear of course and I’m sure you do too of banks seeing deals where the numbers work but they feel like it’s not the right thing for that borrower. At that time you’ve got a banker who’s sitting across the table from your dad and says no to a deal that would have grown his own personal portfolio. There’s that, and then there’s also the fact that you’ve got to tell somebody no to their face and say, “I don’t think this is a good idea.” Do you recall, do you have any recollection either directly at the time or from your dad later on, how did he react to that initially, to that rejection? Was that a tough pill to swallow?

Todd Classen: Yeah. My dad had several of these stories and this was definitely one of them where it was for him to not believe that he had the best answer, especially at that earlier stage in his career. It was tough. He definitely didn’t go directly across the street and buy that used case tractor instead of that new John Deere. He sat and thought about it, and struggled with it because he thought maybe he could go someplace else to get a better loan, or something. It was tough for him.

We’ve seen in agriculture so much success here as of recent, anybody today is going to struggle with that same thing. I’ve got the success, I’ve got the success. Why is this person holding me back? All said, in the case of my dad, he came to realize this wasn’t his area of expertise, he was a farmer. Not necessarily the most knowledgeable on all of the financial side, so he went and asked some more questions and learned some things from why that decision was made. I think probably the most noted thing that my dad said about this was going back and asking and learning about the decision really helped him have more respect for that banker.

Dallas Wells: Yeah. One of the things we’ve talked about before, and it’s a big topic in a lot of the banks we talk to also, is the challenger mindset. There’s a great book out there on that, we’ll link back to that in this episode also. The challenger approach to selling and to interacting with your customers, where we get away from the customer’s always right mentality and sometimes you have to tell them things they don’t want to hear. We do that all the time with our clients. How is this story, this experience, this piece of your history, has it shaped the way that you deal with your own clients and the banks that you work with today? Do you take that same challenger approach?

Todd Classen: Absolutely. I’m fortunate enough to work in a company similar to yourself, where we have an opportunity to help with best practices or what we see as opportunities for institutions to improve their process and such. It definitely changes the way I approach my job. I do a lot of work with a lot of institutions. I probably have visited a couple hundred over the last couple years. I get to see a lot of things, one of the interesting opportunities for me then is to be able to share those experiences, even though they might contrast or be counter to what a bank thinks they want to do in their next step. If get the opportunity to share the story and the experience with them and show them how it can be done via the software or whatever, it might open their eyes to a new opportunity, a new experience. It definitely drives part of why I took this job and part of why I enjoy it so much.

Dallas Wells: Shifting gears just a little, given the current condition of the banking industry and the position a lot of banks find themselves in, where they’re really struggling for good, solid, organic growth, do you think that same decision would have been made today or do you worry that some of the current pressures would cause lenders to approve loans even if they’re not sure that it’s the best deal for that particular borrower?

Todd Classen: Yeah, I would said in agriculture two years ago I would have been fearful that they would have been approving a lot more of these deals, because everybody was projecting and forecasting such a high value and dollar amount for some of the commodities like crops, some of the corn and soy bean prices were so high. I do see in the customers that we’re working with a lot of these community bankers have concern about this industry at the moment. I think they have a memory of what happened with real estate and a memory of what happened with agriculture in the ’80s. I think that it’s driving a conscience in the industry at the moment, so I do see more people this last year or so saying, “Boy, we’ve got to do a better job of detailing the risk of this deal, or pushing back on a few of these approvals, so that we don’t recreate those industry events, that were so traumatic and so altering, of prior.” They’re getting there.

Dallas Wells: Yeah, I think that’s a good point. I think maybe the harder part is that some of the onus, the nature of the way it works today, some of the onus has been put back on the borrower because it’s easy enough for them to get access to a lot of different banks and financing options now, somebody will tell them yes. It used to be your dad would maybe go to the local bank, and if the local bank said no you’re kind of out of luck. Now you line up all your options and you go down the list, somebody will say yes. I think that’s a slight shift and something that the industry I think will continue to struggle with because then the banks feel that pressure of, “Gosh, somebody’s going to do this deal, maybe it should be us.”

Todd Classen: I think community banks are in a unique situation here, where they need to be viewed as that trusted advisor. That’s where that relationship comes into play, they have to build those strong relationships with their customers. That’s where companies like yours and mine can really help the bankers not have to focus on maybe some of the analysis or some of the other numbers, and let the systems and software and technology do that for them so they can focus on the relationship and help be a little bit of that advisor. At least that’s what I hope we can do for a lot of these institutions, is make their lives a little bit easier so they can focus on making the communities a little stronger. If they’re a trusted advisor hopefully those people won’t go find those higher risk loans and make as bad decisions when they go outside of their community bank.

Dallas Wells: Yeah, good point. Actually let’s talk a little bit more about what you. Tell us a little bit about Moody’s Analytics and what you do there.

Todd Classen: Moody’s Analytics is, I’ll say the software and analytics division of the Moody’s Corporation. We focus on helping institutions with risk management. Whether that’s credit assessment and loan origination or scoring models, those types of things where we help the banks really be able to streamline their processes for generating agricultural, commercial small business loans, and also evaluate the risk within that portfolio to be able to identify the riskiest deals, the riskiest customers and help them manage that. Which, one of the largest investments on their balance sheet if you will, the book of business that they have. Our specific focus is a cloud based software solution that I work in supporting. I work with, like I said, a couple hundred institutions. We have about eight hundred on our platform, where we focus on helping them with their origination process for small business and ag commercial loans.

Dallas Wells: One of our recurring themes here is helping banks, talking to banks about the need to speed up the entire process. From the time you to a borrower till they actually have money in hand to do what they need to do. That process is still in most banks slow and painful and cumbersome. Everything else in the world is speeding up and getting easier and more efficient. Banks have to balance that with of course all the regulatory changes of the last years, it’s a tricky balancing act. It sounds like you guys are in that same bucket, so to speak, of let’s help them find a way to still properly measure and monitor that risk, but do it much faster so that we can better respond to those end customers, the borrowers that need to get things done.

Todd Classen: Yeah, you hit it pretty much on the nail, on the head there with everything. It’s the regulatory increases the amount of risk, the expectations of the customers for fast return, all of those things play into added external pressures on a bank. They’ve got to grow the business, they’ve got to do it faster and they’ve got to do it with more regulatory scrutiny and with more risk in the environment. We work on processes that help them with all of that. Can we help them with their regulatory recording? Can we help them with their risk management? All of those things.

By being able to work with so many institutions we bring a lot of expertise to the table. That’s where if we talk about the different types of customers we work with, some are partners and actually are advisors to us, and in other instances we are the advisor to those customers. Especially with community banks where this isn’t necessarily their area of expertise, a lot of times we take what we learn from some of the larger institutions and help pass that down via the technology or via our expertise to help them improve their processes.

Dallas Wells: Okay. I know that you are on the road quite a bit. I think when we talked in April you said during the last year you’d visited a hundred plus banks and probably the same the year before. I assume that’s still the case again this year. What are some of the tactical pain points that you guys are hearing most often? What are banks really struggling with right now?

Todd Classen: Yeah, it’s been a lot of the same themes as what I’d seen the last couple years. It’s been a lot of struggle for myself. The pain points really are we do see the tightening margins in a lot of the industries. Being able to grow those businesses while making sure that they’re profitable, which means the process underneath has to be more efficient and faster like we’ve talked about. It’s got to be a quick process but you still have to manage that risk so they don’t put that on the books and possibly endure future losses and such. The biggest paint point really around a lot of these origination platform events is being able to be more efficient than they were the day before with the same number of people in a lower margin market.

The other piece of it that we really are seeing is how do they organize and manage all the data that lays within that to make better business decision? What market should they go into? What directions or strategic moves should they be making as a bank? There’s a lot of data and value in the origination processes that before they weren’t really utilizing to the most to have the most impact that they could have. We see a lot of the pain points being able to compile that data together and leverage it and use it, so the process has to be a feeder into ultimately their true business intelligence of decision making and strategic direction for the bank.

Dallas Wells: Yeah. I think that’s well said. That’s the conclusion we’ve come to is that the next big thing for the industry and those that are going to be the winners are the ones that figure out how to manage that data. Right now everybody’s kind of drowsing in it, there’s more data than they know what to do with and how to manage it. Some of them are starting to figure it out and they’re already seeing the results of that. I think that’s the big hurdle for banks to clear, is figure out how to wrangle all the technology and the data and get it all pointed in one direction and turn that into some performance.

Todd Classen: Yeah, I think your one comment, “wrangling in the technology,” is clearly a challenge for a lot of the community banks. I think the banking industry as a whole there’s a lot of technology now being pushed into the market space, which is great. I’m a fan of competition in the market and I’m a fan of people pushing the frontier, but for the community bankers where their expertise, and even a lot of the larger banks, where their expertise may not always be with that type of technology, it’s on us, our organization as part of these companies to really help educate them on how to maximize the value of that. Again like I said at the beginning, hopefully if we do our job really well we give them tool kits to make their jobs easier so they can focus on doing a better job in their community banks or in their communities, and helping the borrowers by being an advisor and having an impact on what I think is the foundation of our country, our entire community structure.

Dallas Wells: Yeah. Todd I think that’s a perfect place for us to wrap it up. Thanks so much for taking the time to do this today.

Todd Classen: My pleasure, thank you for having me on.

Dallas Wells: Yeah you bet. Thanks everybody else for taking the time to listen. If you like what you’ve been hearing make sure to subscribe to the feed in iTunes, Soundcloud or Stitcher. We’d love to get ratings and feedback on any of those platforms. You can always find those episodes as well as show notes, we’ll have links to Todd and some of the specifics we talked about today in today’s show notes, those are at precisionlender.com/podcast. Thanks for listening, until next time I’m Dallas Wells and this is The Purposeful Banker Podcast.