Loan Growth | 7 Ripples Through Your Main Office
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Growth means we have to plan for today and position for tomorrow.
Riding the Loan Growth Wave. Earlier this week, the FDIC reported that banks had a blockbuster second quarter. The nation’s 6,058 FDIC banks earned $43.6 billion in the second quarter, up from $39 billion in the first – a 1.4% rise in net income. These earnings were fueled by over $182 billion new loans, compared to $100 billion in the first quarter.
Furthermore, Callahan & Associates is reporting loan growth for credit unions is also on a run. In fact, credit unions are riding an 8 quarter wave – resulting in double-digit annual loan growth the last two years. For banks and credit unions, this is great news, allowing many to thrive.
Today and Tomorrow. However, with growth comes challenges. Challenges for today and tomorrow. For today, FIs are challenged with servicing and processing this business. For tomorrow, they have to position for future growth, as well as outpace and out-position the competition all while serving an ever-evolving customer base.
Main Office Transformation
This post is the first of a multi-week series on Main Office Transformation. This series will address how Banks and Credit Unions can deal with all the components of transforming their main office to thrive today…and tomorrow. To begin, let’s consider the ripple effect of loan growth on the institution. These ripples touch on the areas where loan growth exerts pressure, creating the need for a strategy to deal with the pressure. For each component below, the FI must address:
- Scalability – How do we provision for the future?
- Flexibility – How do we build-in the ability to change?
- Proximity – How does the Bank or Credit Union engrain its culture across the departments?
Ripples, Pressure and Waves – Oh My!
- Lending Department – This is the most obvious and intuitive area where loan growth exerts pressure. After all, it’s their fault we have all these loans!! On a serious note, increasing loan volume puts increasing pressure on the department. The entire sequence of activity – originating, underwriting, processing, closing, packaging and selling – must scale with loan volume. A variety of organizational structures and processes define how a new loan moves through the institution. All along the way, the people and technologies that touch the loan must be accommodated.
- Loan Servicing – Once the loan is closed, then servicing activity begins. While this is a “given,” it is also an activity distinct from the loan originating/underwriting function. Loan servicing can be greatly impacted by technology, promoting efficiency, it is also subject to the cyclical fluctuations in the lending market. Hence, scalability and flexibility become important features in planning. Depending on the company’s operating philosophy, locating it in close proximity to the Lending Department may also be desirable. Proximity can help build and sustain a cohesive lending culture and can provide a form of feedback to originators and underwriters.
- Collections – The “inconvenient truth” about lending is that sometimes loans don’t perform as planned. The Collections Department must step in and manage the process of getting the loan back on track, or recovering the collateral. As with the upstream lending functions, requirements for collectors rise and fall with the economic cycle. Further, their requirements for staff and space are influenced by the company’s underwriting philosophy. Some FIs chose looser underwriting standards to accommodate higher rates for higher risk, and understand that higher delinquencies are a natural consequence of that decision. More conservative FIs choose higher underwriting standards, and argue that lower loan yields are mitigated by the decreased costs of collections (staff and space).
- Contact Center – The Contact Center may be tied to the Servicing function mentioned above, or may operate independently. In either case, increasing loan volume will boost the requirement for customer communication. Intuitively, this is manifest in cases of customers calling/emailing/texting/chatting with the FI to address routine or unusual questions about their loans. A second aspect to the Contact Center is outbound sales. (We’ll talk more about this next week.) As part of the onboarding process, particularly with indirect loans, this may mean periodic calls/emails/texts to the customer to make them aware of additional products and services that would benefit their financial lives. Scalability is an ingrained factor here, assuming that the Contact Center also fields customer inquiries on a broad range of topics, not just lending. Privacy is often a concern in planning for this function as undue background noise can distract from the conversation, diminishing the FI’s professionalism and tarnishing the brand.
- Compliance – Increasing loan volume increases the burden for Compliance. However, strong policies and procedures that are consistently followed can reduce the need for greatly expanded staffs to handle these chores.
- Marketing – Success breeds success, new loans create the opportunity for add-on sales and subsequent customer development. Marketing is directly involved in this activity, although the impact of increased lending is usually not linear in terms of pressure on staff and space.
- Accounting – Of course, someone has to keep track of all the dollars and cents flowing through the organization. And, hopefully, the new loans are generating plenty of dollars and cents. As with Marketing, Accounting is an area where the increased volume has a minimal impact on staff requirements.
Plan to ride the waves
The planning process to address the effects of growth is straightforward in concept, although there are some details that are critically important. At a high-level the process goes something like this (as mentioned earlier we’ll dive deeper in these categories in the coming weeks.):
- Forecasting – Using the FI’s best crystal ball, the organization needs to forecast and project where it will be over a 5 to 10-year horizon in terms of loan growth. This usually leads to a healthy discussion of portfolio mix, products that should be added, products that should be deleted, participations, commercial/consumer mix, etc. Sober thinking is required. The temptation to “aim for the moon” will result in overestimating requirements, if the results are not achieved. Conversely, sandbagging makes achieving desired results easier, but tends to understate future space requirements. As a result, the FI may find itself on a treadmill, constantly trying to add resources, and space – losing efficiency and profit as a result.
- Calibrate – Most of the functions mentioned above can be calibrated. The exercise at this point is to establish benchmarks, and calibrate each function based on the loan growth projection. Questions naturally arising during this activity include insourcing/outsourcing functions, changes in technology, and changes in organization or operational processes. The end result of this effort should be a staffing model forecasted in conjunction with the loan projection.
- Allocate – Once the staffing model is in place space can be allocated for each function, based on the calibrated personnel forecast. In this phase, the common functions also have to be considered – file rooms, conference rooms, break rooms, etc. Combined with the staffing model, the space allocation yields the planning requirements for the functions impacted by growth.
- Program and Plan – In concert with design-build professionals, the company’s representatives will develop the program i.e. the instructions to the design-build team that ultimately defines the facility that will support the staff.
Connecting the Ripples. Most FIs welcome the ripple effects of loan growth on their main office because it allows the company to continue providing its value proposition to the community, customers, and stakeholders. However, addressing the growth takes a steady hand, and a team to get it right. In the coming weeks we will address this process to help you along your way.
