"...with a book of business."

“…with a book of business.”
I’ve been seeing a number of advertisements for commercial loan officers – relationship managers in places like Monster.com that are specifying the candidates have a book of business of so many million dollars. A book of business is usually thought of a portfolio of customers’ loans and deposits with the candidate’s current bank with amount to some preset value. One of the common values that has been floating around is $20 million.

It makes sense for the bank that wants to hire a new commercial lender. The new employee brings with him or her new business to support the compensation, grow the new bank, and generate more profits for the new bank.

It is “Jack and the Beanstalk” growth in my mind.

The first year, the new employee produces roughly $20 million in new growth. What happens in year two? Replicating the first year is a difficult but not altogether impossible task. Year two success requires a number of pieces to fall into their proper places at the proper times. Year two may make the task of herding cats look incredibly simple.

Is this a risky strategy?

Maybe yes and maybe no, it all depends on the quality of the new business the new employee has brought to the new bank. The whole key to the success of this type of program for growth is that the growth must come from quality assets.

How do you define quality assets?

Quality, like beauty, is in the eyes of the beholder.

To the new employee, these assets are all high quality, solid assets. To the former bank and its examiners, the assets may be substandard or dubious or very questionable.

We are, after all, human and we generally fail to see flaws where they are obvious. The borrower who never seems to be able to reduce his debts as he said he would is perhaps viewed as a good businessman who is facing unreasonable competition and deserves another chance to fix things because the new employee plays golf with the borrower regularly at the borrower’s golf club.

If the business was facing unreasonable competition, shouldn’t the borrower be at the business, thinking up new strategies and markets to enter, instead of spending almost an entire day on the golf course?

I certainly hope that he or she would be at the business.
I once worked with a credit executive whose idea of having a low loan delinquency rate was to grant more new loans so that the total of new loans grew faster than the total of loans with delinquent payments. It sounded so nice to hear him explain it. I knew it wouldn’t work and his plan did not. I helped clean up the mess.

In my career as a commercial loan officer, I have seen other commercial lenders be hired with the idea they will bring their book of business with them. The borrowers had followed the lenders from bank to bank with their weak businesses that had been kept on financial life support by the lender. The amount of the debts had increased with each new bank, the old loans were paid off and new money was needed for working capital purposes.

To prevent the bank from taking action against the new borrowers, the lender moves on to a new bank and takes the borrowers with him or her. The resolution is postponed for another day

Eventually, the judgment day comes and the borrower is unable to pay the bills.

Then, the loan becomes the problem of the bank’s collections department where the staff liquidates the collateral in an attempt to pay all of the outstanding indebtedness. The liquidation will almost never pay the amount due; the bank takes a loss which reduces income for the period and possibly capital if the loss is large and income is limited.

If the loan losses are too great, the bank staff will have an opportunity to work with the FDIC’s Division of Liquidation. The DOL are not your friends; they are a cross between best aspects of morticians and Huns.

Fascinating image, morticians and Huns.

This is not to say that all commercial lenders have weak and poorly performing book of business. Some are very competent, intelligent, and morally strong. They resist the temptation to nurse weak credits.

The root of the problem is with the bank’s board of directors and senior management. Instead of following a deliberate plan to grow organically and prudently, they adopt a policy of buying growth at almost any price and turning a blind eye at the signs of danger. These banks eschew the simple and embrace the risk.

For example, I know of one medium sized bank that decided to enter the commercial equipment leasing market. On paper, it looked like a good idea. In reality, it was a road to losses. The bank was competing in a market against industry giants who were offering better terms and conditions to the lessees. The industry giants took all of the best customers, leaving the bank with the weaker ones. The end result was the leasing business was closed within a few years at a loss.

Entering a new market where one does not know the business is risky. Generally speaking, it is far safer to stick with what you know how to do successfully and practice diversification of risk and assets.

The final reason why I think this is a risky and downright silly or maybe even a stupid strategy is that banks don’t have to follow this practice to grow. Unless you have been a hermit, living out in the great Mojave Desert, you should be aware that there is a lack of credit available for businesses. All bank has to do to grow is say something like “we’re making loans” and business will almost automatically flow to the bank. The bank can then select the best credit risks from the large pool of credit seeking businesses and grow.

Gee, looking for customers the old fashioned way, what a strategy.

Doing business the old fashioned way is simple, not very exciting, and almost boring. It is a very successful strategy nevertheless and one that will usually generate growth and revenue for long periods of time.


Be well and stay happy.