5 STEPS TO INCREASE

ORGANIC LOAN

GROWTH

Many bank executives are anxiously scrambling to grow their lending business. This priority is highlighted in the findings of a recent FIS survey of community bank CEOs.

The No. 1 concern found in this 2016 survey of financial institution executives was growing loan revenue.

A second priority was improving lending margins.

Issues Importance

Growing Loans 92%

Improving Lending Margins 84%

Improving Customer/Member Service and Experience 83%

Increasing Non-interest Income 80%

Reducing Non-interest Expense and Managing Cost 85%

Increasing Core Deposits and Customer Acquisition/Retention 71%

Responding to Compliance Requirements 75%

Implementing New Systems and Technologies 56%

Leveraging Data and Analytics for Strategic Decisions 61%

Realigning delivery channels: branch, Internet, mobile, call center, self-

service56%

Minimizing Impact of Non-traditional Competitors 51%

Responding to potential changes to Capital Requirements and Reserve

Calculations44%

Implementing an Enterprise Risk Management Program 38%

Consolidating New Acquisitions and/or Operations 24%

Top Issues Facing CEOs1

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5 Steps to increase organic loan growth

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Not surprisingly, margin income continues to decline as the industry has failed to return to the kind of profitability prior to the recession of 2008.

The adjacent graphic depicts the overall banking industry return on assets for the last ten years.

5 Steps to increase organic loan growth

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1.21

0.18

-0.94

0.03

0.65 0.760.97

1.100.96 1.03 1.04

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Pre

cen

t

Fourth Quater Figures

FDIC Insured Institutions Average Return on Assets

Average ROA

The Key QuestionEconomic improvement will only generate a finite level of new loan demand. The real question

is, which banks are going to earn the business and book new loans (and renew existing credits)?

It’s crucial for banks to address this challenge without engaging in irrational price competition, or

taking on inadequately structured credits.

This e-book describes a comprehensive approach to achieving profitable, quality organic loan growth.

The approach entails five steps to optimize the relationship potential of existing customers, and add new customers — often by taking business away from competitors.

5 Steps to increase organic loan growth

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The following steps

will help improve

the competitive

posture of any bank

in today’s

challenging lending

environment.

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Re-evaluate the bank’s customers, markets and fair share potential:

• Add to existing market intelligence with available third-party market potential data and insights.

• Understand the profitability of existing relationships with a focus on single-service customers.

• Evaluate and consider new markets for Loan Production Offices (LPOs).

Reconsider the bank’s product offerings and relationship packages:

• Identify modifications to current loan and relationship-enhancing, non-credit products and service offerings.

• Evaluate new lines of business or credit products that may expand the bank’s offerings.

Re-engineer business processes:

• Accelerate the credit cycle to enhance the customer experience.

• Eliminate low-value work and streamline remaining tasks by leveraging technology.

• Ensure the appropriate tools and procedures are in place to support relationship profitability and pricing.

• Reduce delivery costs to offset rate pressure in achieving profitability.

5 Steps of a loan growth strategy

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Re-evaluate and redeploy personnel against redefined targets:

• Re-evaluate sales aptitude in lending staff and consider the best match for skills.

• Expand professional development offerings for individuals with gaps and potential and attract new talent if needed.

• Reassign staff based on new sales opportunities and expectations.

Restructure management reporting and incentive systems:

• Ensure that reporting is available to provide visibility into the effectiveness of changes.

• Effectively align goals and incentives to achieve properly balanced objectives of growth, quality and profitability.

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5 Steps of a loan growth strategy (continued)

Objective:

Develop a complete, fact-based analysis to drive future decisions regarding sales initiatives to expand existing relationships and add new customers in the bank’s trade area. The analysis can also illustrate the limits of this potential and provide input to strategic planning on new markets.

Actions:

• Identify which existing customers are prospects for additional services, especially which single-product customers can be converted to a broader and deeper relationship.

• Understand the profit contribution of each customer and determine how it can be improved in the segments with low or negative contribution.

• Identify the market’s potential to support adding to the bank’s customer base with a comprehensive market analysis that leverages third-party data to identify demand in specific trade areas for a full array of products and services.

• Identify the gaps that exist in the bank’s share of market potential and develop comprehensive strategies and tactics to close the largest gaps.

Step 1Re-evaluate the bank’s customers, markets and fair share potential

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Objective:

Ensure that bank offerings are competitive and comprehensive. The industry clearly understands that broader and deeper relationships are easier to retain.

The key to success is offering an integrated set of product packages at competitive pricing from an overall relationship perspective.

Actions:

• Access and digest the primary and secondary market research regarding shifting customer expectations for each major line of business targeted by the bank.

• Complete a competitive market analysis of product packages and offerings to identity gaps in the bank’s offerings.

• Use the segmentation analysis from the first step as well as the insights gained from the research publications and competitive analysis to redesign packages for specific customer groups and target markets as needed.

Step 2Re-consider the bank’s product offerings and relationship packages

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Objective:While evaluating the bank’s product offerings and developing an understanding of market potential are critical steps, effective execution of every step in the loan process — starting with prospecting and ending with a funded loan — must be as efficient and effective as possible. The loan process should create a compelling customer experience.

Redesigning business processes is the key to streamlining and accelerating the credit approval cycle to deliver timely decisions.

Actions:• Form cross-functional teams from within the bank’s lending, loan

processing, credit administration, loan operations, and risk/compliance staff to identify bottlenecks and the sources of rework in the current processes.

• Evaluate options (supported by third-party input regarding best practices) and decide on and document revised workflows that are supported by appropriate:

• Staffing levels

• Organized structures

• Enabling technologies

• Revise management reporting to provide insight into performance at all steps of the process.

• Test changes in a controlled environment to further refine processes before rolling out the change across the bank.

Step 3Re-engineer business processes

3

Objective:

Ensure the ultimate success of redesign initiatives by assigning individuals with the right skills, doing the right things, in the right places to maximize market potential.

Actions:

• Ensure that staff with business development responsibility has appropriate sales aptitude and skills. This may require evaluating talent and developing a range of training opportunities to further professional development of individuals or assigning individuals to positions that better match their ability to contribute to the bank’s profitability.

• Create training for business development and support staff on new products and service offerings, and the revised business processes.

• Develop a better understanding of each trade area (see Step 1) and then re-assign business development and support staff to markets with greater potential.

Step 4Re-evaluate and redeploy personnel against redefined targets

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Objective:

Ensure the insights gained from market analyses, redesign of business processes, and realignment of human resources are reinforced with appropriate goals, measurements and incentives.

Actions:

• Develop sales targets/goals for each existing, revised or new offering for each trade area and each individual business development officer.

• Support the sales process with additional management reporting that provides visibility into progress against new goals and objectives at short intervals. This allows for prompt attention where progress is short of expectations.

Step 5Restructure management reporting and incentive systems

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In SummaryRegardless of the pace of economic activity, the availability of credit will outstrip quality of demand. This is the fundamental nature of banking. This situation is exacerbated in today’s environment.

The only way to improve organic loan growth (M&A, participations, or whole loan sales are obviously other approaches) is to outsell the competition.

Cost-effectively achieving sales dominance requires the following new thinking:

• Rethinking approaches to understanding market potential.

• Adjusting to developments in products and services expectations.

• Supporting the operations with efficient and effective processes.

• Aligning the bank’s human capital to match the potential.

• Supporting the whole process with reporting that enables prompt and effective action to address shortfalls.

An experienced advisor such as IBS Consulting can assist banks in their quest for excellence in loan growth and margin improvement.

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