The production of a typical community bank often resembles the chart below. There are discernable peaks and troughs. We know this as our pipeline functionality in our Loan Command pricing and management model helps banks track production and closing rates for loans. In this article, we explore what a typical closing percentage looks like for a community bank, how it changes month to month and provide some tips as to how to smooth the process out and get more efficient at loan production.
The Ups and Downs of Loan Production
Few banks are rigorous about their sales process. For a typical bank, the sales process starts at first contact of a potential customer and ends when a term sheet is signed. From the time a term sheet is signed (or commitment letter if you’re like some banks) to the time the loan is closed is part of the loan pipeline process. The more time the business development and underwriting spends on the sales process the less time they have to devote to the actual underwriting and documentation of a loan. Because many banks require their loan officers to do some or all of the heavy lifting in getting the loan through the pipeline stage, there is less time for selling. As a result, these business development officers need to go back and forth between the two major stages of loan production, and you get a typical jagged pattern of loan bookings as displayed below.
The Peak/Trough Challenge
The challenge comes in that banks need to shift personnel back and forth between sales, underwriting and pipeline management – three different disciplines. These different skill sets are not only inefficient to switch between, but also presents an ebb-and-flow-effect, as when production officers are focused on underwriting, they are not in front of the customer. In an extreme case where banks have their loan officers do everything to include underwriting, approval, management, and documentation, you can see the impact like this one bank below.
Here, from their pipeline management report, their expected loan closings go from $44 million within the next 30 days, down to $4mm in the 30-60 day period then back up to $57mm after 60 days. Those are some large swings. These swings typically drive up costs, so it is no surprise that banks like the one above exhibit efficiency ratios north of 75%.
The Peak/Trough Solution
The solution is to move to more centralized underwriting where you have dedicated analysts that can take the loan from the production officer to allow him or her to get back into the field and in front of customers. Centralizing underwriting not only makes the process more efficient but also increases accuracy, reduces bias and decreases risks.
Next to more centralized underwriting, employing technology, particularly a loan workflow system is getting to be mandatory. Finastra, Sageworks, nCino and others all have great platforms that not only help automate the process but help banks improve by pointing out the bottlenecks in the process and workflow issues.
Finally, banks need to get more rigorous about their loan production process. As the second largest functional cost behind their branch system, restructuring loan workflow to cut cost and speed the process can pay huge dividends. This process starts with benchmarking every major step. How long do loans stay in each stage, how long does it take you to spread three years of financials and when a term sheet is signed what is the average time to close and what percentages of loans close? These and other questions not only need to be answered but need to be tracked and managed. The bank above has an 89% closing percentage of loans in the pipeline. That is pretty good, and above the 81% average (from Loan Command), but it only tells part of the story. We also monitor loans per officer and per analyst, so when you see a high percentage, you want to check your inputs and make sure you don’t have too many people devoted to production.
Putting this Into Action
Loan production is a balance of marketing, sales, process management, credit and resource allocation. This isn’t easy stuff, but banks can no longer afford to let one of the most important processes within the bank go unmanaged. Start by charting your metrics and then benchmarking your activity. Then, map out your workflow and look for ways to restructure to get more efficient. This might be as simple as adding more underwriters and loan admin staff so your production people can be better leveraged. Banks that can restructure their process will find that their peaks and valleys go away, they become more efficient at every step and loan production goes up while per unit costs come down. Pull that off, and you are well on your way to having a large impact on your bottom line.
Submitted by Chris Nichols on October 10, 2017