Business lending strategies from capital partners

The recent passage of financial services modernization legislation means that community bankers are now facing more competition than ever before. As a result of that pressure-and because mergers and acquisitions have left many smaller businesses without local bank services-many community banks are

But the performance of commercial loan porfolios can be as volatile any investment in the capital markets. Activities such as business loans, commercial loans and real estate development loans require specific underwriting and risk management.

The secret to success in commercial lending, as in any new area of business, is preparation. There is, after all, no shortage of examples to show the inadvisability of entering this field without adequate preparation.

"History shows that every time a bank has gotten into trouble, it's because they jump into a business they don't understand," says Michael Rooney president and chief executive officer of Capital Partners Consulting Corp. of Cherry Hill, N.J., a company founded to help community banks respond to the needs of their local business communities.

Capital Partners is a hands-on loan review and evaluation service staffed and founded by bankers that offers complete guidance in formulating lending strategies, management, training, due diligence, organization and portfolio structuring.

Here's how it works: Capital Partners' team of experienced former bankers conducts a comprehensive on-site review of a community bank's business loan portfolio, rating and analyzing the quality of each loan using state-- of-the-art computer analysis and hands-on expertise. The report, which includes graphs, analysis and recommendations, is presented to bank management immediately.

"Our service is preemptive because we alert banks to weaknesses and potential trouble spots in their loan portfolio so that they can take action before the examiners arrive," says Rooney "Our programs have been enthusiastically supported by line personnel, management, CPAs and examiners."

According to Rooney, the community bankers who are most successful at entering the business of business lending are those who "sit down, plan it, identify how far they're willing to go and then monitor it carefully"

Preparation begins by identifying the loan opportunities in your local market and marrying these needs to the institution's level of risk tolerance. Entering or expanding into commercial lending requires a deliberate and strategic plan. Establishing a system for comprehensive risk analysis and underwriting procedures is a basic step. Risk analysis must identify the borrower's ability to generate the cash needed to service the bank's debt payments. Collateral support is not the basis for a loan. Yet the approach to collateral analysis must look to factors such as true resale value of any collateral.

Strong credit administration is needed to monitor and direct a commercial loan portfolio. The process forms the foundation for risk analysis. The extent of the credit analysis process is driven by the specific needs of the institution and the business market that it serves. Its final mission is to identify individual loan risk and ensure that the credits are consistent with the institution's policy standards.

Management of portfolio quality cannot be accomplished after-the-fact through delinquency review or loss mitigation. Proactive risk management is the only fiscally sound approach. The process must either establish or outsource an independent risk evaluation program to ensure that management and the board are conscious of the bank's level of risk.

"Preparation for commercial lending is no less important than the programs set in place for residential mortgages," says Rooney. "Staffing and structure needs are dictated by different variables, but by the same logic: Identify the risk and manage the portfolio."

First Federal Bank of Hazleton, Pa., a $615 million community bank, is a client of Capital Partners. "The Capital Partners' program is cost-effective and makes good use of technology as a diagnostic tool," says E. Lee Beard, First Federal's president and CEO, and immediate past chair of America's Community Bankers. "The consulting team also helps to improve the overall health of the institution by recommending remedial action, credit administration and training."