One strategic initiative at our company, California Community Bancshares, has been to change the mix of our balance sheet.
The holding company owns several banks and one thrift. Our Northern California banks have changed their asset mix. When I joined the team Placer Sierra Bank and Sacramento Commercial Bank were awash in liquidity from their former base of thrift deposits, and mortgages were a big part of Placer's loan mix.
To help ensure margin expansion, we had to replace the mortgages and lower-yielding investments with solid, creditworthy, higher-yielding loans.
In recent months loans at Placer Sierra have grown significantly. The total first-half loan production at the bank was $914 million.
Looking just at commercial loan originations by the Northern California operation, the growth rate was about 400% in each of three recent months. Growth in monthly volume of new loans and available credit lines went from $15 million in what was formerly considered a good month to almost $60 million.
This increase in business has taken place with no change in our credit underwriting standards or in our origination sales force.
I would like to share with you the process that made this possible:
- Awareness. Placer's management team shared our balance sheet and income statement with our loan officers. Managers explained how every creditworthy loan is worth about 400 basis points more to the shareholders than federal funds and how relationship-based commercial loans create more franchise value than mortgages, which have been commoditized in recent years. Our loan officers, all of whom are also option holders, understood how they could personally contribute to the increase in our income and stock value.
Change in sales process. Placer has an excellent commercial lending team, but it was not required to produce significant volumes of new business. Consequently, the sales process was not tight enough. Our chief commercial banking officer, Randy Reynoso, realized the need for more intensity. He instituted daily meetings of the lending sales teams and created a system for tighter call intensity.Expectations, and activity levels, changed. Loan officers increased their calls to prospects fivefold or more, set more appointments, and followed through faster. In six weeks the pipeline swelled, and both loan and deposit relationships started flowing in.
- Shortening the sales cycle. We analyzed Placer's lending sales cycle, which is typically up to 100 days. We identified where we could shorten it so as to book loans sooner. For example, when documents were due, we could hand-deliver them to the borrower and take the conversation to the next level, rather than sending them out and following up with a call a few days later.
Monitoring and holding people accountable. Our staff has a rare and effective combination of excellent credit skills and good controls, coupled with a thorough understanding of the balance sheet and our income needs. Though the credit team will not be tempted to make a loan that does not fit our highly conservative credit culture, our lenders are creative enough to find ways to meet creditworthy clients' needs.In the past we had asked our people each month to predict how much they would fund the next month. The result - a forecast of $2 million to $3 million for the current month, followed by expected closings of $20 million to $30 million the next month. This was repeated monthly.
Now, by inspecting the results weekly, our lenders realize that we will hold them accountable for their predictions and that they have only one week to generate the results they anticipated.
Though we still cannot predict with 100% accuracy, the margin of error has been hugely reduced.
- Building relationships. Like other community banks, our banks offer extremely fast turnaround on decisions. In return, we want the entire relationship with our customers - loans and deposits. Our commercial portfolio is almost fully self-funded as a result, and we have longer-term, more stable relationships. The creation of the holding company, coupled with the supercommunity banking philosophy, has given the member banks higher lending limits and the ability to more fully meet their customers' credit needs. It makes for happy customers and happy lenders.
- Providing incentives. Our incentives to the lending teams have not changed much, but I feel that their presence is an important ingredient of success. Lenders not only understand the impact of their work on long-term capital appreciation but also enjoy the shorter-term income benefits of success.
- Selling a full product line. Our company enjoys the benefits of higher lending limits and a broader product line than many community banking competitors can offer, while delivering local and speedy decision-making that many larger banking companies cannot achieve. The complete product line, including cash management, sweep accounts, and other appropriate products, is useful not only for building longer and stronger relationships but also for bolstering the bottom line.
Moving up-market to compete with larger institutions. A supercommunity bank has a competitive advantage relative to larger institutions. It can offer local decision-making, faster turnaround, and a community orientation that bigger companies find difficult to duplicate. Our company has capitalized on its position as a group of community banks linked through a holding company to expand its lending activities to the point where we are right below the level of the majors.The keys to success are believing that leapfrog performance is possible, then increasing activities to meet the desired goals. Once the team accepts that big, hairy, audacious goals are within reach, they can figure out what needs to be done to achieve them and then do it.
The first month we booked $60 million of loans, everyone was stunned and elated. This month we're beginning our 2002 budget work, and the run rates being discussed are higher, yet less intimidating - now that we know what's possible.
Ms. Bird is the president and chief executive officer of California Community Bancshares of San Francisco.
