Effective Relationship

Management

“Separating So-So

Bankers from Super

Bankers”

Learning Objectives

Changing Role of the Lender

How to Add Value to the Relationship

Expectations of Customers

Life Cycle Relationship Management

Learning Objectives

Building Customer Relationships

Conducting a successful call

Profitably Pricing Relationships

Role Play- RTC Corporation

Changing Role of the

Lender

How many of you feel comfortable

being called a salesperson?

How many of you entered the field

of banking to avoid sales?

Traditional Role

Lenders traditionally functioned

as financial decision makers.

Waited for customers to come to the

bank

Customers verbalized financial

problems and sought solutions

New Role

Trusted Advisor – different approach

Goes to customer

Takes time to understand customer’s business

Attempts to identify problems

Proposes solutions utilizing bank products without taking unacceptable levels of risk

Adds value to the customer relationship

Credit Skills

Traditionally most important for lender Evaluating and underwriting new requests

Monitoring existing relationships

Assessing alternatives in problem loans

Credit skills are still important, but in a different way. Expanded role as financial advisor/problem solver

showing borrower how to make more money

Business

Development Skills

Emphasis has shifted to good

business development skills

Developing new relationships

Expanding existing relationships

Why is this important??

Changing Role Driven

by Competition

Comparison of customer and lender

perspectives on why customers left

the bank found….

Reason Customer Lender

Credit 30% 30%

Price 5% 40%

Errors 5% 25%

Inattention 60% 5%

What should we

learn?

The only perception that counts is

the customer’s.

Banks must free lenders to spend

more time with customers.

Changing Role Driven

by Competition Banks must be more market driven

Currently spend 30% of time with customers

Goal of larger banks is to have lenders with customers 70% of the time

How does this happen?

Restructuring credit delivery/process

Centralized or regionalized credit decisions

Credit scoring

Automated document preparation

Reduced monitoring of smaller credits

What does that

mean for me?

Changing compensation packages

Greater emphasis on performance based compensation

How might your bonus be determined?

Business development efforts (calls)

Portfolio credit quality

Timeliness and accuracy of risk ratings

Relationship profitability

Overall bank measures (ROA/ROE)

Questions Regarding

the Changing Role

of the Lender?

Value Added

Relationships Banking services are a

commodity unless we can

differentiate ourselves from the

competition by adding value to

the relationship.

Value Added

Relationships

Traditionally, banks focused on….

Rate

Fees

Collateral

Covenants

Financial Statement Requirements

Value Added

Relationships All customer typically sees is costs

Without our help, they will make decision on

the basis of cost

Bank’s focus must be to structure and

present value proposition to show how

bank’s proposal will save them money.

How Can We

Measure Value?

Incremental Revenue

Reduced Costs

Operating

Financing

Presents great opportunity to

earn loyal customers

Other ways to add value?

Questions Regarding

Value Added

Relationships?

Expectations of Small

Business Borrowers

Reliable & consistent

source of credit

Lender understands my

business/industry

Local delivery and

quick response

Loan officer stability

and skill

Access to loan

officer

Price

Reputation

Wants their

relationship to be

valued

What does that

mean? Price is important but not the

primary driver

Price includes factors beyond

rate and fees

application process

financial statement requirements

collateral/covenants

approval time

monitoring requirements

Banks have two broad

alternatives to compete for small business borrowers

Relationships focused on using

lender expertise to help borrower

enhance profitability

Transactions focused on reducing

“cost and hassle factor” involved in

getting loan

Where do you fit?

BIG BANKS

Large banks are pursuing a strategy to reduce transaction costs to borrower

Simplified applications

Centralized decisioning

Reduced financial statement and monitoring requirements

Faster turnaround

8-24 hours from application to funding

Most of you will…..Community Banks will continue

to emphasize relationships

Closer to customer

Part of the local community

Knowledge

company

industry

market

product

Final Thoughts

Banks cannot compete against non-bank financial institutions on the basis of price

We must add value

Utilize our expertise

One note of caution in working with borrowers and their financial statements…

Do not allow offering advice/adding value to become making decisions normally reserved for company management

Can create lender liability

Questions Regarding

Expectations of Small

Business Borrower?

Life Cycle Relationship

Management

Businesses have life cycles

Stages

Embryonic - Wonder

Growth - Blunder

Mature - Thunder

Aging/Renewal - Plunder

Important for lenders to

recognize these stages

Stages Create

Opportunities Stages necessitate changes in

asset mix

competitive strategy

management requirements

Progression through life cycle creates opportunities (and threats) for lender

Borrowing requirements and product needs change

between $3mm and $4mm in sales, many add a second bank

between $7-10mm, many hire CFO

Life Cycle

Relationship Plan Lender must be proactive and develop

relationship management plan

Anticipate customer needs

Continually present appropriate products for stage in life cycle

Lender should utilize partnerships with other vendors or banks to provide services bank may not offer

Very important for the lender to control the relationship

Questions Regarding

Life Cycle Relationship

Management?

Building Customer

Relationships

Preparation

Discovery (making the call)

Formulate Proposal

Presentation

Negotiation

Close

Follow-Through

Maintenance

Preparation

Become knowledgeable about your

bank Policies

Competitive Strategy & Strengths/Weaknesses

Capabilities

Products and Services Offered

Strategic Plan for Acquiring Customers

Cost Structure

Market Area

Competition

Economy

Preparation

(continued) Review profitable customer relationships

for similarities in

Location

Industry

Products used

Establish priorities based on the following

Existing potential

Growth potential

Financial desirability

Prospects for successful solicitation

Preparation

(continued) Kinds of Calls

Follow-up, cross-sell, or maintenance

calls on existing customers

most successful and gratifying

Calls on new prospects referred by

existing customers

handle with care

“Cold calls” on new customers

techniques?

“Renewal calls” on past customers

Preparation

(continued) Identify Prospects

Develop Sources (In order of effectiveness)

existing customers

referrals from existing customers

referrals from accountants and attorneys

also other financial advisors

public sources

Dunn & Bradstreet

trade associations

market area surveys

Identify Prospects

(continued) Develop working knowledge of prospect

and their business before making the call

easiest for existing customers

Set goals for prospecting

Have a framework for calling

getting info, tracking calls, monitoring results

Develop marketing plan for each customer and prospect

Arrange appointment with decision maker

Discovery (making

the call)

Purpose of the discovery process

Build a basis for a relationship

establish rapport

cultivate mutual trust

project confidence

build credibility

customers deal with bankers not banks

relationship with banker is the foundation for

banking relationship

Purpose of discovery

process identify customer’s financial needs

establish how need is currently being

met

establish whether it is being met to

customer’s satisfaction

identify decision makers

for existing customers seek ways to

expand the relationship

do not underestimate this

Discovery

(continued) How do we get this information from prospect?

Use Probes (questions)

Open probes

questions that allow the widest latitude for response

useful because they allow prospect to talk about their business

Closed probes

questions that require short responses

used to elicit/verify specific facts

Requirements for probes

use open first, closed later

keep them simple, focused, and non-threatening

Examples

Discovery

(continued) Other items about discovery to remember

Listen emphatically

keep an open mind

be sensitive to misperceptions they may have

non verbals will tell you how the call is going

Remember the purpose of the call

establish rapport

build trust and confidence

identify problems

suggest possible solutions

Proposal

Proposal must concentrate on

prospect’s needs

Proposed solution must be

workable

reasonable

tailored to prospect’s needs

Proposal In developing proposal, we must

define “want positions” vs. “will accept”

Examples?

What determines?

Establish criteria for “fallback” position

Determine “throw aways”

Issues that bank will concede on

Important issues to borrower, but not bank

Determine “walk away” point

Terms predetermined to be unacceptable

Presentation Emphasis on problem solving, not

selling

Focus on package rather than individual elements such as rate, fees, collateral

Emphasize benefits to borrower & business

Effective presentations are

Fast paced

Straightforward

Controlled by presenter

Presentation

Differences make the difference

Prospects buy a product based on differences, not similarity to other products

Emphasize differences that solve prospect’s unique financial needs

creative terms

pricing

support requirements

You, as the lender, probably are the most significant difference

personal appearance, presentation, confidence, and sincerity are very important

Negotiation

We must effectively utilize

leverage

Real leverage

time

superior product

lower price

better location

strong collateral position

Leverage Perceived Leverage

Greater personal stature, prestige, image, expertise

Superior sales skills

Superior preparation

Control of physical/psychological factors

Party with real leverage can negotiate aggressively

Party without real leverage must use perceived leverage skillfully

Who has real leverage in banking relationship?

Objective of

NegotiationReach agreement which meets needs

of the customer and the bank focus on interests rather than positions

negotiate benefits, not costs

create a desire to reach agreement

defuse emotion/anger

listen with empathy

respect other party’s point of view

if you can’t get yes, make it hard to say no

be prepared to walk away

avoid becoming emotionally involved

Close

Close is solution to prospect’s problem

Potentially a slow process

May take years to get long-standing relationship from competitor – be persistent

Don’t take turn downs personally

Final agreement will come when

Perceived value of agreement exceeds costs

All problems are solved

Follow Through

Elements of good call follow up

include

internal call report

for existing customers, helps document

credit file

letter to prospect

immediate action on requests for

information, proposals, etc…

if you don’t do this, why bother with all

the other work you did….

Maintenance

Requirements for maintaining good

ongoing total commercial relationship

personal relationship with customer

periodic calls

good service

fair pricing

continuing interest/understanding of business

quick response to problems (take ownership)

anticipate future needs/tailor services to meet

Questions Regarding

Building Customer

Relationships?

Profitably Pricing

Relationships

Nine Steps to Better Loan Pricing

Know what you have to get

cost of funds

direct product costs

administrative overhead

profit objective

Price for risk

correlate credit risk premiums in pricing to risk

rating of loan

Nine Steps to Better

Pricing Price the transaction

recognize unique aspects of each deal

cost of funds

administrative burden

commitment/usage

monitoring

terms

collateral

guaranty

risk

default

Loss

risk adjusted return on capital

type of loan

industry

Nine Steps to Better

Pricing

Recognize the value of the relationship

Relationship pricing

Calculate relationship profitability

Pricing model examples

Present benefits, not costs

Demonstrate how loan will allow borrower to increase revenue or reduce costs

Utilize bank’s financial analysis and your expertise as foundation for adding value

Nine Steps to Better

Pricing What’s the deal?

when borrower counters with “I can get a better deal from the competition,” be sure to define the deal

rate

fees

deposit relationship

amount

term

collateral (advance rate, appraisal requirements, environmental)

covenants

financial reporting

costs to move relationship (appraisal, environmental, legal)

Nine Steps to Better

Pricing Sell the value of the banking and

personal relationshipAll of you should ask “what is it worth for the

privilege of doing business with me?”

tenure

prior assistance

experience/knowledge

reciprocal business

personal rapport

Utilize performance based pricing use pricing to influence borrower behavior

tie pricing to covenants in loan agreement

cash flow coverage, leverage, liquidity - define

Nine Steps to Better

Pricing

Establish a walk away point

alternative investment

opportunities

other borrowers

securities/fed funds

potential future relationship with

the customer or prospect

avoid negotiating with yourself

example - multiple price concessions

Questions Regarding

Profitably Pricing

Relationships?