In this session, we will review current commercial lending trends, discuss proactive efficiency strategies and highlight a bank realizing gains based upon those strategies.

1. COMMERCIAL LENDING TRENDS THAT
DRIVE SOUND CREDIT DECISIONS AND
HIGH-PERFORMING PORTFOLIOS
Jon Gathman - State Bank
John Watts - Baker Hill

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Agenda
• Commercial lending trends
• State Bank
• Getting started

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Commercial trends – What’s new?
• Diversification of portfolios
– Commercial and industrial lending up
• Commercial real estate lending growing as well
• Small business lending (inching) up
– Creative financing
– Commercial real estate lending has turned around
– Fintech is changing the conversation
• Efficiency
– Automation of lending processes
– Segmentation of portfolios
– Do more with less

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Commercial trends
$-
$500
$1,000
$1,500
$2,000
$2,500
Billions
Commercial and industrial loans
*Courtesy of Bank Reg Data

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Commercial trends
$-
$50
$100
$150
$200
$250
$300
$350
$400
Billions
Construction loans

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Efficiency at 12/31/12 vs. 12/31/17
63.14
64.24
60.25
58.23
69.04
70.96
75.42
71.78
81.06
85.7
55.18
55.97
50.95
56.4
60.68
64.73
65.3
66.2
71.98
75.14
>1T
100-999B
50-99B
5-49B
1-4.9B
500-999M
250-499M
100-249M
50-99M
0-49M
Efficiency ratio by institution size
Overall average efficiency ratio: 63.80 vs. 56.32
*Courtesy of Bank Reg Data

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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Are you optimistic about the current trend in commercial lending?

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Can you teach an old dog new tricks?

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State Bank
So, how can you do it in real life?

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Who is State Bank?
• $876 million bank headquartered in Defiance, OH
• Had 12 systems and tools to process commercial
loans and manage their portfolio
• 17 relationship managers
• 75% of their commercial loans are under $350,000

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Key objectives for State Bank
• Grow, grow, grow
– Double digit objective
• Asset Quality
• Compliance and Audit
• Technology

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Dealing with the trends
• Automate the lending and portfolio
management processes:
– Integration between systems
– Promotes process consistency
– Shares information and data to promote
communication
– Promote teamwork
• Workflow and processes
– Standardization of processes
– Promotes teamwork
– Promotes “process ownership”

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Growth
• Efficiency in process to allow for more time at sales
– Pre-call memo
– Calling organization across team personnel
– Referral conversion to opportunities
– Warehousing of key client information and automated
communications

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Asset Quality
• Consistency in underwriting
• Portfolio Risk Management for early identification
• Efficiency in process on automated scoring and renewals
allows for loan review expertise in higher level, complex
credits
• Banding and validation

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Compliance and Audit
• Improving inconsistency in the process
– Many lenders in diverse geographic regions
– Lack of meaningful volume in some offices leading to lack of
meaningful experience
– AppLink provides a simplified process with various compliance items
“required” to move forward
– Ease of testing SOX key controls and audit issues

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Technology
• Process Management
– AppLink and Relationship
Lending along with BPM offers
one stop input for all credit,
doc prep and booking
information
• Data Warehousing
– Cross business line sales
reporting
– Referral routing and tracking
– SLA monitoring

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State Bank
The results!
Outcome

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67.88
62.62
66.72 65.21
63.04
66.64
64.37
67.92
67.25
65.19
68.66 68.28
65.79
67.34
60
65
70
75
2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4
Efficiency ratio last 12 quarters
State…
Peers
The results…

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520.5
532.5 549.4
565.2 584.0
613.2 625.2
648.9
631.8
661.0
682.7
700.6
0
100
200
300
400
500
600
700
800
2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4
Millions
Total outstanding loans
The results…

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1.70
2.18
2.45
2.04
1.77
2.44
2.72
2.55
2.28
2.61
2.95
4.41
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4
Millions
Net operating income
The results…

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While improving credit quality!
4.42
3.52
6.74 6.65 6.58 6.69
2.89 2.74
2.38 2.45 2.38
2.7
0
1
2
3
4
5
6
7
8
2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4
Millions
Nonperforming loans

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While improving credit quality!
$303.0
$350.0
$58.0
$240.0
$94.0
$2.0
$137.0
$268.0
$51.0
$69.0 $75.0
$35.0
0
50
100
150
200
250
300
350
400
2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4
Thousands
Loan charge offs

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What can you do?
Get started now!

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Get started now!
Strategies - Policy, process and technology
• Integrated information
– Understand where crucial client data resides
• Automation to support all lending processes
– Segmentation – what might that look like for your institution
– Creation of consistent processes
• Management buy-in and adoption
– Cultural change
– Adoption and accountability
– Commitment to the changes

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Get started now!
Strategies
• Staff adoption
– What’s in it for me?
– What is the big picture?
– What is my role in the big picture?
• Metrics to prove efficiencies
– Full-time employee counts
– Loan volumes

26. THANK YOU