Q&A: Non-Bank Commercial Lending
Doubt there's much interest in this, but might as well put it out there. I'm a credit analyst at a specialty finance company. We directly originate loans (mostly lower MM) and typically compete against commercial banks or other similar companies for those deals. Everything is transaction driven (no cash management, capital markets, etc.), and a combination of leverage and the spread creates out-sized returns for what are otherwise vanilla loans. There are various product groups, but the general philosophy is the same. I don't have a ton of market intel as an analyst. It seems like a pretty fragmented market and the business model changes depending on where you sit in the capital stack and your financing. There are BDCs, hedge funds, PE-managed/owned companies, no-name shops with private capital, etc. so it's a pretty wide universe (within the context of MM/lower-MM debt, hah). - Hours range from ~50-70 hours a week, usually closer to 50 than 70. - Comp is solid for the lifestyle. More like consulting than IBD. Can't speak too generally for this though. - I don't know what it's like to work in, like, the Wells Fargo rotational program, but the threads on this site don't align with my experience at a smaller company.
I interned in commercial lending last summer. It's funny how commercial lending gets no coverage on this site when some of the lenders make boat loads of cash specially with commission based lending models.
I've said this since the 1st day I got here.
The attitude is like Commercial Lending doesn't even exist. I assume there are people on Wall Street who are in Middle Market lending (not even Corporate Lending). But maybe I am wrong and those roles doesn't exist on Wall Street. Obviously this site is geared for IB, but considering other industries get a lot of coverage (Real Estate, Consulting, etc), Commercial Banking should have more of a spot light. I mean, you have John Thain who was a well known IB guy moving to CIT to run a Commercial Bank. If that doesn't validate the inter-contentedness, i don't know what does.
I also agree there is a mountain of money to be made. Additionally, you can be greatly successful in a low COL area so not only are you making very good money, you are retaining most of it and have a superior quality of life.
Oh well, I will get off my soap box. I have already stressed these points, ad nauseum, on this site.
To the thread starter, what is comp like for the guys on the originations side? I assume they are relationship managers since they manage the credit after closing? Since you dont take deposits, where does your funding come from?
Realized I'm reviving an old thread but curious...what's daily responsibilities like when you're in a down cycle? Ex - CRE/C&I lending was the primary driver behind most (regional) bank loan growth over the past 3 years or so. Now it's decelerating. Are you still making calls looking for new business? Managing relationships? Monitoring credit metrics?
Down market could lead to devoting much of your time to work-out credits / relationships.
My Bank is a very big in Agricultural banking so even though '08-'13 couldve been considered "down" years, the Bank was still very active since the Ag economy was really booming in those years (thanks NAFTA!).
And as a pure Community Banker, if I am not going crazy lending and start gearing up for a down turn, I start soliciting deposit only clients for Treasury Management services and products. Typically local municipalities, non-profits, etc. Stock up on some liquidity to gear up for the next uptick in economic activity.
Try to catch up to all the money we've pushed out the door during this interest rate environment where lending heavy was the only way to offset the margin compression - just pure volume. We are conservative in that we don't (won't) fund loan growth with wholesale funding and rely strictly on low cost, core deposits to fund growth and try to keep pure liquidity only enough to examiners off us. Keep most of our liquidity off-balance sheet. It is a conservative approach but we don't need to sacrifice credit quality for yield as our earnings are strong.
Kind of have a feeling we are in for a pull back - just not sure what it is going to look like. Commodity prices are dropping and if we hit an Ag and a Commercial / Real Estate pull back - it is going to be choppy waters. Just hope we get some significant rate hikes (we are very asset sensitive) and hope that our conservative underwriting standards hold up and we don't have to start hitting the ALLL hard every quarter.
Thanks for the color. Everything you said re: funding profile and asset quality makes sense. Do you have specific sales goals (i.e. bring in X new relationships/yr, or min. $$ aggregate revolver, term loans etc) and are these goals adjusted when you're in a no growth environment? Any concerns over M&A/consolidation of community/smaller regionals given the regulatory burden of $50b total assets?
Yes on specific sales goals. However no Wells Fargo funny business going on over here. We don’t have “widget” goals – just aggregate volume. Open as many deposit accounts as you want – the goal is balances, not number of accounts.
In the go-go years, typical loan goals would be $25MM annually for Senior RMs. No breakdown on credit types – could be anything from CRE Construction, A & D, revolvers, term, Ag production lines, development loans, etc with $2.5MM in new deposits. Our top producers were hitting $60-$80MM annually in commitments those years with normal RMs hitting $5-$10MM in commitments.
Slower years could be $15MM in new loan commitment with $8MM in new deposits for the top producers. My guess is we start breaking down specific credit types – not on the actual goals, but in our incentive comp plans. We are reducing our construction and A & D exposures along with anything where we are concentrated in (Investment CRE – Office, Retail, etc). So we may reduce the comp paid on those deals and increase them, say for Owner-User Industrial which is where we don’t have significant concentration. Regulators are making it hard on CRE concentrated Banks (defined as CRE over 300% of risk based capital and ADC loans over 150% of risk based capital) and increasing the reporting requirements if you exceed those parameters. They think (and are partially right) that many of the Bank that failed were heavily concentrated in CRE and they see another bubble there. Kind of agree with them.
I actually really like the consolidation going on. I think it is rather alarming that a lot of the smaller players are getting eaten up; however, for a decent size community Bank (anything over $1B in assets) who is running efficiently, it creates a big void with only so many options for those clients who don’t want to deal with a Big Bank (trust me – there are more and more who are tired of dealing with them, and there are less and less options for good community Banks). Thanks again to WF for making my job easier :).
Once you start getting to the $3B-$5B mark, you typically have the capacity to deal with large regional clients and offer similar suite of products, but still have the advantages of local decision making and less red tape to deal with. And really from a regulatory standpoint, $10 is the threshold that really steps up the regulatory burden. Lots of good information out there about Banks getting ready to cross that threshold and how they are dealing with it. https://www.cbinsight.com/press-release/snl-financial-banks-approaching…
My bank is right around $3B in assets and I think our consensus is that $5B would be a really nice sweet spot. Were a really will run Bank (55% efficiency ratio) and our 1.15% ROA and 11.5% ROE are top percentiles in the industry (although far from the glory days which we probably won’t ever get back to). We are just closing on a small acquisition and really using it to lay the blueprint for the next one. Having a smaller one under the belt will be extremely beneficial as we will have all the training materials and intergration / mapping over procedures down. Wouldn’t be surprised if we go after a $600MM-$1B Bank into an adjacent, bigger market which offers us diversification in terms of the credit types that we are used to and offers much more in terms of market deposits. Getting to $5B will happen in my career and I think it is really exciting – albeit maybe not too interesting for the users of this site.
I do not think you need to be a $50B-$100B Bank to survive. Community Banks aren’t going away and will likely continue to battle the Regional and Big Banks. I would really like to see some regulatory relief as Dodd Frank was over reaching and while we don’t have AS MUCH as our bigger brothers, it is still choking the smaller guys who don’t have the asset base to spread across the cost.
Sorry, logging in for the first time in ages...
1/2. I don't think it's any different from other new grad finance positions, in terms of interviewing. All the WSO/Vault/M&I guides are still relevant, but with less of an emphasis on the DCF and actual valuation aspect. It might help to have a coherent explanation as to why you want to work in debt/lending. As far as primers
http://www.leveragedloan.com/primer/#!whatisaleveragedloan is good overview (I don't even work in leveraged lending).
Yes, we need certain returns, which in turn leads to a different risk profile from bank commercial lending. We refinance a lot of loans in workout with commercial banks. Underwriting is more of a career path as well (at least within my firm). My impression is that commercial banks put you through a rotational program and then the goal is to work in originations. Again, only speaking for my company but the underwriters aren't rubber stamping whatever origination brings in.
50MM to 1B is about right.
It's a far cry from high finance and might be kind of depressing on first glance for the GS or bust crowd, but just google like commercial finance/leveraged lending/bdc news and some decent sites will pop up...but I don't think anything really comprehensive or great exists for the middle market because it's so fragmented.
We don't really operate in the same space.
~100 people. My group is probably ~15 people not including the portfolio team.
Deal teams are usually a junior person and a director. An originator will source a deal, hand over some initial data, we do a prelim that goes through an informal screening. Based on that, a term sheet goes out. If we sign up the deal, the originator is basically hands off from that point.
My job is basically 1. writing the credit memo 2. making the model and 3. running internal processes (pissing off back office, funding mechanics, etc.). The director usually reviews the memo/model, runs the legal process, and manages third parties. It's not a case of "the analyst is seen and not heard" - we go to management meetings, ask questions, sit in on most legal calls and review docs.
Curious - does your firm have a separate portfolio management team? Is that essentially a monitoring/risk management responsibility?