How TD Bank tackles small business

TD Bank has emphasized its retail side for so long that sometimes one can forget that TD is very much a commercial banking company. It’s much the same situation as existed with Commerce Bank, acquired by TD Bank Group acquired in 2008, in which a bold retail presence obscures a strong commercial side.

The bank has a Maine-to-Florida network numbering over 1,300 retail locations and is still opening more.

Despite that, TD is very much a commercial lender, and one that stayed in the market when other organizations throttled back during the recession, points out Fred Graziano, TD Bank’s head of regional commercial banking, government, and small business banking. Business lending of all types runs neck and neck with personal lending at TD, and in the second quarter average business loans grew by 10% year over year, says Graziano, who started with Commerce Bank in 1992 as a middle-market lender and is now EVP.

In fact, all those branches are part of the “web” that helps commercial lending happen at TD Bank. But more on that later.

Lessons are being forgotten

Competition has picked up in all markets. “We’re all chasing each other’s commercial deals and banks are forgetting the things that got us into trouble,” says Graziano. “We’re seeing loosening of credit terms. We’re seeing more leverage. We’re seeing ‘convenant-lite’ deals back in play. I think examiners are going to have to remind the banking industry about what happened.”

Graziano says TD Bank is still a fairly conservative lender, as it was back in the Commerce days. “That’s why our loan-to-deposit ratio is not as high as some competitors.”

TD Bank’s approach to developing business and developing business bankers can serve as food for reflection for banks reassessing their approach to credit risk management.

“I’ve been known to say that sometimes the best answer to a customer request is ‘no’,” says Graziano, during a recent visit to our New York City offices. The story behind that sentence concerns TD Bank’s view of what a business banker’s job is, how they do the job, and where their job begins and ends.

When “No” isn’t “No”

“Out localling the locals” is one of the goals within TD Bank, according to Graziano. While the total assets are $235 billion across the company’s Canadian and U.S. operations, TD Bank gives considerable autonomy and flexibility to its regional units and to the smaller units down the hierarchical line.

Graziano says the company still does many business loans below $15 million, and considers its style to be more akin to community banking than megabanking.

“That’s our bread and butter,” he explains. “Large-ticket corporate transactions help us with overall loan growth. But the small business customer and the small regional customer are still very profitable clients for this organization.”

TD Bank’s attitude about loan approvals is part of its success with smaller borrowers. Typical approval rates these days are 20% of applicants, but for TD, it’s more like 48%. Graziano explains that the bank realized, a while back, that credit didn’t have to be a “yes” or “no” proposition, and that “no” didn’t have to mean the end of discussions.

Often, customers don’t really know what kind of credit they want, nor how much they can really qualify for. As a result, they sometimes err in what they apply for, and can readily overshoot what their credit will stand.

“You may be asking for a credit line, for example, but what you really need is a term loan,” says Graziano. “And you may have asked for $100,000, when $75,000 is what you qualify for.”

Communication and customer education convert turndowns into approvals, he explains. Sometimes the change needed is structural, sometimes it’s a matter of size of credit, and sometimes it may mean finding a Small Business Administration or other guarantee. Or proposing an alternative type of credit, such as a lease, say, for equipment.

“It’s our job as bankers to help the small business customers figure out what they need,” says Graziano. “As a lender it’s my job to sit and talk with you, so I can be your advocate within the bank. It’s my job to educate you about banking, and to show you when you can depend on us and when you can’t depend on us. We’re still big on belly-to-belly, relationship lending. And if you’re a customer who doesn’t like to talk to your banker, we’re probably not the right bank for you.”

No “empty suits”

To provide that kind of service to customers, a TD Bank lender can’t be what bankingexchange.com Talking Credit blogger Ed O’Leary refers to as “an empty suit.”

Graziano acknowledges that in some banks the attitude is that credit can be split into multiple specialties. He and others refer to as the “finder, grinder, minder” school.

“The ‘finder’ is really more of a salesperson,” says Graziano. “He is not credit trained. It was as if banks told him to go out and hunt, but don’t touch anything you bring back. You’re not capable of touching it, right?”

Graziano sees no sense in this: “How can someone like that possibly have a good discussion with a customer?”

The “grinder” in this model is the underwriter, who runs the numbers, and figures out if the customer qualifies for the loan. And the “minder” is the supposed relationship manager, whose job is to service and keep the customer with the bank.

At TD Bank, says Graziano, “every commercial borrowing relationship no matter what size has a relationship manager assigned. If your relationship is of $100,000 or more, you are going to be touched by our small business relationship manager at least four times a year and one of them is going to be an in-person visit.”

Growing business lenders in house

What sets TD Bank’s program apart is not that the relationship manager actually does every part of the process day-in, day-out: The point is that every business banker touching customers is capable of being “finder, grinder, and minder.”

The concept of the “finder” was that these prospectors dragged in likely-looking deals, but they had no clear idea if they were necessarily bankable. “The old finder just threw everything against the wall and hoped something would stick,” says Graziano.

That just doesn’t compute at TD Bank. “You can’t talk to [a loan prospect] unless you understand a balance sheet and an income statement and how all that works,” says Graziano.

“I’m not saying that our relationship managers are doing the underwriting,” Graziano explains. “I don’t want them to do underwriting because that’s not what I am paying them for. I can pay people much less to do the underwriting.” But they have to be able to distinguish the bankable credit from the unbankable.

That prioritization is only part of it. Graziano explains that the day of the one-stop lender is over. Regulators won’t tolerate letting relationship managers be the final yea or nay on credit. Independence and controls are the order of the day, today.

But TD Bank expects the relationship manager to be the point person for that customer and to do that, they must understand all elements of the process.

“We have groups that support the RM, but the RM is still the knowledgeable person and the one who presents a credit relationship for approval,” says Graziano. That broader comprehension is important when the relationship goes beyond credit.

Such bankers can be found, but TD Bank prefers to train them. Graziano points out two problems with searching for and hiring bankers with business-lending savvy. First, experienced hands are growing older and approaching retirement. Second, everyone wants them for some part of their credit organization, be it front-line or bosses, so they come at a premium. TD Bank’s approach is to develop multi-faceted relationship managers from within, through extensive training.

Isn’t that horribly old-fashioned?

“No, because it’s worked for us, made us successful,” says Graziano. Besides, he adds, “developing people never gets old.”

TD Bank’s credit boot camp

For many years many community banks relied on large banks training lenders, and on snapping them up after they’d had some experience after the program. But as many large banks have had to cut costs, one result has been that fewer organizations provide lender training at the bank level.

“I’d rather develop them, train them, and get them to understand our credit culture and our corporate culture,” says Graziano. Even experienced lenders may take six months to become effective, he says, versus a banker who has been steeped in TD Bank’s ways from the start.

TD Bank launches two programs a year, training the entrants initially to be credit analysts. Each time the program is offered it trains 25 people. The training runs for 18 months. TD Bank combines its own offerings with segments based on trade association and private educational modules.

“The first several months are pure hell,” says Graziano. “These consist of formal classes where they learn to spread statements and read financial documents. Then we send them into the field with working lenders. They go on calls, see how we speak to customers.”

Once the training wraps up, the students have several options. “They can be a small business lender or they can be a community lender,” says Graziano. “Or they can remain within Credit Management and oversee a group of analysts. Some do that, and some go into Credit Risk or into Audit or into Loan Review.”

Not everyone is cut out to be in a selling role, but most graduates do become first-level lenders, according to Graziano.

Providing a career path

Ultimately, many move up the ladder, he adds. How high depends on how well the bank sees them handling customers. “I really shouldn’t say that we develop lenders—we develop bankers,” Graziano explains. Training includes exposures to the bank’s retail side as well, so the trainees understand the entire bank.

In speaking of moving up the ladder, Graziano adds that he believes larger banks offer opportunity to young bankers that they will not have should they move after training to a community bank that grabs them up.

“What I always say to a young banker who is thinking about going to a community bank, is ‘Do you want to be a community bank lender forever?’,” he says. “‘Or do you want to be in an organization like ours, with its size and complexity, where you can build a multifaceted career?’” While Graziano himself has spent much of his time with the company in commercial banking posts, he took his present position after several years overseeing TD Bank’s de novo branch expansion.

“It’s up to us to have good conversations with our employees.,” says Graziano. “When you don’t sit down and have a personal development conversation with your employees, that’s when you lose them.”

That said, Graziano does not worry about those trainees who do wind up being snapped up by other banks. He believes that if management has done its job properly, the employee may go, but the customers will stay.

Losing a book of business when the banker leaves is not a concern. “I think smart customers choose a bank, not a banker,” says Graziano. “We have lost relationship managers, but I will tell you we haven’t lost a lot of credits that we didn’t want to lose.”

Working within TD Bank’s system

Part of what makes Graziano confident in what he’s just said is that management works to make the customer relationship, managed by the relationship manager, a web of service. The manager is the hub, but not the whole wheel.

At TD, the bank’s seven U.S. regional presidents “own” and manage both the retail bank and the commercial bank in their territories. “It makes it very easy for us to deliver the entire organization to a customer when we are not siloed,” explains Graziano. And it plays to the TD Bank network as a deposit-generating machine.

Business lenders don’t work out of TD Bank’s stores, they report to the regional organization. In turn, the regional chiefs rely on both business lenders and the store managers to develop commercial lending and banking business.

“Every one of those store managers are required to go out and make customer calls—50% of their time,” explains Graziano. “Our store managers are very good at making business development calls. And we train them, too, in business lending.”

The regional chiefs report both to Graziano and to TD Bank’s retail head. Goals are based on the perceived opportunities in each market—the sheer density of business in the New York metro area, for example, drives higher expectations than would be set for markets with more farflung business populations.

Serving the franchise market

While playing to a wide range of commercial customers, TD Bank has been selecting specialized niches as well. One is franchisees, where the bank’s credit evaluation begins not with the ultimate borrower, but with the franchisor they will work with.

And Graziano says there are multiple appeals to the medical market. Besides lending to the practices themselves, their practitioner owners represent a deep pool of opportunity for mortgage lending, personal banking, and wealth management, all playing off the TD Bank brand of “most convenient bank” that goes back to the days of Commerce Bank and its founder and CEO, Vernon Hill.

Graziano explains that the broader relationship is not only desirable, but increasingly necessary.

“The onboarding of a business loan by itself, particularly at a smaller level, can be quite expensive,” he explains. “So you need to deepen that relationship and you need to have customers using more aspects of your bank—or you are going to have a very expensive distribution model.”