A conversation with Lawrence Marsiello, Managing Director – Pine Brook and former Vice Chairman and Chief Lending Officer of the CIT Group.

The severity of the economic downturn saw a number of commercial lenders exit the market or, at minimum, significantly reduce or adjust their lending focus. Like many sectors of the financial services industry, the aftermath of the financial crisis resulted in fewer players in the equipment finance industry – with the survivors implementing new strategies and tactics to protect their portfolios in anticipation of the next inevitable downturn.

But the question remains – What must commercial lenders do now to ensure they will succeed and ultimately survive the next negative cycle?

Lawrence Marsiello, a 40-year veteran of the commercial finance industry, believes the key to success lies in the execution of a clearly defined strategy understood at all levels within a commercial lending institution – governed and measured by the board of directors.
 
Marsiello is currently a Managing Director on the Financial Services Investment Team with Pine Brook, a New York-based investment firm that provides “business building” and other equity to new and growing businesses, primarily in the energy and financial services sectors. Prior to this role, Marsiello was Vice Chairman and Chief Lending Officer of the CIT Group. His background as a leader of one of the largest commercial lenders in the United States, and more recent role as an equity investor specializing in the financial services sector, provides us with a unique perspective on the issues commercial lenders must address in order to not only survive, but thrive in this post-recessionary lending environment.
 
MT: Thank you for joining us Larry. Looking back over the past four to five years, what do you believe was the primary reason for the liquidity crisis that negatively impacted so many seemingly strong commercial lenders, and were there any positives garnered from the crisis?

Marsiello: I believe the credit crisis in commercial finance was generally caused by too many lenders chasing too few deals, driving down loan yields while relaxing structural and collateral protection.

The resulting credit crisis did have several worthwhile effects. First, it washed out the lenders that abandoned credit and pricing standards in the name of volume generation. Second, it removed aggressive lenders who, in response to declining loan yields, recklessly binged on increasing leverage or debt capital to maintain return on equities. This “carpe diem” mindset substituted higher leverage on lenders’ balance sheets in order to offset the financial impact of lower yields on toxic credits.

Subsequently, the lenders who survived the financial crisis enjoyed unprecedented and attractive risk and return characteristics in 2009 and 2010. If you had “dry powder” in 2009 and 2010, then you had the ability to generate outsized returns on very lender-friendly terms.

MT: What do you believe are the most significant challenges facing commercial lenders in this post-recessionary climate from the equity sponsor and credit underwriting perspectives?

Marsiello: I believe getting the basics consistently right continues to be a challenge, and by that I mean ensuring that loans and leases being originated are adequately priced, and the risks in each transaction are fairly judged to generate returns sufficient to satisfy both debt and equity providers. Second, continually improving the skills and acumen of the staff to source, underwrite and manage credit to generate the expected returns will continue to be a challenge. Today, very few organizations can attract talent with “cradle-to-grave” experience in business development, underwriting, portfolio management and workout. The organizations that can attract, develop and retain this base are the organizations that will make the least mistakes.

MT: What do you believe are the keys to survival for commercial lenders – for example, access to liquidity or self-imposed stress tests?

Marsiello: There are many keys to survival, but there are two that I believe matter the most. As the market becomes overheated as it was in 2006 and 2007 – when it was driven by excessive liquidity (meaning, depressed yields and completely borrower-friendly terms) – the key will be for executive management to have the courage to “tap the brakes” or “put down their pens.” Historically, the most toxic loans are typically generated 6 to 18 months before the market bottom. Additionally, in view of the potential for another systemic liquidity shock, lenders need to be cognizant of the need for a durable debt and equity capital base. Most finance companies and banks typically do not fail due to a lack of profit; rather they fail due to a lack of liquidity and the loss of debt or equity investor confidence.
 
MT: Do you believe commercial lenders have made the necessary adjustments to accurately identify and monitor “enterprise risk” across multiple lending business lines?

Marsiello: Overall, today’s boards of directors and management teams possess higher risk IQ and risk sensitivity. That being said, it's important to remember that risk practices and procedures are largely influenced by the last cyclical downturn. So, since no two cycles are alike, I believe some lenders will get it more right than others during the next credit crunch. It remains to be seen which lenders have culturally and systemically embraced effective risk management practices and procedures compared to those that just talk a good game.

MT: Will the need to compete in terms of pricing and structuring pressure, and the need to gain market share, threaten the newly defined risk parameters in the near term for commercial lenders?

Marsiello: I believe newly defined risk parameters can be successfully adhered to, but it comes down to execution at all levels including the executive level. Board engagement is critical in my mind. An engaged and invested risk-minded board of directors setting and managing the risk performance and boundaries in line with agreed upon strategies and tactics is critical.  Ultimately, effective execution of any strategy is the primary role of the CEO and the executive team.

Also, conveying a clearly understood value proposition to the market is critical to gaining market share, not pricing or more lenient structuring. Lenders need to ask themselves what differentiates them from their competitors. Is it organizational attributes that borrowers value and are willing to pay for, such as speed to market or efficient and decisive decision making? Is it the lender’s depth of industry knowledge? Is it expertise in healthcare, construction, transportation or IT that allows them to better underwrite, manage and price to the risk of a deal? For example, equipment finance professionals know collateral, and they know it intimately. That’s a real attribute that can be effectively utilized to gain market share.
 
MT: What new and/or old issues are likely to present themselves over the next two to five years for commercial lenders while re-building their loan portfolios?

Marsiello: Following the loan portfolio contractions of 2008 and 2010, many lenders have grown their loan portfolios over the past few years with credit problems at an historical low level. Now, with portfolios maturing, credit quality issues are likely to rise. The challenge remains to identify problematic credits early – before they fester into losses. The key is not to watch the parade go by, but rather, take timely action to protect returns. Commercial lending is a hands-on business of evaluating the details and recognizing positive and negative developments early.
 
MT: If you could provide two or three snippets of advice or guidance to the leaders of commercial lenders, what would that advice be?

Marsiello: If I look back at commercial lending organizations of all types (say over a 10-year time period) that generated consistent growth and returns, they share common traits which I believe remain valid today. First, a commonly understood value proposition to the market and a supportive credit culture permeating the organization. A value proposition and credit culture that is clearly communicated and agreed upon by key decision makers is critical for success. Second, these players possessed an intense understanding of a borrower’s industry, financials and assets that serve as loan collateral. So, deep industry expertise is also critical. Third, successful lenders did not suffer from what I call “style drift.” Meaning, if the credit decisions were historically largely collateral based, the successful lenders remained within their agreed-upon risk box. Throughout the cycle, they did not deviate or morph based upon recent market fads, materially influencing their underwriting box. Finally, in pricing credits, successful lenders possess a laser-like focus upon generating risk-adjusted returns. At Pine Brook, in considering a potential equity investment in either a commercial finance company or community bank, we highly value these same organizational characteristics.

Lawrence Marsiello joined Pine Brook in April 2010 and is a managing director dedicated to the commercial bank, consumer and commercial finance segments of Pine Brook’s financial services investment practice.

Having begun his career at Manufacturers Hanover Trust Co. in 1974, he has over 40 years of cycle-tested experience. He retired in February 2008 as vice chairman and chief lending officer of the CIT Group. Previously at CIT, Marsiello served as group chief executive in the Commercial Finance Group. Through the Business Credit Group (asset-based and cash flow loans) and Commercial Services Group (the largest U.S. factoring company), the Commercial Finance Group served 3,000 clients representing $9 billion (18%) of CIT’s managed assets and 25% of the company’s net income.
 
Marsiello is a member of the Turnaround Management Association and the Commercial Finance Association. In the fall of 2008, the Turnaround Management Association elected him to the Turnaround, Restructuring and Distressed Hall of Fame. Marsiello serves on the boards of Tricolor, Inc., a subprime auto finance company controlled by San Francisco-based Serent Capital, LLC and United PanAm Financial Corp., a Pine Brook portfolio company. He also serves as a trustee of St. Francis College (Investment Committee Chair) and of National Jewish Health in Denver, Co. Readers may contact Lawrence Marsiello at lmarsiello@pinebrookpartners.com.