March 2011 Archives


One of the LinkedIn Groups I belong to is having a raging debate about whether that first C of Credit, 'Character', can be considered any more. Or should be considered again! (BTW: Connect with me at LinkedIn. My profile is at 'Linda Keith CPA'.)

Small Business Banking Professionals

That is the group. The discussion posed this question:

Banks are digging deeper into the character of their borrowers. How are you or your bank addressing the "character" issue?


Bankers from around the country and from banks big and small have weighed in. The answers are all over the map, too. Here are some samples:

  • We have to get back to character lending
  • We cannot get back to character lending
  • The business bankers don't make the underwriting decisions and the underwriters don't know the borrower, so character as part of the equation is lost
  • Newer lenders don't get the training or the mentoring they used to and don't know how to take character into account
  • Character lending in any form has the potential to be discriminatory in nature
  • Character is indicated when a borrower has been through very tough times recently but continued to pay as agreed, keep on employees and support the community
  • A red flag for character is If the borrower has run up credit cards or consumer loans for toys (boats, fancy cars) without increased net worth to show for it
  • If business has been tough, finding out how they have treated their vendors, suppliers and customers might be a clue to character
  • A quality centralized underwriting team can coach front-line lenders in the questions to ask and how to document answers that will give the underwriters the 'character' clues they can't get first hand
  • If the lenders compensation is based on origination volume, they might not take the character issues seriously that the underwriter won't be able to discern

Wow, as I said, all over the board.

So how about you?

Does character still factor in? And if so, how? And how do you find out about it?


Many business lenders use global analysis to consolidate cashflow among related entities. For example, if a small business has one 80% owner and another 20% owner, it is likely you'll consider the cashflow of the business combined with the cashflow of the 80% owner.

After all, if the owner is guaranteeing then his/her personal cashflow from other sources may come into play. And besides, the cashflow they take from their business may be higher or lower than the company can clearly afford.

So what about the balance sheets?

I got this question from one of my AgLending clients last week. In a training on Tax Return Analysis for Agriculture we had used their proprietary software (as is my custom when doing in-house training).

Like many Ag Lenders they look at the consolidated balance sheets as well. The question:
Do you go ahead and consolidate balance sheets with two owners and the farming operation when each owner is only guaranteeing 50%?

They were considering consolidating all three entities at 100%. They were also considering removing 50% of each asset class of the two guarantors, clearly much more work.

My answer is my favorite...'it depends'. My first inclination always is to do it the most simple way if the harder way won't improve the credit decision.

My questions, her answers, and our solution.

Q: What do you use the consolidated balance sheets for?
A: Current ratio and Debt-to-Assets

Q: Does it look like it will make a difference either way?
A: Not really

Q: What do you think the examiner would think?
A: The examiner happens to be here  and she thinks if we consolidate all three and make a note that the guarantors are each only guaranteeing 50% we'll be fine.

Less work, good credit decision and happy examiners...

It doesn't get any better than that!

Under a headline 'Small Business Lending Strong in 2010' I found this lead sentence:

Lending to U.S. small businesses in 2010 saw it biggest year-over-year gain since December 2006, according to the Thomson Reuters/PayNet Small Business Lending Index.

Sounds good, yes?

So let me point out, a huge year-over-year gain up from a terrible year does not equate to small business lending being 'strong' in my view.

"The economic atmosphere for small businesses did not improve much in 2010," said Denny Dennis, NFIB Research Foundation senior fellow, in a press release. "We don't expect credit levels to reach the levels they did a decade ago."

Some banks and credit unions are targeting small business lending and seeing an increase in their loan portfolio. But any blanket statement that small business lending is strong is misleading, don't you think?

Why does it matter?

It matters because business owners and lenders are attempting to predict future performance in an uncertain environment. When business owners hear that small business lending is strong
  • they may be surprised by a turn-down
  • they may not request the loan far enough out to allow time to seek it from several sources
  • they don't know how to take it when they get turned down for a loan.

Fuzzy thinking

Lenders, if your borrower comes in and says their company experienced the best year-over-year growth in five years, be sure to look at how bad the previous year was before you let yourself be impressed!
In his newsletter, The Tea Leaf, Jeff Thredgold covers where the jobs are, where they still are not, and what is next.

Here you go! Jeff Thredgold's Tea Leaf

The short version...
Overall construction is finally trending up in employment.
State and Local government is in big trouble.
As people who had given up come back into job search mode, it may continue to wobble.

What is happening in your geographic footprint?

Hard to keep up with the impact of all the new (and old) rules, don't you think? So if you are not heavily into compliance but don't want to trip over yourself in conversation with your prospects and clients, here is a free webinar I think might be helpful. I'll be attending.

What is covered

Here is the description at the TriNovus website:

The topic of this education session is the probable effects the new financial reform legislation will have on community banks.

The Restoring American Financial Stability Act, also known as the Dodd-Frank Act was signed by the President on July 21, 2010. The legislative intent of the bill is to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices and for other purposes.

This webinar will discuss the impact of this act on community banks. 

Want to come, too?

Trinovus is a company focused on helping financial institutions with their compliance needs. Want to come, too? Contact Gary.Foster@TriNovus.com to sign up.