Director Finance

I live at sea level but only two hours from Mt. Rainier. We had a very late summer this year, some would say we missed it altogether in the Northwest.

But Friday was a summer day. Warm but breezy. Lots of sun. And late August is a great time to visit Mt. Rainier as the wildflowers pop in profusion.

Right? Not quite.

A late summer at sea level, it turns out, means a late summer on the mountain. The wild flowers are not out yet. And on the Skyline Trail, you cannot even get past Myrtle Falls without traversing some snow.

Don't assume...

If you were to go to the Rainier National Park website to check on trail conditions before heading up to the mountain with athletic shoes instead of climbing boots, and without your climbing poles -- I can't imagine who would do that -- here is what you'd find:

August 17, 2011: Mt. Rainier received a heavy amount of spring snow this year creating hazardous conditions in the backcountry. Subsequently we expect a very late melt-out this summer. Issues to consider are route-finding, creek and river crossings and trail damage. Good navigation skills are needed in these conditions. It is easy to get disoriented and/or lost. There are also steep, icy slopes in numerous locations around the park. Always check with Park Rangers for trail conditions before heading out into the backcountry.

Rather than the anticipated 3 hour hike, with a 1,700 foot elevation gain, we headed up one way, turned back due to snow, tried another, turned back. It was still breathtaking but not what we expected.

And if we plan to see the wildflowers, we need to head back up in a few weeks. I'll check online to see if they have popped before I drive the two hours each way to see them!

Lenders: What assumptions are you making about your borrowers?

About how their business is doing because:

  • it is 'Back-to-School' season
  • the recession is over
  • your other borrower's business is improving

Directors: What assumptions are you making about your financial institution?

About how you are doing because:

  • management is upbeat
  • the recession is over
  • the other directors don't seem as concerned

Check your assumptions by checking in...

For lenders and business bankers, not only is it a great time to visit business borrowers to be sure you have a good sense of how business is going, but it is essential because other business bankers looking to increase market share or re-balance their loan portfolio might just get there first.

And if you are a director? Never stop asking those substantive questions to continue monitoring the health of your financial institution.

What is good enough?

One last thought. Just because conditions are less than what you expect doesn't mean they are not good enough. We had a fantastic day. Be open to what you'll find when you ask the questions you should ask. And then make a fresh assessment of the situation.

Allowance for Loan and Lease Losses: ALLL

This is often thought of as a reserve, a set-aside for the fact that some borrower is not going to pay. Which borrower? We don't know, otherwise we would not have lent to them.

Going up?

The Allowance increases in one of two ways:

The financial institution recognizes an expense, the Provision for Loan and Lease Losses, to build the Allowance to the 'best guess' required to prepare for loans that will not be collected. This guess is based on a rather complicated, and extensive process of

  • identifying loans that are at risk (impaired) and determining the likely amount that might be received, and
  • applying a historical loss rate, modified for today's environment, to the remaining loans on the books.

Recoveries outpace charge-offs. This is the least painful way to build (or rebuild) the allowance and results when the financial institution recovers previously charged-off loans faster than the decision to charge-off other loans.

This may happen when a recession truly turns the corner into recovery and loans perform better than expected.

The impact of an increasing ALLL

If it goes up as a result of booking the expense, the increase reduces profits and the resulting addition to capital for that period. Shareholders may not be as happy, but examiners and auditors likely will be.

If it goes up as a result of improving recoveries, everyone is likely to be happy.

Either way, if the guess as to the ALLL is a good one, the balance sheet more accurately reflects the loans receivable. Anyone trying to understand how well (or not) the bank or credit union is doing should appreciate that.