Successful Lender


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.

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.



In today's Wall Street Journal, an article on Banks Reach Out to Small Firms caught my eye.

groceries.pngIt starts with a branch manager in a grocery store following a customer around who also owns a business and enticing him back to apply for a small business loan, which she was able to make.

The recent economic struggles have left lenders with a challenge if you are relying on historical cashflow figures. The Tax Return Analysis training I present to business lenders focuses on calculating historical/recurring/projected cashflow and we are certainly talking about other indicators these days. So here are three indicators other than cashflow mentioned in the article:

  1. BB&T and J.P. Morgan Chase & Co. say they are looking more closely at quarter-to-quarter comparisons when they evaluate small-business loan applicants to see if there are signs of a turnaround.
  2. Bank of America now gives more weight to orders and anticipated revenues when weighing a company's prospects.
  3. Loan officers at Webster Bank have been told to put more emphasis on character. "We want to recognize those people who have made the necessary changes in their business," says John Guy, head of small-business banking.
I have three questions for you:
  1. What are you weighing more heavily to determine if the small business you are interested in has turned around?
  2. Are you finding the regulators focused too much on recent historical cashflow, not enough or about right? Are they on board with alternative ways of looking at credit-worthiness?
  3. If 10 is loose and 1 is the tightest it has ever been, where are your underwriting standards related to small business loans? Never mind. Don't answer that just in case the regulators are reading. '-)

According to CFO magazine citing a survey by Greenwich Associates, 'an historically high number of small and midsize companies have put their banking business out for bid.'

19% of midsize companies and 16% of small businesses indicated plans to do so in 2011. Greenwich asserts than in a typical year, only about 10% of companies switch banks.


SwitchingBanks.png

Why are they switching?

The top driver for small business was the current level of customer service. Also cited were a desire to reduce banking fees and access to new sources of capital. And related to the economic challenges and the credit crisis, in some cases the companies' needs are just not aligned with the capabilities of their banks.

What is a banker to do?

  • Don't assume your banking clients who have stuck with you thus far plan to do so. You may be the last to know.
  • Prioritize your current clients, get in touch with the keepers and stay in touch
  • Prioritize your prospects, get in touch with those you want and stay in touch

What are you doing?

What are you and your business development and business lending colleagues doing to connect or reconnect with business borrowers?

  • Calls or visits?
  • Resources such as business seminars to help them be successful?
  • Referrals to their business of potential customers or advisors?
Or something else altogether?
Are you having any trouble at all keeping up with all the terms and acronyms related to bank challenges and failures? Is it hard to be that knowledgeable banker at the cocktail party or the business meeting when you stumble over terms and acronyms?

Here is the glossary of terms and the acronym list from the Material Loss Review Report on 'my' failed bank. I was a shareholder in the 92nd bank to fail and found the 43 page report interesting reading. Okay, I didn't read it, I skimmed it.

Adversely Classified Assets
Assets subject to criticism and/or comment in an examination report. Adversely classified assets are allocated on the basis of risk (lowest to highest) into three categories:

  • Substandard
  • Doubtful
  • Loss
Allowance for Loan and Lease Losses (ALLL)
Federally insured depository institutions must maintain an ALLL that is adequate to absorb the estimated loan losses associated with the loan and lease portfolio (including all binding commitments to lend). To the extent not provided for in a separate liability account, the ALLL should also be sufficient to absorb estimated loan losses associated with offbalance sheet loan instruments such as standby letters of credit.

Call Report Consolidated Reports of Condition and Income
Also known as the Call Reports, these are reports that are required to be filed by every national bank, state member bank, and insured nonmember bank pursuant to the Federal Deposit Insurance Act. These reports are used to calculate deposit insurance assessments and monitor the condition, performance, and risk profile of individual banks and the banking industry.

Cease and Desist Order (C&D)
A formal enforcement action issued by financial institution regulators to a bank or affiliated party to stop an unsafe or unsound practice or violation. A C&D may be terminated when the bank's condition has significantly improved and the action is no longer needed or the bank has materially complied with its terms.

Collateralized Debt Obligation (CDO)
CDOs are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDO securities are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.

Collateralized Mortgage Obligation (CMO)
CMOs are created when individual mortgage loans are packaged or pooled by issuers and offered to sale to investors. There are two types of issuers - agency and private label. Agency-issued mortgage-backed securities meet specific underwriting criteria whereas private label issues generally comprise nonconforming loans.

Concentration
A concentration is a significantly large volume of economically related assets that an institution has advanced or committed to a certain industry, person, entity, or affiliated group. These assets may, in the aggregate, present a substantial risk to the safety and soundness of the institution.

Investment Grade
Investment grade generally means a security that is rated in one of the four highest rating categories by two or more nationally recognized statistical rating organizations.

Other Than Temporary Impairment (OTTI)
An impairment of a debt instrument occurs when the fair value of the security is less than its amortized cost basis. According to accounting standards, when the impairment is judged to be other than temporary, the cost basis of the individual security must be written down to fair value, thereby establishing a new cost basis for the security and the amount of the write-down must be included in earnings as a realized loss.

Prompt Corrective Action (PCA)
The purpose of PCA is to resolve the problems of insured depository institutions at the least possible long-term cost to the DIF. Part 325 of the FDIC Rules and Regulations, 12 Code of Federal Regulations, section 325.101, et seq, implements section 38, Prompt Corrective Action, of the FDI Act, 12 United States Code section 1831o, by establishing a framework for taking prompt corrective supervisory actions against insured nonmember banks that are less than adequately capitalized. The following terms are used to describe capital adequacy:
 
  • Well Capitalized
  • Adequately Capitalized
  • Undercapitalized
  • Significantly Undercapitalized
  • Critically Undercapitalized.
Tranches
Multiple classes of equity and debt that are set in a senior or subordinate position to one another based upon seniority in bankruptcy and timing of repayment. The tranches are divided into three general categories:
 
  1. Senior tranche
  2. Mezzanine tranche
  3. Equity tranche
Uniform Bank Performance Report (UBPR)
The UBPR is an analysis of financial institution financial data and ratios that includes extensive comparisons to peer group performance. The report is produced by the Federal Financial Institutions Examination Council for the use of banking supervisors, bankers, and the general public and is produced quarterly from Call Report data submitted by banks.

Acronyms:
ADC Acquisition, Development, and Construction
ALLL Allowance for Loan and Lease Losses
ARD Assistant Regional Director
BOLI Bank-Owned Life Insurance
BSA Bank Secrecy Act
C&D Cease and Desist Order
CAMELS Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk
CD Certificate of Deposit
CDO Collateralized Debt Obligation
CMO Collateralized Mortgage Obligation
CRE Commercial Real Estate
DIF Deposit Insurance Fund
DRR Division of Resolutions and Receiverships
DSC Division of Supervision and Consumer Protection
EIC Examiner-in-Charge
FDI Federal Deposit Insurance
FHLB Federal Home Loan Bank
FHLMC Freddie Mac - Federal Home Loan Mortgage Corp
FIL Financial Institution Letter
FNMA Fannie Mae - Federal National Mortgage Association
GAGAS Generally Accepted Government Auditing Standards
GSE Government Sponsored Enterprise
LTV Loan to Value
OIG Office of Inspector General
ORL Off-site Review List
OTTI Other Than Temporary Impairment
PCA Prompt Corrective Action
RO Regional Office
ROE Report of Examination
SEC Securities and Exchange Commission
UBPR Uniform Bank Performance Report
UFIRS Uniform Financial Institutions Rating System

Got that? No, there won't be a quiz!

Do you have any to add to the list?

As a lender, you have three questions to answer before you can say 'Yes' to their loan request:

  1. Would the borrower pay the loan if they possibly could?
  2. Does it look like they can pay it from operating income?
  3. What is the back-up plan in case they can't?
However, the answers to numbers 2 and 3 are not even relevant if you can't get the right answer to the first question. What you are trying to determine with the first question is:
  • Could you do this deal on a handshake?
  • Is their word their bond?
  • Do they keep their promises?
The most important decision the lender will make about the business owner is whether you can trust them.

Yes, this is subjective and you won't find the answer specifically in any of the documents provided.You will find it by how the owner says what they say to you and your interpretation of the documents they provide.

Tax Returns

  • Do they report all their income or do they confide in you, the lender, that they do some of their work under the table'?
  • Does the company pay for the owner's personal cars and travel?
  • Does the owner resist providing the tax returns and schedules you request?

Conversation

  • Does the owner brag about deals that might sound underhanded (even if they aren't) without providing the full context?
  • Does the owner come across as someone who is ruthless in business (in a bad way)?

Follow-Through

  • Does the owner provide the interim financial information they agreed to on time?
  • Or does the lender have to keep hounding the owner for information she promised to send?

Impressions count

Everything the business representative does, everything he says, and everything the company provides to the lender should be run through this 'Character' filter. If the business and the business owner do not pass this test, their ability to pay and the strength of their collateral and personal net worth will be irrelevant.

Get to 'yes' with the first and most important question. Then move on to questions 2 and 3.
I often find the ideas CPAs are sharing about maintaining client relationships are right on target for what business bankers need to be doing.

So here is a quick list of six ways to lose your customer and the CPA alternative for keeping their clients from AICPA's CPA2Biz ezine. Read the article here.

1. Lose: Do the minimum OR
    Win:   Go the extra mile on the current engagement. CPA examples:
  • Conducting extra analysis using business-intelligence tools like BizBench.
  • Bring the project in earlier than promised.
  • Or hand-deliver reports and discuss in person.
2. Lose: Don't call, don't write, don't visit OR
    Win:   Spend more time with the client. (see related story.) CPA examples:
  • Visit at every opportunity.
  • Schedule business meetings near mealtimes to grab some extra quality time over a nice meal.
  • Invite the client into the firm's office.
3. Lose: Consider each customer in isolation OR
    Win:   Build the business relationship. CPA examples:
  • Help the client network with your other clients.
  • Offer free seminars for the client's staff.
  • Refer new business to the client.
4. Lose: Business is business OR
    Win:   Make it personal. CPA examples:
  • Understand their goals in life and business.
  • Get hard-to-find tickets to big games or shows.
  • Remember birthdays and anniversaries.
5. Lose: Don't do your homework OR
    Win:   Learn more about the client's industry. CPA examples:
  • Read the same trade journals they do.
  • Learn all you can about their competitors.
  • Join them at trade shows.
6. Lose: Be satisfied with a surface knowledge of the company OR
    Win:   Increase your knowledge of the client's company. CPA examples:
  • Spend time with the junior managers.
  • Understand the company's power structure.
  • Meet the boss.
Certainly the depth and type of relationship building a CPA engages may differ somewhat from their business banker, but maybe less than you might think.

And as they point out in the CPA-focused article, if you are not paying attention to your clients you can bet your competition is.

What are you doing to lose (or to keep) your borrower's business?


The U.S. Small Business Administration has announced the SBA's Patriot Express Pilot Loan Initiative for veterans and members of the military community wanting to establish or expand small businesses. 


Eligible military community members include:

 

  • Veterans
  • Service-disabled veterans
  • Active-duty service members eligible for the military's Transition Assistance Program
  • Reservists and National Guard members
  • Current spouses of any of the above
  • The widowed spouse of a service member or veteran who died during service or of a service-connected disability
  • The SBA and its resource partners are focusing additional efforts on counseling and training to augment this loan initiative. 


Start with a Self Assessment

Here is their message to veterans:

You've got an idea for a business. Now it's time to evaluate if your dream of starting a business can be a reality. The Checklist for Starting a Business is a comprehensive tool designed to prepare you for self employment by analyzing your responses in key areas and providing a menu of supporting resources.


To learn more about the Patriot Express Initiative:

 

Patriot Express Loan Initiative

Resources to Help You Start, Grow and Succeed

Assisting Small Business Owners

Press Kit

Patriot Express Forms
Here is an interesting post by Jane Harford, FHA DE Underwriter writing for the National Association of Mortgage Processors blog.

She does a great job of listing the red flags that pop for her and what she would do next as a loan processor. As usual, what makes a processor nervous perhaps should have made the loan officer or originator nervous.

Jane and I both like to highlight potential red flags and then remind you that these are not deal killers for the most part. They need to get your attention so you can follow up. One or two, much less of a problem than eight or nine!

The Dirty Dozen

Here is her list with her comments and mine:

  • Providing an incomplete or handwritten 1003.
    • Jane: If the entire file is not put together yet, the processor might not notice 'issues' with the file as items come in piecemeal.
    • Linda: As a RE investor, my 1003 was always handwritten. I think Jane has a great point, though. The ability to analyze a complete file instead of dragging info from the borrower every step of the way gives you a clearer picture.
  • Employer's address is listed only as a post office box.
    • Jane: The business may not exist.
    • Linda: My business address is a PO Box.
  • Borrower's education completed differs from his/her job category and level.
    • Jane: Just because they have a pay stub to support their wage does not mean they did not fabricate it. Pay attention if the level of salary or type of job does not make sense for the education.
    • Linda: Good call, Jane. I had not thought of that one. I would add to consider previous work experience as well. My husband, for example, earned a horticulture degree but ended up in construction.
  • Borrower's office phone number is the same as the home phone number.
    • Jane: This could mean the borrower is self-employed or not employed at all.
    • Linda: Even if self-employed, home-based 'serious' businesses have a separate phone number. If the business phone is answered by a kid who then yells 'Mom, it's for you!' that would concern me.
  • Assets don't seem to be consistent with the borrower's disclosed income.
    • Jane: If the assets are not consistent with the borrower's income or the recent balance in their bank accounts, recently opened, are significantly higher than their 'average' balance, Jane asks us what we think the red flags are.
    • Linda: I am not sure what she thinks they are. I would guess overstating assets. Or perhaps Mom and Dad 'lent' her money just before the mortgage application so it would look like she has the down payment. I would add that frugal people often have assets that seem high compare to their income so, as Jane suggests, notice and follow up if you have a concern.
  • The borrower's income is not consistent with his/her age and education status.
    • Jane: She did not add comments on this one.
    • Linda: I agree, and also think that it is getting more difficult to guess what income should be based on age and education. The impact of the recession on job disruption has to be factored in.
  • Borrower's home phone number has a different area code from the work phone number, even though they are in the same area.
    • Jane: She did not add comments on this one.
    • Linda: My kids are keeping their cell phones as their only personal line and often still have the number from when they lived elsewhere. Again, good to notice, and this may be the explanation.
  • Borrower is purchasing an investment property, but rents for primary residence.
    • Jane: She did not add comments on this one.
    • Linda: Good call, again one that would not have jumped to my mind. I can think of good reasons, but it would be less likely to buy investment property before primary residence.
  • Unrealistic drive time between home/work for an owner occupied purchase.
    • Jane: In her comments, she added unrealistic distance between primary residence and second home.
    • Linda: I continue to be amazed at how far people commute to work. That said, you would know what is realistic or customary in your geographic area.
  • REO schedule shows that borrower owns property, but no mortgages appear on the credit report.
    • Jane: Did not feel the need to expound on this one.
    • Linda: Neither do I. Cross-checking is one of the best ways to catch any kind of fraud. Check tax returns to financial statements. Check application to REO. Check REO to credit report. I own property free and clear. It is a reasonable question to follow up on.
  • Debts listed on 1003 show no mortgage debt, but a check of MERS shows that borrower is on an existing mortgage.
    • Jane: Check this out.
    • Linda: Ditto.
  • Borrower's answers to the declaration questions differ from the documents provided and the profile that the borrower fits into.
    • Jane: This needs to be clarified, explained, and satisfactory documentation provided.
    • Linda: If you are the person talking to the borrower (as opposed to looking at their file) add what they say verbally to this idea. Sometimes you catch fraud because the person cannot remember all the ways that they lied in the application and say something that is not consistent.

    What is on your fraud watch list?

Your business borrowers are making big decisions in very 'confused seas'. Is it time to:

  • Rehire workers?
  • Add to production?
  • Beef up inventory?
  • Market more aggressively?
  • Borrow money?
Last weekend I planned to take the kayak out for a trial run. I moved the seat forward and wanted to see if it improved my stroke.

Thumbnail image for Thumbnail image for BankerKayakWhiteBackgroundSmall.PNG
Tide was the highest early in the morning and in front of my house, putting in at high tide is easier. But, ah, this is the Pacific Northwest. The day would be at it's warmest around 2pm...maybe up to 55 degrees!

  • Was tide or temperature the most important factor?
  • Since I can know tide with certainty (I can look it up on charts or just look outside) but cannot know the weather with certainty, should that impact my decision?
  • How much more difficult would it be to put in around 2pm, the scheduled low tide? I'd have to carry that kayak across mud to do it. Isn't that why I bought a 34 lb boat?
  • What is the benefit of getting it out of the way (early morning) versus getting sidetracked (or comfy in front of the fire with a good book) later in the day?
  • Does the fact that I can do something about temperature (wear more clothing) and cannot do something about tide come into play?
  • Is it time to take low tide out of the equation by buying portable wheels?
Look at the steps your businesses and business borrowers are taking as we move into the recovery. Most decisions will have some certainty and some uncertainty. Sometimes quick action is the best move and other times holding off will be better. It is uncertain which is best in each situation.

As the business lender, you may be called upon to pass judgment on the results of this borrower's decision-making when you consider their next loan.

As the business owner, you may be reluctant to share all the false starts, missed opportunities or initiatives that just did not work.

But if a business is not willing to suffer a setback right now, it may not be taking any action at all. That is probably the wrong move, too.

  • Did I go out in my kayak?
  • If I did, when did I go?
  • Tides or temperature...what do you think?
  •  Email me and I'll tell you!