“I’m Sorry, But You Just Don’t Meet Our Underwriting Standards”

American Chartered Bank

“I’m Sorry, But You Just Don’t Meet Our Underwriting Standards”

This phrase is:

  1. A banker’s favorite saying, or
  2. What an informed business should be able to say to a bank.

The answer is B.

Now more than ever, it is important for businesses to do their due diligence on banks, just as banks perform due diligence on them.  It is even more important to understand a bank’s motivation and priorities at this crucial time in the post-recession economy.  Unfortunately, clients may have become less of a priority to banks.

Much has happened in the last seven years or so to change the landscape for all businesses, particularly banks.  Too big to fail, troubled loan portfolios, TARP, bank closures, takeover of failed banks, mergers, turnover, zero interest rate environment, out-of-state decision-making, significantly increased regulatory and reporting requirements - these are factors that have caused significant changes in the banking business and have had a profound effect on the local business community.  To be sure, the banking industry has come a long way and it is stronger than ever, but there are some questions that you may want to consider for one of your critical strategic partners:

  • Is the bank financially strong? Balance sheet?  Earnings?
    If your strategic partners - banks, vendors, etc. – are not strong that could create instability. Their priorities may be with plugging the holes rather than nurturing clients. Bankrate and Bauer are two very basic bank rating sites that may provide helpful information. For full financial reports go to www.fdic.gov.
  • How is the condition of the loan portfolio of the bank?
    There is a metric called the “Texas Ratio” that measures the amount of troubled credit compared to a bank’s capital. A score of 100 basically means that 100% of a bank’s capital is at risk due to already recognized issues.  A score of <50 is desired.  A troubled bank is focused on managing their troubled loans and cleaning up for the examiners, not always on their good clients.
  • Is the bank growing or shrinking?
    During the recession banks shrunk in asset size as a result of deleveraging and to maintain or improve their capital ratios. Most banks are growing again.   If the bank is still shrinking, it may mean that they may still be dealing with loan troubles or other factors causing clients to leave the bank.
  • Where are decisions made and by whom? What is the process?
    Due to consolidation and Chicago losing its status as a banking center, decisions may not be made locally. It is important to have a relationship with the decision-makers and understand where the decisions are being made.
  • Is the bank responsive, how long does it take to get a loan commitment?
    If it takes weeks to get a decision, there may be a problem.
  • How is the banker motivated and rewarded?
    Does the banker have anything at risk? Are they motivated to help you succeed or does it not matter to their future and well-being?
  • Are deposits important to the bank?
    In this unique and elongated period of extremely low interest rates, deposits may not be very profitable to a bank at this time. You may be a successful business that has a strong balance sheet and does not borrow, keeps very high deposit balances, and receiving very little attention because you may not be as profitable  an account today.  Rates will rise and profitability of deposits will improve so a long-term view values conservatively run businesses.  Make sure that a successful business such as yours matters to the bank.
  • How often has the relationship manager been changed?
    If you have to retrain a new banker every two years, there is an issue.
  • Does the bank/banker understand businesses my size, in my industry?
    Is the banker experienced and do they “get it”?
  • What is the opinion of other businesses or professionals that I respect of the bank?What do accountants, lawyers and others say about the bank?

These are some of the questions that businesses should be asking as we move forward in a challenging economy.  All industries are more competitive than ever and businesses need to leverage the relationships and strategic partnerships that they have to succeed.  A proper amount of due diligence will ensure that you are with a good partner and can maximize your efforts.  Banks may need to hear that they don’t meet your underwriting standards.

Make sure that you matter!

Best success,
Ken Stemke
American Chartered Bank

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