It is impossible to open the Wall Street
Journal or watch CNBC without seeing
news about the financial, stock and housing markets. While there are some disturbing reports, it is not necessarily all
rough sailing for all businesses, according
to Bob Friend, senior vice president of
commercial banking at FirstMerit Bank in
Columbus. Still, it pays to be aware of what
your bank might be going through.
“As much as your bank keeps an eye on
your business, you should keep an eye on
your bank’s business,” Friend says.
Smart Business spoke with Friend about
what companies should think about when
reviewing their banking relationships in
light of current financial news.
Is there a real crisis in financial markets?
There is certainly a great deal of consternation and turmoil going on in the market
today. It is especially true in the real estate
market and residential and condominium
projects, in particular. In general, banks
have tightened their underwriting standards and, in some cases, stopped lending
completely in certain market segments.
Many banks took significant charges in the
fourth quarter related to various facets of
the real estate and related markets, so
banks are being much more cautious in the
types of lending they do and in the structuring of those loans. In the traditional C&I
middle market segment, banks are still
aggressively pursuing new business opportunities to well-performing companies.
However, the underwriting requirements
have likely been stepped up due to concern
of the economy and the possibility of a
recession.
Is the situation the same at most banks?
No. Banks are affected differently based
on their respective credit cultures, industry
concentrations and capital positions. Over
the past few years, some banks tightened
or changed their lending standards earlier
than others. Some banks were aggressive
in certain market segments, such as sub-prime lending, which turned into a problem area. As a result, individual banks have
different risk tolerances and risk profiles.
The impact of these tolerances and the
potential poor credit decisions can lead a
bank to incur subsequent losses resulting
in a lower capital position for the bank.
Do all banks have similar capital positions?
No, they do not. Capital positions can
vary significantly between banks based on
policies and performance. A number of
banks’ capital positions were negatively
impacted during the fourth quarter due to
significant write downs. A bank’s capital
position is a measure of the health of the
bank. A low capital ratio can impact a
bank’s ability to borrow funds or the rate in
which it borrows. Consequently, a higher
cost of capital to the bank can potentially
be passed on to the borrower as a higher
interest rate or affect the bank’s ability to
be competitive.
Are banks pulling back on loans?
In certain segments, banks are pulling
back. As discussed above, banks are clearly pulling back or closely evaluating certain
types of loans. In fact, some banks have
reportedly stopped making new loans in certain real estate sectors, again principally in the areas of residential construction.
In addition, the overall health of the Ohio
economy can be a factor in the evaluation
process. But banks still want to make
loans. However, it might be that some of
the conditions or requirements to obtain a
loan have changed. Borrowers may find
that conditions, such as guarantees,
covenants or equity requirements have
become more demanding.
Is there a drive for more consistency in credit underwriting?
Yes, definitely. All banks seem to be placing greater emphasis on the underwriting
and documentation process. Some of the
activity is being driven from the oversight
of federal examiners. However, most of the
focus is being driven by the management
of the banks in an attempt to identify and
manage risks at an early stage in the
process. This process has a direct impact
on customers in the form of heightened
information requests and follow-up.
What should I be discussing with my local
bank manager?
Discuss the bank’s performance over the
past year and the past quarter. How does
the bank’s performance compare to its
peers. Ask if they have changed credit philosophy or the industry segments they
serve. If a bank has taken charges or write-offs in a specific industry, ask if it has
changed its policies toward that industry.
Ask if there have been any significant
changes in the management of the bank
and how this could affect your company.
Customers should regularly perform an
analysis of their bank in a similar fashion
that a bank analyzes the company. Although a company’s results might be fine,
unrelated outside events can affect the
way a bank evaluates a customer, whether
good or bad. In the end, a company must
continually exercise its own due diligence
to insure its banking relationship is the
right one.
BOB FRIEND is the senior vice president of commercial banking at FirstMerit Bank, Columbus. Reach him at [email protected]
or (614) 545-2763.