Financial Lending Notes
March 24, 2009

Opportunities in the Midst of the Storm

The banking industry has obviously gone through its share of turmoil over the past year. But all is not “gloom and doom” for banks, despite what the news headlines might lead you to believe.

In its 2008 Small Business Banking Satisfaction Study, J.D. Power and Associates actually reports some good news for banks. Despite the economic uncertainty and tight credit environment that prevail today, the level of satisfaction among small business owners with their banking institutions has increased over the past year — from 697 (on a 1,000-point scale) in 2007 to 720 in 2008.

Respondents to the survey (owners of companies with annual sales of between $100,000 and $10 million) said their banks are doing a better job of providing shorter wait times and resolving their problems. Factors relating to the relationship with their account manager and their in-person branch experience are most important to small business owners, accounting for 40 percent of the overall banking experience, the study found.

“This underscores how critical it is to proficiently execute simple relationship fundamentals, including welcoming customers to the branch, assigning dedicated bankers to their accounts and establishing proactive quality outreach practices,” noted Rockwell Clancy, executive director of financial services for J.D. Power. “Simply meeting with small business customers at their place of business significantly improves satisfaction.”

Taking the Offensive

Clearly, there are opportunities in the midst of today’s storm for banks, despite the challenges posed by the credit crunch and financial crisis.

The first step should be to refocus on the areas where you can truly add value to your relationships with small business customers — things like building strong relationships between them and their account managers, as noted in the J.D. Power survey, as well as serving as one of their trusted advisors, not just their “banker.”

Meanwhile, if your bank is well-capitalized with good credit ratings, a strong balance sheet and the desire and capacity to lend, there may be profitable lending opportunities in today’s marketplace. Here are a few strategies that can help you take advantage of them:

Target the best customers of your troubled competitors. You can identify troubled financial institutions in your market by downloading their Uniform Bank Performance Reports (UBPRs) from the FDIC’s Web site at http://fdic.gov. Then begin a targeted calling effort that focuses on luring these customers to your bank. In your calls, however, do not speak ill of your competitors; simply ask customers if they have unmet lending needs you might be able to help them with.

Keep in mind that some banks that aren’t troubled either can’t, or don’t want to, fund loans in the current environment — their good customers should be part of your calling efforts as well.

Also look to nurture relationships with small business owners’ centers of influence, such as their accountants and attorneys. Let them know that you have money to lend and are looking for good customers to lend to. They are likely to know if their customers are experiencing problems renewing or increasing their lines of credit, and they have a vested interest in referring them to potential sources of financing.

Look for customers that need to buy fixed assets. Clues to this may be hidden in a business’ financial statements.

For example, if accumulated depreciation exceeds the net book value of fixed assets, those assets are likely getting old and the business may be a candidate for an equipment term loan. Similarly, if the net fixed asset base has been going down over successive years, the business is not even replacing depreciation. Of course, the business may not be replacing fixed assets because it doesn’t have the capital, or can’t qualify for the financing, to do so.

Also note that vendor financing, a traditional source of equipment financing for many small businesses, is largely unavailable today. This may represent another lending opportunity for your bank. And remember that Section 179 offers incentives for purchasing fixed assets and placing them into service. The Obama administration has passed a new economic stimulus package that extends 50 percent "bonus" depreciation and the higher Section 179 expensing limit of $250,000 per year through the end of 2009.

Look for customers with maturing balloon payments. Many businesses bought real estate between 2003-2005 with three- and five-year balloon payments that are maturing but cannot refinance them with their current banks. Similarly, some businesses want to refinance now to avoid ARM adjustments, or simply to take advantage of the current low rates. Both of these scenarios may present opportunities for you to meet the needs of businesses whose current banks can’t.

Look for opportunities to re-price loans. As counter-intuitive as this may sound, the current environment may offer opportunities to cull your portfolio and re-price loans that have been marginally profitable or unprofitable in the past.

Playing Defense

Just as important as taking advantage of new opportunities is protecting the good customers that you currently have. This is especially true if your bank is not in a financially strong position right now.

The first thing you should do is consolidate your troubled loans into the hands of workout specialists who have the time and expertise to deal with them most effectively. This will free up your business development officers to spend more time protecting their turf and calling on potential new customers. If your ability to lend money is limited, be sure to allocate the funds that you do have for loans to your best possible customers and strongest, most profitable relationships.

Of course, with deposits in such high demand, many banks are not even considering making loans to companies without a corresponding deposit relationship. For these banks, the priorities have shifted to credit quality, securing deposits, and loan growth — in that order.

 

  

Compliments of:

Porter Keadle Moore, LLP (PKM) is a full service accounting firm based in Atlanta, Georgia. PKM offers audit, tax and systems services to clients throughout the country. The firm focuses its efforts on companies registered with the Securities and Exchange Commission (SEC), community banks, the insurance industry, technology and life sciences companies and the real estate/construction industry.
 

To discuss this article contact Pat Tuley, CPA with Porter Keadle Moore, LLP at ptuley@pkm.com.

Pat has over 23 years of experience in public accounting. He has worked with clients ranging from individuals to international Fortune 50 companies in a variety of tax consulting and compliance areas. He is most active in the real estate and banking industries, serving numerous clients across the Southeast. Pat has led PKM’s tax practice since 2003. Prior to joining PKM he was a partner with KPMG, where he spent 17 years of his professional career.

 
Regulators Clarify Banks’ Roles and Responsibilities

Late last year, federal regulatory agencies issued a joint statement emphasizing the “prudent role that bank lending practices play in promoting the nation’s economic welfare.” The agencies encouraged banks to work together with regulators to ensure that the needs of creditworthy borrowers are met, specifically by:
  • Providing credit in a manner consistent with prudent lending practices, and continuing to ensure that they consider new lending opportunities on the basis of realistic asset valuations and a balanced assessment of borrowers’ repayment capacities.
  • Maintaining a strong capital position by ensuring the adequacy of their capital base and focusing on effective and efficient capital planning and longer-term capital maintenance.
  • Engaging in appropriate loss mitigation strategies and foreclosure prevention by working with existing mortgage borrowers to avoid preventable foreclosures, as well as mitigate other potential mortgage-related losses.
  • Reassessing the incentive implications of their compensation policies to ensure that they are aligned with the long-term prudential interests of the institution.
 

Tim provides accounting and auditing services to financial institutions as well as clients in the construction, service, technology/life sciences and manufacturing/distribution industries. He routinely works with companies registered with the Securities and Exchange Commission; privately-owned companies and S Corporations. He has experience with Initial Public Offerings (IPOs), Mergers and Acquisitions, Sarbanes-Oxley compliance and internal control consulting. You can contact Tim at tmessman@pkm.com.