QUALITY CONTROL:
Bank Execs Say They’ll Lend … To the Right Company
Banks have seen their portfolio of nonperforming loans rise as many businesses restructure or close up shop amid a weak economy that is showing few signs of turning around.
Even with low interest rates, banks across the country are taking a harder look at prospective borrowers and some are adjusting their lending requirements to make sure that they are lending to solid credit risks.
Business Journal reporter Rajiv Vyas asked bank executives in Orange County about these recent trends, whether they have tightened their lending in the light of the weak economy and what it takes for businesses to get credit these days.
Robert Campbell
Chief Executive, President
Bank of Orange County
Our bank is not committed to growth for the sake of growth. Because we are willing to grow slower rather than run the risk of not maintaining a solid foundation, we have not changed our credit policies or loan criteria.
We continue to revisit and examine areas of loan concentration, particularly those industries negatively impacted by the economy.
Our bankers play an important consulting role in helping clients anticipate downturns and manage their finances so that they don’t get into a credit bind when the economy slows.
Credit is still readily available to firms that have a reliable cash flow that shows they can repay their debt. Inventory turnover and a good record of accounts payables and aging of receivables that doesn’t stretch a firm’s working capital are also important.
Because of the uncertainty in the economy, lenders are looking for a secondary source of repayment should the company feel the economic pinch. Likewise, we look to see if a company has a high concentration of their business coming from only a few of their customers, and to what degree those customers are being impacted by the economy.
Character is another important aspect of credit criteria. The character of the management and owners can speak volumes to a loan officer. The depth and experience of management are also taken into account.
Borrowers need to be prepared with current, up-to-date financial statements in order for a quick response to their loan requests. A minimum of three historical years of financial statements, prepared by a reliable source, play an even more important role in a tight economy. However, as a community bank, we can offer great flexibility in working with the unique nuances of small businesses.
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Tom Rogers
Senior Vice President
South OC Commercial Banking Services
City National Bank
City National has designed its underwriting standards to weather all phases of the business cycle. We pride ourselves on consistency. Our company is in the business of lending money and, despite a challenging economic environment, we continue to make loans to our clients and to new applicants who are creditworthy.
We know our clients well enough to get a sense of how they will react in adversity, and this makes it easier to evaluate credit requests.
Effective risk management means getting behind the numbers, listening to clients, understanding the risks they face and what their companies are all about.
It also means helping them with contingency planning.
During the recent work stoppage at West Coast ports, for instance, we regularly talked with clients about alternative shipping strategies for their merchandise.
Regardless of economic conditions, there’s no reason that a creditworthy borrower should have trouble getting a loan.
We look for several things when we’re evaluating a business credit application. The first is a team of experienced managers who know their industry, their customers and their competition.
The second is a coherent business plan that explains the need for credit and sets forth a repayment strategy.
This plan should describe the business, its finances and growth projections. It should also address the company’s customer base and the risks that management foresees.
Finally, of course, cash flow is critical. At the end of the day, it is cash flow that repays loans.
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Alan Epperson
OC Business Banking Area Manager
Mike James
Group Executive VP, Business Banking
Wells Fargo
Our lending philosophy is the same today as it was 12 months ago, and we continue to follow the same lending criteria.
Here are some survival tips for small-business owners:
n If your business is having financial trouble, you’re not alone. The worst thing you can do is not talk to your banker. We like to hear from you when times are good, but it is critical that we hear from you when times are bad.
n Remember that traditional banks are not your only potential source of credit. You can borrow from equipment manufacturers, your suppliers, asset-based lenders, equipment lenders, factoring companies and even your landlord.
n Stay close to your markets and understand your customers. Long term, the customer-centric model will beat the product-centric model every time.
n Seek good financial information and constantly measure your progress. You must understand your sources of revenue and your costs, including your investment in receivables and inventory. Cash flow is king.
n Hire and retain good people even during the tough times.
n Strive for diversity. If your people do not reflect the diversity of your markets, then your people aren’t going to be able to quickly pick up signals from the marketplace.
n The most important thing a small-business owner can be is flexible.
n Execution is more important than strategy. The third-best strategy, perfectly executed, will beat the best strategy, poorly executed, every time.
n Maintain your financial flexibility. The best way to do this is to arrange for alternative sources of funds, by asking your suppliers for extended terms, financing equipment instead of paying cash, negotiating lines of credit as an insurance policy for tough times, selling excess equipment and relentlessly managing your expenses, accounts receivable and inventory.
n Continue to invest in the Internet. While thousand of dot-coms may have crashed, the Internet is alive and well as a way to serve customers.
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Christopher D. Blake
President, Eastern Region
Pacific Western Bank
We have always emphasized the importance of using sound underwriting principals, regardless of the economic climate.
Although we rely on our credit policies and procedures for guidance, they are not so rigid so as to prevent entrepreneurs from succeeding. Our lenders make every effort to tailor and structure credit to meet the needs of our borrowers.
Whether we extend credit depends upon the nature of the loan request. First and foremost, we look at the total relationship. At a minimum, a business should expect to bring a deposit piece along with the credit request. We typically do not make business loans just for sake of making loans. We also want the deposits.
To make a sound credit decision, we look at the purpose of the loan, the collateral and how it will be repaid. The potential borrower should have a legitimate business purpose for the use of the funds. The borrower should identify how the loan will be secured,in some instances, the company may be strong enough to warrant unsecured credit.
To demonstrate how the loan will be repaid, we typically analyze the company’s historical financial performance. We try to keep things fairly simple: if the borrower has maintained a good payment history, then chances are they will continue to do so.
We analyze cash flow available to service the loan. This is extremely important. We also determine to what extent the borrower is leveraged; the relationship between all of the company’s debt to its net worth. The borrower should expect to make available to the bank at least three fiscal years of its financial statements and the most recent interim financial statement.
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Tara Balfour
President, Commercial Banking,
California Region
Bank of America
When it comes to lending to middle-market companies, Bank of America follows a disciplined and balanced approach.
We continue to support our clients but we are being strategic about the risks we take and are focused on ensuring that we get paid appropriately for those risks. We will continue to meet the needs of our good customers, companies with strong track records, solid balance sheets, defendable niches and strong management teams.
Our goal is to grow and expand our commercial banking business, and that includes loans. To do this, Bank of America aims to be responsive, to gain a thorough understanding of our client’s industry and business, and be resourceful in designing the right financial solutions for each client.
We encourage prospective customers to contact any of our client managers to discuss their financial needs and for current customers to continue to keep the lines of communication open with their client managers.
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Richard Goodman Jr.
Vice President and Manager
Newport Beach Business Banking Center
Bank of the West
Bank of the West has not taken any formal steps to tighten policies or underwriting standards in the past year.
As a relationship bank, we try to maintain a fairly steady keel throughout the business cycle, so we can minimize disruptions to our clients. We may be a little more selective on particular transactions, but we have had no broad-based changes. We are out in the market actively looking for good commercial business, and we remain focused on expanding our share of the many markets we serve in the Western states.
Companies that bank with us have strong proactive management teams in place, a well-defined business plan, sufficient historical cash flow to support their credit requests and both short- and long-term objectives for the future. A high level of communication between the bank and management is the key to our success.
To form a financial partnership with our customers, we must understand the intricacies of each business that we serve. We learn about their industry, their competitors, economic factors that could influence their financial status, their projections for the future and other challenges that management faces each day.
If conventional financing is unavailable for a particular company, then we have other options such as Small Business Administration loans or leasing products to offer.
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Thomas Yott
Chief Executive
South County Bank
Our target market is the small to medium size business with less than 50 employees, annual sales of less than $20 million and located in Orange County.
We are “cash-flow” lenders and not “collateral-based” lenders, although we may choose to secure a credit extension with collateral from the borrower.
We look to the historical trends of the borrower to determine the stability for future support of the primary and secondary sources of repayment. We believe our bank has a healthy credit discipline and do not look to tighten what we believe to already be sound lending practices.
A borrower needs to have a sound business plan that covers a strategy to get through challenging economic times.
We remain guarded as to the performance of the economy, and at the same time remain committed to our customers to service their credit needs.
When things become a little tight for our customers we find that is the time they need their banker. We develop long-term relationships with our customers and become that financial partner who will assist them in working through the economic downturns.
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Dave Blankenhorn
Chief Executive
Harbor National Bank
Our underwriting standards on business loans have remained the same, but we are looking more carefully at the nature of the business and the potential impact of a longer term recession on that type of firm.
Most of the companies we deal with have made appropriate adjustments to this business cycle.
We have been concerned about the “bubble effect” on real estate loans for some time and have acted accordingly when looking at loans. We are primarily a commercial real estate lender.
To be considered, a business needs some history of profitability, a decent balance sheet and, most particularly, good management. We find keen competition for these loans and any firm with a solid type of business should be able to obtain credit. We have plenty of liquidity and are always looking for loans.
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Rick Ganulin
Chief Executive
Pacific Liberty Bank
Pacific Liberty Bank specializes in making Small Business Administration loans for working capital, equipment, real estate purchase or refinance to family owned businesses.
Credit standards have not been tightened despite talk of recession in Orange County.
Small businesses are the engines that drive the local economy. Owners are resilient and seem to survive much adversary. This makes small business an excellent credit risk even in times of economic uncertainty.
Many small-business owners have cash reserves and equity in real estate that is underleveraged. Since real estate rates have plummeted, this equity is often an untapped source available for working capital if needed.
Small-business owners who want to borrower must have experience in their chosen field and good accounting systems. The typical materials needed to make an informed credit decision are:
n Three years of business financial statements and tax returns.
n An interim business financial statement no older than ninety days.
n Current accounts receivable and payable aging.
n A personal financial statement, from each guarantor, no older than ninety days.
n Three yeas of personal tax returns from each guarantor.
More detailed supporting information will be requested to confirm personal and business assets.
Credit is abundantly available for well-run, established, family owned businesses. Less established or new companies may need additional collateral or a guarantor to obtain the desired credit.
With interest rates low it is a good time for family owned business to review their current interest rates and loan structure and do some price shopping.
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Jeffrey Gaia
Managing Director
California Bank & Trust
California Bank & Trust has not tightened lending at all, and we are aggressively seeking good lending opportunities. There are plenty of credit-worthy customers with legitimate borrowing needs. We are in the midst of a business-loan campaign right now.
In this economy we are offering loans to a wide variety of business customers. On small deals of less than $100,000, there has actually been a relaxing of credit.
California Bank & Trust prides itself on its primary philosophy of “relationship banking.” We handle each deal uniquely and are willing to go outside the box to make a loan work for a customer.
In evaluating a customer for a loan, we look at character, capacity and capital. A business should have been operating for at least one year, and needs to demonstrate a sound financial condition and profitability. Of course they need to show a history of paying their obligations.
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Stephen Gordon
Chief Executive
Commercial Capital Bancorp
Commercial Capital Bancorp has neither tightened, nor loosened its lending criteria. The bank continues to look at opportunities individually, and evaluates credit decisions consistent with our past practices.
When underwriting these opportunities, we look for reasonable business plans, realistic revenue and expense projections, real earnings and strong management.
Our area of strength,multi-family lending, accounting for roughly 85% of our loan production,has shown a resiliency that surpasses other real estate investment types, and should continue to perform well due to the lack of affordable housing in California.
