Seven Steps to Improve Loan Quality Now

By Linda Keith CPA

Football was a family affair when I was a teen. My father was the coach. My brothers were the star quarterback and the defensive captain. My sister and I were the team statisticians.
This economy feels like that season when we could not win a single game in regular play. We went to overtime…every time.

We usually won. Even if we did, we knew it would be another battle next week.

PERPETUAL OVERTIME

In this environment, more banks are finding themselves in overtime again and again.

• A borrower doesn’t hit your target DCR though they are making timely payments. You rate the loan.
• The regulators are insisting you increase your capital levels.
• With more rated loans and dropping deposit levels, you tell your sales team to put their pipeline on hold.
• Even if none of the above is a problem at your bank, the uncertainty of when the economy will turn up and how long the recovery will take has you conserving capital, cutting costs and scrutinizing loans much more carefully.

It is one challenge after another.

ARE YOU IN THE GAME?

If you are still reading, my guess is you are in. Use this article as a check to be sure you are taking the steps necessary to win.

1. Identify the Trouble Spots

This step is obvious. The key is to revisit it often enough. And to communicate results out to those who need to know.

• Stress test the portfolio, determine concentration risks and take steps to reduce them
• Identify borrower relationships where your bank has too much ‘skin in the game’ and develop/implement the strategy to reduce it without harming the borrower or the relationship
• Identify troubled borrowers as early as possible when the chances of helping them turn it around are the highest

2. Stay in Touch with Strong Borrowers

I got a call last week from a lender I had worked with asking if he could put me in his referral network. He thought I might have CPA connections in his area.

He is prospecting for loans with professional services and health care. “Much of what was low risk is now medium risk, so I am concentrating on what is still low risk.”

It is easy to focus on your troubled borrowers, or those in troubled industries, and spend too little time with your strong borrowers. Rest assured, some other banker is looking for them.

3. Go Offense

You have identified your concentration risk and overexposure to any loan type, industry or borrower. Now let the lenders, the branch managers and the business development officers know what types of borrowers you are after.

Give them the tools, training and goals they need. Monitor their activity and results.

4. Assess the Tools and the Team

Your analysis software or worksheets have to be up to the task. Your analysts or lenders can’t just fill in blanks or copy from last year with the new numbers. You need them to make the judgment calls this environment requires.

A recent bank client was using a tax return analysis worksheet brought back from a training years before. There were no instructions and no one had updated the worksheet for recent tax changes.

At another bank, the client contact was not the same person doing the analysis. We improved their understanding of what the other needed. When I was CFO of a construction company, I experienced more than a few ‘ping pong’ conversations.

• The lender provides information to the analyst who has questions
• The lender asks the questions and gives the analyst the answers
• This raises other questions
• And so it goes

Back and forth and back and forth. Soon the lender is so embarrassed they don’t want to call again. And trust me, the borrower is wondering what the heck is going on.

5. Get in shape

Too many banks are making the same mistakes too many businesses are …cutting costs by category instead of deciding which costs in that category to cut.

You likely need more training on credit analysis in an economy that is creating so many troubled businesses.

6. Align Goals

Look at incentives to the loan team, from the business development officer through to the underwriter.

Do you reward where you want the focus?

• Reward for more business with the same ‘relationship’ over new business
• Reward for new customers in targeted industries or loan types
• Reward for relationship building
• Reward for additional training

Business works best when you reward employees for carrying out your most important strategies.

Look for disconnects in the reward system created or made worse by the recession. If you reward the lender for more loans to the same relationship, do you also provide clear instructions to watch for concentration risk?

Since results, even from the right types of actions, are much less predictable, does it make sense temporarily to reward the activity regardless of the results?

7. Practice Relationship Banking

Is relationship banking more a concept than a practice at your bank? Find out by asking this question.

If your banker leaves a voicemail with a current business borrower to set up a meeting, what will the likely reaction be?

A. Great! I can’t wait to hear what she has come up with to help me now.

B. Gee! I didn’t think our LOC was up for renewal for another 3 months.

C. Oh @#!#%$%! Why is she calling?

Whichever you answer, your lenders need to (re) connect. Some companies need help early.
Even companies doing well will appreciate good ideas from their banker. And they may be a great referral source to other businesses who are doing well and whose banks are not, or whose bankers are not staying in touch.

NON-THREATENING CONVERSATIONS

No business owner wants his lender to see his business as needy or desperate. Find the experienced lenders in your bank who are good at opening non-threatening conversations. How about this:

“With the state of the economy (or your industry) I know your business has to be feeling the pinch. We created a RAPID RESPONSE team with ideas on cutting costs, tightening timelines and boosting revenue. I’d love to meet with you to share some of the ideas and tools we have come up with.
And if you have challenges we haven’t thought of, I’ll put it to the team and we’ll get you some information that can help.”

As lenders bring back questions, they develop their ability to spot troubled businesses and bring value to the relationship.

Double back to goal congruence. Is community service a goal of the bank? If so, do your lenders have the time and encouragement to carry out the goal?

FORMULA FOR SUCCESS

Choose to be in the game

Add 7 Steps to Improve Loan Quality

Your bank, your borrowers, your lenders and your shareholders will be there for the upswing.