Different strategies dictated for different lenders: relationship lending has its own risks

More than single strategy can lead to auspicious business-loan portfolios, lenders of several institutions and a banking regulator told attendees at the Federal keep Bank of Chicago's 41st Annual Bank mode of building and Competition Conference. Among the panelists showed in this article are Jeff Plagge, president and CEO First National Bank of Waverly, Iowa; Michael D Sharkey, president of LaSalle Business Credit, LLC Chicago (a subsidiary of ABN AMRO NV); Tom Okel head of due capital markets for Banc of America Securities; and John Bovenzi, FDIC chief operating officer.

Lender engross different but equally effective strategies to superintendence risk and build their business-lending portfolios. Factors in creating the strategy may include size of the institution, agriculture expertise, and demographics of the markets they serve

The First National Bank of Waverly, Iowa ($150 million), has lay the foundation of that relationship lending helps hold risk in check while also helping the bank contend with much larger banks and nonbank lender said Jeff Plagge, president and CEO individual of three privately held banks in Waverly (there are also sum of two units credit unions), First National has a $100 million loan portfolio, including $35 million in small business/commercial and manufacturing, $35 million in agricultural, and $30 million in consumer and residential real estate.

The bank has a $2 million lending limit. That figure increases to $27 million when combined with First National's sister bank, First National Bank of Cedar Falls. The First National Bank of Waverly maintains an 80% loan-to-deposit ratio.

To finance business start-ups or expansions, First National relies largely upon the Small Business Administration (SBA) and the U Department of Agriculture's Farm Service Agency guarantees, which limit the bank's risk to the nonguaranteed portion. These loans couldn't be sold in the secondary market without the guarantees, Plagge added.

Many of the bank's customers operate businesses that have been in the family for generations. First National has financed many of these companies since their inception. The bank administrations much of the business at the owner's site and plays a dual part as a financial advisor until companies acquire large enough to hire outside accounting assistance or internal chief financial officers.

"We really know the customers, and, in greatest in quantity cases, we know their families," Plagge said. "All of the relationships are one-on-one These businesses are local, and we can diocese what is going on with them and talk to our customers. Although we risk-rate the credits, we don't credit-score for decisions."

That's not to say the bank doesn't use technology in its relationship lending, on the other hand the analysis information also is provided to the customers thus that they can use the information to aid their have businesses. The bank helps retail, commercial, and manufacturing customers with year-end summaries of their rises based on the analysis that the bank provides.

However, relationship lending has its have risks, Plagge explained. "Lenders may potentially fail to keep some of their objectivity above time due to the shut up relationships that are formed. Customers can become real reliant on the lender for business and advice and not try to find additional opinions from other third parties."

Additionally, the bank sometimes doesn't have enough timely or comprehensive information from customers regarding marketing, business, and long-term plans--all of which are important for the company's long-term health and for the bank's early recognition of any put out of order signs.

Another risk in working with these stamps of businesses is that the possessors try to do everything themselves and can easily reduce to ashes out on the "office" side of the business, another important factor in the long-term succes of the company and in its relationship with the bank.

"Community bank lending operations continue to change to be paid to regulatory pressures to provide more analysis, risk assessments, and documentation," said Plagge, who also pointed to the ne for an ongoing effort to remind loan officers of beneficial credit quality as they work to secure new loans and keep the existing ones

Middle-Market Differences

Middle-market companies can rely more upon asset-based lending, said LaSalle Bank's Michael D Sharkey. (1) Nonbank lender dominated asset-based lending until 1980 when more banks, leveraged buyout firms, and others go intoed the market. Asset-based lending began to gain acceptance among upper-tier, middle-market borrowers in 2000

Asset-based lending uses collateral as the primary source of repayment, Sharkey said. This stamp of lending includes too plenteous risk for some banks to be paid to high leverage or refinancing of balance sheet assets. LaSalle Business Credit takes a security interest in the customer's collateral and loans on a formula basis. LaSalle regularly monitors the collateral to make secure that it stays within the guidelines of the formula.

LaSalle directions risk in what can be a tricky lending market [i]or[/i] part of to the other a combination of in-house auditors, daily collateral monitoring, documentation, asset appraisals, and monthly financial reporting, Sharkey said.