June 21, 2012

Banking – How to Have a Successful Relationship Review

Filed under: Uncategorized — comparadungrp @ 8:51 pm

As we all know, the American Economy is attempting to rebound from the worst financial crisis since 1929. There have been many casualties along the way, which has created a great deal of hesitancy in all categories on the next steps, that would include expanding operations, taking on new commitments, and in the banking industry extending and taking on new relationships. Everyone wants to feel certain that all is going to be okay before taking on any additional burden. To have and maintain a successful banking relationship is dependent in part, on communication. This communication should be in the form of timely and accurate financial statements with a narrative that tells the complete story of operations and the results.

The extreme of the most recent example would be the IPO issued by the investment banks on behalf of Facebook. For example, there has been a lot of anticipation about this celebrated company and its market value. Prior to the offering, some of the analyst questioned the performance of the company and how it was going to be sustained. They were trying to head off any surprises. The IPO went forward, and within hours, the market reacted negatively regarding what is now thought to be some insider information that revenue performance was not going to be as robust as once thought. The Shareholders’ response has been a suit brought against the company and the investment banks that underwrote the IPO. Needless to say, no one wants any surprises. This is an extreme case compared to middle market companies going in for their annual review; however, I would suggest that to the owner of a middle market company, compared to a $100 billion stock offering, the annual review is just as important.

This is the time that many companies will be submitting their financials for review. Most companies have a 12/31 year end, management has closed the books, and the accountants have been in to complete their review of the financial statements and stated an opinion. The next step for management is to submit these financials to the bank for a review and any increase that they may have a need for at this time. In the past, management has sent the financials in the mail to the banker and waited for a response after the review. If there was a need for additional funds, above what was already available, they would make a phone call and request the need at that time.

Given the uncertainty in the economy, and the cautious state in the banking industry, I would suggest a more proactive attitude should be taken. We have all heard how some banks have asked certain clients to leave and find another bank to meet their needs. This does not have to be because of a downward trend in the company’s financial performance. It could very well be because banking management has taken a more in depth look at various industries and decided the portfolio is too heavily weighted in a particular area, and they want to reduce the potential risk. Furthermore, during a strong economy, risk managers (credit administration) are more incline to take on more risk and their willingness to take that extra step is there. Internally, there is a friendly tug of war between the commercial bank marketing manager and credit administration. Each has a goal; commercial banking is to make more loans and increase the profitability; and credit administration is to reduce the bank’s charge offs and lower the number of classified loans on the books.

A better idea is to provide your banker with a well thought out plan, a review of the past twelve months and how the financials reflect those activities. Better yet, given the past, what is the plan for the next twelve to eighteen months and how will the financial performance be reflected during that period? Doing this requires more work, but in the end it will be well worth the effort. Preparation of some proforma financials would be very positive and a narrative to go along with them is good. To be more pro active, you can call the banker and request a meeting. Tell him or her that you would like to provide the year end financials and review the company performance. I can assure you that the banker will be happy to make time for you. Furthermore, this is a great time to ask that a credit officer attend the meeting, a credit officer that will have input on the relationship. The relationship manager is the advocate for your banking relationship and by meeting the credit officer you have just recruited another advocate. By meeting both sides of the bank and presenting your company, you have now become, more than financials, but a living, breathing entity that is known to the bank by name and not by numbers or industry. While there are no guarantees, a well thought out presentation will make a positive impression on the bankers which will build confidence around your management style.

Lastly, once all of the above is done, this document cannot be put on the shelf. I would suggest that it should be reviewed monthly and compared to actual results. Differences should be noted along with your action plans; so that an accurate explanation can be made the next time this information is presented to the banker. If the financials are not required to be submitted monthly, make a point to send them in quarterly, and have a face to face meeting semi – annually to go over the performance of the company. Here again, invite the current risk manager to attend the meeting, particularly if there has been a change either in performance or the credit officer. I can tell you from experience, those that will be reviewing this information have long memories.

One last comment, if you are not prepared to do all of the above before your review date, ask for an extension of 60-90 days. Be prepared to explain why you need an extension and be able to provide supporting facts that will justify your need.

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