Market survival Featured

8:00pm EDT March 26, 2008

It is impossible to open the Wall Street Journal or watch CNBC without seeing news about the financial, stock and housing markets. While there are some disturbing reports, it is not necessarily all rough sailing for all businesses, according to Bob Friend, senior vice president of commercial banking at FirstMerit Bank in Columbus. Still, it pays to be aware of what your bank might be going through.

“As much as your bank keeps an eye on your business, you should keep an eye on your bank’s business,” Friend says.

Smart Business spoke with Friend about what companies should think about when reviewing their banking relationships in light of current financial news.

Is there a real crisis in financial markets?

There is certainly a great deal of consternation and turmoil going on in the market today. It is especially true in the real estate market and residential and condominium projects, in particular. In general, banks have tightened their underwriting standards and, in some cases, stopped lending completely in certain market segments. Many banks took significant charges in the fourth quarter related to various facets of the real estate and related markets, so banks are being much more cautious in the types of lending they do and in the structuring of those loans. In the traditional C&I middle market segment, banks are still aggressively pursuing new business opportunities to well-performing companies. However, the underwriting requirements have likely been stepped up due to concern of the economy and the possibility of a recession.

Is the situation the same at most banks?

No. Banks are affected differently based on their respective credit cultures, industry concentrations and capital positions. Over the past few years, some banks tightened or changed their lending standards earlier than others. Some banks were aggressive in certain market segments, such as sub-prime lending, which turned into a problem area. As a result, individual banks have different risk tolerances and risk profiles.

The impact of these tolerances and the potential poor credit decisions can lead a bank to incur subsequent losses resulting in a lower capital position for the bank.

Do all banks have similar capital positions?

No, they do not. Capital positions can vary significantly between banks based on policies and performance. A number of banks’ capital positions were negatively impacted during the fourth quarter due to significant write downs. A bank’s capital position is a measure of the health of the bank. A low capital ratio can impact a bank’s ability to borrow funds or the rate in which it borrows. Consequently, a higher cost of capital to the bank can potentially be passed on to the borrower as a higher interest rate or affect the bank’s ability to be competitive.

Are banks pulling back on loans?

In certain segments, banks are pulling back. As discussed above, banks are clearly pulling back or closely evaluating certain types of loans. In fact, some banks have reportedly stopped making new loans in certain real estate sectors, again principally in the areas of residential construction. In addition, the overall health of the Ohio economy can be a factor in the evaluation process. But banks still want to make loans. However, it might be that some of the conditions or requirements to obtain a loan have changed. Borrowers may find that conditions, such as guarantees, covenants or equity requirements have become more demanding.

Is there a drive for more consistency in credit underwriting?

Yes, definitely. All banks seem to be placing greater emphasis on the underwriting and documentation process. Some of the activity is being driven from the oversight of federal examiners. However, most of the focus is being driven by the management of the banks in an attempt to identify and manage risks at an early stage in the process. This process has a direct impact on customers in the form of heightened information requests and follow-up.

What should I be discussing with my local bank manager?

Discuss the bank’s performance over the past year and the past quarter. How does the bank’s performance compare to its peers. Ask if they have changed credit philosophy or the industry segments they serve. If a bank has taken charges or write-offs in a specific industry, ask if it has changed its policies toward that industry. Ask if there have been any significant changes in the management of the bank and how this could affect your company.

Customers should regularly perform an analysis of their bank in a similar fashion that a bank analyzes the company. Although a company’s results might be fine, unrelated outside events can affect the way a bank evaluates a customer, whether good or bad. In the end, a company must continually exercise its own due diligence to insure its banking relationship is the right one.

BOB FRIEND is the senior vice president of commercial banking at FirstMerit Bank, Columbus. Reach him at or (614) 545-2763.