Ranking Your Small Regional Lender - Help To Come Up With Scoring!

3 Replies

Our guidance line relationships have grown of late to the point where we have put together a draft ranking mechanism for our "horses" in an attempt to get the most favorable terms from our lenders.  Special thanks to J. M. for helping with the latter part of this scoring relating to the bank's risk assessment.  I figured J may want to display his intellectual horsepower on this thread for the good of all instead of doing it privately with me in email threads.  

Our approach was to break down all of the aspects of a lending relationship from a borrower's perspective in a fashion as close to quantitative as is possible.  Here is where the model stands currently:

Overall Criterion Weighting

-Documents Risk Assessment - 30%

-Relationship, Ease Of Funding Draws - 15%

-Line Quantity - 15%

-LTC/Project - 15%

-Compensating Balance Requirements - 10%

-Term Of Loan/Extension Handling - 10%

-Rates - 5%

The "documents risk assessment is further broken down into these parts to make up the 30% weighting:

Bank Document Risk Assessment

-Nervous Lender Clause - 22.5%

-Cross-collateralization, cross-default, and/or dragnet clauses - 22.5%

-Guarantees - 22.5%

-Grace/cure period - 10%

-Deposit relationships for security - 10%

-Carve-outs for bad boy provisions - 7.5%

-Relationship lending - 2.5%

-Fire and casualty insurance - 2.5%

The bank's risk assessment has yet to be included in the overall scoring, but J Martin gave us these resources to see whether or not the banks are solid:

FFIEC Data - https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

Feedback here is valuable since scoring the banks is not my area of expertise.  We're currently looking at their Tier 1 leverage capital and construction and development concentration to see how to score them.

Any feedback on the above?  Are some ratios high or low?  How would you change the rankings?  Thoughts?  I have a spreadsheet for this I can share at some point as it stabilizes some.  

Well Karen I will.

First, I hope Bryan and the group he is in has great success with their new venture.

However, I do have concerns from a legal and ethical side in a public discussion of evaluating bank ratings by private parties and what assumptions might be made. Federal law covers aspects of communicating the solvency and operations of an insured institution. The analysis is not confidential, the methods used, but the degree of application of risk factors of an institution is.

The information required begins with the "Call Report" submitted by a bank and that information is not public information. I didn't go to the site linked above, they may give the areas of analysis, not an issue, but data will be.

It's also beyond the expertise of untrained parties regardless of how brilliant they may be or think of their abilities to assess institutional risks as much of it is subjective. Management is a critical factor and that will not be accurately assessed without experience and historical data, these aspects aren't available to private parties.

Public discussion by those having information is not only  unethical but illegal. Another thing is that ratings are not arrived at by any one examiner, but through a collaborative effort and with trends of past performance considered, one examiner may have an opinion but performance is not something arrived at by one person or formula or matrix.

I have spoken about simplified assessments being considered by investors, for that information can be obtained and assumptions made as to making a choice of those banks an investor may want to do business with or have a concentrated relationship with, that is a good thing, prudent and good business practice.    

I think the best thing for Bryan in his post is showing an awareness of his fund management group in attempting to make such an assessment. It is also proprietary to his group, I think if his attorney was aware of the public discussion he may give some cautions. It is good from a marketing and management aspect, making potential clients aware that such aspects are considered, but how they consider weighting their matrix or stress isn't something I'd disclose publicly.

If Bryan's fund is large enough, he may get a bit of assistance from regulators as to a request of determination relating to risk for the bank, a bit of reverse phycology in assessing his operation as posing any significant risk for the bank as to concentrations, such would expose his operation to closer examination, but if all is good this might provide a process of elimination that might be helpful. Such would be asking the bank for the determination as regulatory authorities don't address inquiries directly with the public. But, I've never been in a cigar smoked filled room with J. P. Morgan folks and the Director of any regulatory agency, so I'm not sure.   

I'll mention too, that the natural progression of bank examiners in their profession is, that if they leave government (which most do) they go into banking or consultation in aspects of bank management. This is a good thing for the industry as the greatest source for bank officers and compliance comes from government, not business schools. Examiners are exposed to hundreds of banks giving them a unique perspective that can not be duplicated by someone else moving up the ladder  from banking operations in one or a few institutions. Examiners who leave government have an exit briefing as to confidential information, the application of methods of determinations are an aspect of what may or should be disclosed. Once examiners move into "private practice" or industry, they free to advise from their experience from generalities but not specifics as to any one institution. At some point, Bryan's fund managers may consider hiring someone who has compliance experience instead of attempting to self educate.

Bank ratings are established by federal regulators as they are the assessment for the insurance premium paid for depository insurance, the assessment does not, as it purpose, attempt address the ability of a bank to serve any customer. Looking at regulatory links will be much like looking at actuarial tables of an insurance company in an attempt to predict when you're going to have a car accident. 

The greatest risk a borrower has is more to the ability to go in tomorrow and obtain funding on the same, or better, basis as they did yesterday. Public information is available from a bank's financial statement, it will indicate the concentration of business, it's liquidity and capital. Capital, assets, management, equity and liability (Camel ratings) are aspects to consider, but management won't be obvious. For the public, probably the best way to view management is from the number of legal issues a lender may have in an area, if they have tons of foreclosures in dollars in relation to capital or loans and they have suits from other operations, you might draw some conclusions.

Rather ironic that many of these issues can also be applied to any lender, including funds being the subject of this post, another reason I wouldn't drill to deep into risk assessments by the public or borrowers, it's like looking in a mirror. It's not in any lender's best interest to promote its risk assessment by an unqualified public.    :)      

The bank's risk assessment currently provides exactly 0% of the ranking methodology cited above.  I am honestly thinking that this is more of a heuristic thing to consider and it may be pretty much impossible to figure out the solvency of a bank.  There are a ton of variables and outside capital raising for them is something that would be virtually impossible to quantify.

For now maybe it makes more sense to just confine the rankings to the other items.  Any feedback on those items is welcome and appreciated.  

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