January 15, 2014

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Banking and Finance

January 15, 2014

I have a question that was asked by the CEO of a company. He said, “Do I provide my banker with my projections? It’s a two-edged sword. If I provide the projections and I hit them, I build credibility and can get future loans. But if I provide the projections and something goes wrong that I didn’t anticipate, suddenly my credibility is destroyed.” What would you advise?

PACKARD: I’ve never seen a projection of losing money. We understand the dynamics. The difference is between somebody trying to be as realistic as he can be as opposed to somebody who’s just trying to impress you. And if you’ve done it enough years, you can usually discern between those two.

And the relationship is developed when he hits a bump and calls up the banker and says, “Look, I’ve got an issue. Look what happened, and I have no control over this.” That’s the kind of trust you build.

BEARD: It goes back to this partnering idea. If you view your banker as somebody that you’re not going to share things with, that’s a different relationship than if you’re saying, “These are projections, and by the very nature of projections, they’re going to be inaccurate.” But if the projections are well thought out, the assumptions are there so that you can truly understand the thinking process, it’s a positive. I would not penalize any of our customers if they didn’t hit the projections—if we saw the thinking and something went different.

You can go to the other extreme, which is don’t give them anything. You don’t do anything that you don’t have to do with them, and you get the money. And that’s not a banking relationship. That’s a commodity. And when things go bad, the banker’s not going to treat you the same as if he really understands who you are. So it’s back to what do you want.

Now, some people want a commodity, and that’s fine. But generally, in my view, most of the smart businesspeople understand that capital is essential to their business, and so that banking relationship becomes important to them just as it would with an accountant or lawyer or whoever else is on the team.

BOWEN: We’ve talked a lot about the bank trusting the borrower or customer. But it also goes the other way. The customer needs to learn to trust the bank. He needs to understand what the bank needs and needs to be able to rely upon that bank to fulfill what they promised or what they committed to. I’m not saying it’s incumbent on us as bankers to develop that cross-trust relationship, that they can trust us, they know what we expect, they know what we anticipate, but they can rely on what we tell them, that we will follow through and we’ll follow up on our commitments to them.

BLEGGI: The benefit of developing that relationship, too, is when there’s a downturn, the bank may be able to be more flexible. At our bank, we looked at our loan policy over the last few years, and we could see that some of our really good businesses are those with strong character. They’ve been paying, but you can see it’s a struggle. Profits are down. We actually adjusted some of our credit standards, the credit score, because we knew that they had had some struggles, but we also wanted to be able to accommodate their needs.

So if you develop that relationship and then there is a downturn and there’s a problem with the business, our bank and I would be more willing to take a risk on that particular customer because we had that relationship. And that’s happened time and time and time again, particularly over the last four or five years.

Do you have any final comments, anything you would like to tell the readers about what they should be doing, what the future looks like?

SUTTON: The big problem to be fixed right now is the political regulatory problem. We all have a role to play in that, in selecting people who will go back to Washington and fix those problems and get the house back in order.

In terms of economic activity, it seems to me that one of the biggest factors at play right now is confidence. We’ve got an array of consumer customers—all kinds of FICO scores, income levels, things like that. We expected to see the high-income borrowers pay their loans down and the lower-income borrowers maintain their loans. That didn’t happen. That was the big surprise to us. Everybody paid down their loans across the board. Everybody was worried about what the future held. They wanted to hunker down. And I think they’re still there.

We got through the downturn, but there’s still all this talk of uncertainty, the debt problem, the dysfunction in Washington. So people are holding back. They don’t have a lot of trust that next year their job is secure, they can get into debt and be able to carry that debt. And they’re a lot more responsible than many people give them credit for. If we can restore that confidence, that core economy is there. It will start to thrive again. We’ve got to fix that problem in Washington for that to happen. And everybody’s got a role to play in that. 

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