Header Financial Lending
January 2012Issue No. 7
In This Issue
The Pendulum Swings Back to C & I Loans
How Do You Calculate Debt Service Coverage?
Charge-off Recovery: Now Is the Time
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Concerned About Regulatory Demands Cutting into your Profitability?

We offer services to keep your bank efficient and compliant at a great value:

  • Internal Audit
  • Financial Statements Audit
  • IT Exams
  • Loan Review
 

Spotting Financing Needs

A keen examination of your small business customers' financial statements may reveal financing needs in the not-too-distant future, which could present opportunities for new C&I loans. For example:

  • Does accumulated depreciation exceed net fixed assets? If so, fixed assets will need to be replaced before long.
  • Are balloon payments coming due or is debt maturing at another bank? If so, the debt may need to be refinanced.
  • Is there a large accumulation of short-term debt on the balance sheet? If so, it may need to be termed out.
  • Are sales and revenue rebounding? If so, the customer may be entering a growth phase and may soon need to replace fixed assets, replenish inventory, etc.
  • What are the interest rate and terms on existing debt? You might be able to offer customers the opportunity to refinance at a lower rate or better terms.

To our valued clients and friends,    

 

Due to the financial crisis, federal regulators have placed greater scrutiny on financial institutions. One result of regulatory guidance is a renewed focus by many banks on making more C&I loans in order to add diversity to their portfolios. However, some banks are finding that it's not easy to get back in the game. Our lead article in this issue examines some of the potential repercussions as the pendulum starts swinging back to C&I loans.

 

Given the importance of debt service coverage in loan underwriting, it's surprising how little uniformity there is in how debt service is calculated, even within the same bank. Our second article looks at the two most common formulas for calculating debt service coverage and points out some nuances to keep in mind when making the calculation.

 

One effect of the financial crisis is the huge amount of loan and lease charge-offs that banks have taken against loss reserves. Establishing a robust charge-off recovery operation now could pay off handsomely in the form of loan recoveries. See article three for more details.

 

We hope that you find this issue of Financial Lending Notes to be helpful and beneficial to your company. If you would like more information on any of the topics mentioned here, we would be glad to discuss them with you in more detail.  

 

Sincerely,

Tom Beisner, CPA, Partner

The Pendulum Swings Back to C & I Loans

The financial crisis that began more than three years ago has changed virtually every aspect of commercial lending - from tighter credit criteria and less risk exposure on the part of banks to greater scrutiny on financial institutions by federal regulators. Regulatory guidance now effectively caps the amount of capital commercial banks can invest in commercial real estate and acquisition, development and construction loans as a percentage of total capital. Read more...

How Do You Calculate Debt Service Coverage?

Debt service coverage is a critical component of loan underwriting. Given its importance, it's surprising how little uniformity there is in how debt service is calculated - not only from one bank to the next, but within the same bank. Virtually every bank establishes a minimum debt service coverage ratio for borrowers as part of its loan policy, generally 1:2 or 1:2.5. But there are multiple ways the ratio can be calculated. Read more...

Charge-off Recovery: Now Is the Time

One effect of the financial crisis and uneven recovery is the huge amount of loan and lease charge-offs that banks have taken against loss reserves. The good news is that the total loan and lease charge-off rate has steadily declined since peaking at 3.04 percent in the fourth quarter of 2009 - it was down to 1.68 percent in the second quarter of 2011 (seasonally adjusted). Read more...

About Us

The Whitlock Company is a full-service accounting firm offering a range of audit, tax, technology, risk management and consulting services to the community banking industry.


The experiences our professionals have gained from these relationships allow us to offer you best practice ideas on business issues specific to community banks.

 

 We appreciate your referrals. If you know of a company, organization or individual who may benefit from our services, please let us know. 

  

www.whitlockco.com / 417.881.0145