Soon after Fleet bank merged with Bank of Boston in 1999, I received a call from my new loan officer. We had just closed our new round of financing, and I was excited to build a new relationship with the new bank. My excitement was short lived when the new loan officer arrived in my office and announced he was from the workout group and would closely monitor our loan and wanted to make sure we maintained compliance with our loan covenants.

In hindsight, this was a blessing in disguise as we were forced to continue to maintain the tight financial disciplines that allowed us to execute on our strategic goals and eventually allowed us to achieve the successful sale of the business. I also realized that I was banking with an institution that would be around to support our business.

How do you know if you are banking with a solid financial institution?

Many businesses are accustomed to banks ensuring sound fiscal control and oversight of their business. But what financial insights and control should you have over your bank?

In hindsight, it may be easy to see that the financial profile of Silicon Valley Bank might lead to its eventual demise, so what can you do moving forward to protect your business?

First, Don’t Panic.

Here are some things to consider:

• Evaluate the financial stability of the bank- The FDIC provides a free online tool called BankFind that allows you to search for information about your bank, including its financial statements, performance reports, and other relevant information. The FDIC also provides a quarterly publication called the Summary of Deposits, which provides information on the bank's deposits and market share. State or federal regulatory agencies, such as the Office of the Comptroller of the Currency (OCC) or the Federal Reserve, provide oversight of banks and may provide information about the bank's financial stability and performance.
• Understand their underwriting policies and risk profile- It is certainly exciting to find a bank that will be willing to lend you the money you need to support your business strategy. However, as Groucho Marks once said, “I don’t want to belong to any club that would accept me as one of its members.” Is the Bank’s underwriting policy creating risk in the portfolio that would lead to future financial challenges?
• Evaluate the bank's loan pricing and terms: Look at the bank's loan pricing and terms to determine whether they are appropriate for the level of risk associated with the loan. Evaluate the bank's interest rates, fees, and repayment terms to see whether they are competitive with other lenders in the market.
• Assess the bank's risk management practices: Determine whether the bank has adequate risk management practices in place to identify and mitigate risks associated with its loan portfolio. Evaluate the bank's procedures for monitoring and managing credit risk, interest rate risk, and liquidity risk.
• Consider the bank's historical performance: Look at the bank's historical loan performance, including its delinquency rates, charge-off rates, and loan loss reserves. Determine whether the bank has a history of managing credit risk effectively and whether its loan performance has been consistent over time.
• Compare the bank's underwriting policy to industry benchmarks: Compare the bank's underwriting policy to industry benchmarks and best practices. Determine whether the bank's underwriting policy is in line with industry standards and whether it adequately manages risk while maximizing profitability.
• Understand the Bank’s ownership structure and how it might align with your business needs. The ownership structure of a bank can have a significant impact on your relationship with the bank. Here are some ways in which the ownership structure of a bank can impact your relationship:
  • Governance: The ownership structure of a bank can affect its governance structure and decision-making processes. For example, a publicly traded bank may have a board of directors elected by shareholders, while a privately held bank may have a smaller board of directors appointed by the owners. This can impact the bank's priorities, strategy, and responsiveness to customer needs.
  • Credit decisions: The ownership structure of a bank can also affect its credit decisions. For example, a community bank, which is owned by local residents, may be more likely to lend to small businesses and individuals in the community than a larger, publicly traded bank.

Overall, the ownership structure of a bank can impact your relationship with the bank in many ways. It is important to understand the ownership structure of your bank and how it may impact the services, fees, and customer service you receive.

Now that you are comfortable with your banks financial stability, the next step would be to evaluate the cash needs of the business and determine what steps you can take to protect your assets if your cash needs exceed the amount insured by the FDIC ($250,000). Tune in next week for more details on how to evaluate your cash needs and protect your assets.

Having a Strong Strategic CFO as part of your Executive team will help evaluate your capital and banking needs and work with you to assess your Bank’s financial viability. Reach out to us for more information.