A few weeks ago, a credit union sent us a loan to underwrite. There were several risks associated with the loan that they did not identify. Once we identified them, and suggested this credit was not a good fit for their portfolio, we were met with the comment, “All you guys do is to say ‘No’.”
It is true that we either turn down or suggest changes on deals more often that come into the MWBS office than those we just approve. Our overall goal is for institutions to put good earning assets on their books. These assets have had their risk analyzed and mitigated where possible. We also contend that covering up systematic weaknesses in the credit with a government guarantee is not the preferred method for doing business.
When looking at a risky asset, the first thing I contend to do is to “do the math." Let’s say you booked a marginal deal for $1,000,000 that had a 90% government guarantee on it. You were able to get a point on the deal. Oftentimes, we see CUs giving away the store for a marginal deal, but that is another blog discussion. Let’s say the deal goes bad and the governmental agency pays on their portion of the guarantee, leaving you with a loss of $50,000 after all is said and done.. Well you think, "I cleared $10,000 at closing so my loss was only $40,000." But, the issue here is the opportunity cost in loan volume necessary to make up the $40,000 loss.
The $40,000 loss must be considered. Let’s say that you have figured out you operate your credit union with a net interest margin of 3%. In order to make up the loss you would need a spread of 3% on a loan with an average balance of $1,000,000 over the course of a year to make up the loss..
It does make the lender want to stick his head in the sand and have his investment officer buy government securities. Truly, we are in an industry where we need to be right 99.5% of the time. A few years ago, when our banking brethren were seeing charge offs approach the 2% level, the Federal Government was inventing TARP and other sort of bailout plans. We must focus on safe assets, as Will Rogers once put it, “I am more concerned with the return of my asset than the return on my asset.”
Hiding in laddered CDs or government agencies is also not an answer as a viable institution is a growing institution. Growth in earnings means prudent booking of good earning assets, which in our case is lending. So when we say “no”, it is because of our analysis of the loan has a greater chance for loss or problems based upon inherent weaknesses in the credit that we see.
In a totally unrelated item, this week I will celebrate my wedding anniversary of 22 years to my wonderful wife, Angela. It is rare when you find someone who believes in you more than you do in yourself and also makes you a better person. Whenever you find someone like that, you should hold on to them. My dad had a saying to don’t marry the person you can live with, marry the person that you cannot live without. That is who Ang is to me. It has been a great ride so far and I am truly blessed by God.