Category Archives: CRE

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Small Business Credit Outlook is Favorable in 2015

By Charles H. Green

PayNet recently issued their quarterly Small Business Credit Outlook, which tracks trend analysis of several operational indicators in the small business sector, including its business cycle, investment activity, and credit performance. Their report offers commercial lenders insight into how marketplace credit risk can be forecasted in various regions and industries.

Through the fourth quarter of 2014, healthy double-digit small business investment PayNetimprovements were noted in Florida, Texas and California, primarily due to borrowing in transportation and construction companies to expand capacity.

Further, based on PayNet’s analysis, large economic segments retain plenty of room to grow. Based on current investment volumes, real estate (+58), construction (+55%), retail (+30%), and manufacturing (+29%) each have broad upside opportunities for improvement to reach previous high investment levels.

Confidence in this expansion phase of the economic cycle is based on the strong financial condition of small businesses. Loans 30+ days past due improved slightly in December, 2014, with delinquencies falling by 1 basis point to 1.24% compared to November. Companies are observed maintaining strong balance sheets, probably due to the relatively recent memories of the stress experienced during the Great Recession.

However, loan delinquencies in North Dakota (+0.30%), Texas (+0.17), and Pennsylvania (0.07%) rose higher than national averages, compared against 0.07% for the U.S. Clearly the impact of lower oil prices has quickly translated into higher financial stress in the general and construction segments of these state economies.

The Midwest region continues to reign as the lowest loan delinquencies, while the Southeast continues to exhibit the highest delinquencies. Florida (1.68%) and Georgia (1.54%) delinquencies are the highest and remain well above the national average of 1.24%.

Verdict? PayNet sees business conditions remaining favorable for small business credit in 2015, with this significant segment of the U.S. economy, assuming some of the  economic load as overseas markets decline.  The business cycle remains in expansion mode at low risk, and while lending activity and the accompanying business investment have slowed, it remains at a healthy pace.

The financial health of the sector seems excellent, with loan delinquencies falling slightly. Read the entire report here.

About PayNet

PayNet is a leading provider of small business credit ratings for lender risk management. The company maintains the largest proprietary database of small business loans, leases, and lines of credit, encompassing over 23 million financing contracts with a face value of more than $1.3 trillion.

With state-of-the-art analytics, PayNet converts data into real-time marketing intelligence and predictive information that subscribers use to make informed financial decisions and improve business strategy. PayNet’s capabilities include historic credit-reporting, credit-scoring, portfolio risk measurement, default forecasting, peer benchmarking, and critical industry trend analysis.

Read more at PayNet.

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He’s Back: Interview w/Chris Hurn, Fountainhead Capital

Charles H. Green: I’m  speaking with veteran SBA 504 lender, Chris Hurn, who has recently launched Fountainhead Commercial Capital. Chris, congratulations on the new enterprise you’ve launched. What can you tell us about your business plan?

Listen to this interview on SBFI’s YouTube channel here.

Chris Hurn: We’re going to do commercial real estate financing for various business Chris Hurn-Fountainhead Commercial Capitalowners, from small to middle sized businesses. At the moment, we are in 12 states and we will soon be nationwide. We will not be merely interim lenders of the second mortgage piece. We’re actually going to be a third party lender on 504s. We will do ground-up construction and renovation.

We will soon have a wholesale program that we will be launching, again, initially in those 12 states. I think that is going to provide a really nice shot in the arm for the small business finance community because as you know the secondary market for 504s has shrunk over the last four or five years.

Charles H. Green: I know you’re assembling a team. Can you tell us about who is on board so far?

Chris Hurn: Sure. I’ve got four business development folks already. I’ve got a general counsel who is initially dealing with all of the legal matters of the firm but is also ultimately going to be, closing our loans. Earlier this week, I’ve hired my chief credit officer, a guy that a lot of people will probably already know probably one of the most experienced people in SBA 504 financing all-time, a guy who used to be at Zions National.

He was the credit officer there, his name is Steve Elsworth. Steve has done over $4 billion in 504 first mortgage secure amortizations. We also have a chief financial officer starting next week who is a CPA. He is a general contractor, a very experienced commercial and high-end residential builder who also wears the hat of a chief construction officer. So it is a lot of people right out of the gate, I guess. We’ve got a tremendous amount of deal flow, which we’re looking at.

Charles H. Green: Chris, you’re best known for the ongoing success of another company you have founded, Mercantile Capital Corporation, and you sold that company in 2010. How will this be different from your earlier company?

Chris Hurn: There are some aspects of the earlier company that I want to make sure to get back and start from scratch with at Fountainhead. We always had a great corporate culture, like a family. I love my former team and I hope to work with a lot of those folks again in the future.

But as I said before, we’re not merely going to do interim second mortgages, which is kind of what my old company has been sort of forced into a corner with. We’re going to be different from the beginning. Part of the reason why I am doing this is because I just didn’t feel like we could fulfill our full potential under the bank’s umbrella.

There is a reason, as you know, Charles, you’ve written a lot about how the rise of the alternative/innovative finance companies for the last four to five years since the recession. I just think that there is a lot of opportunity for a non-bank lender to make some of the reasonable credit decisions.

Charles H. Green: Okay. Let’s turn to the 504 program just a minute. Based on the remarks that I picked up in the House Small Business Committee last week, they apparently have no interest in renewing the CDC 504 refinance provisions that were allowed in 2011 and 2012. Do you think that this is a dead issue?

Chris Hurn: I sure hope it is not. It made up in roughly 13 months where it was truly operational after the agency had really put out exactly how it was going to work. It was about a third of the volume during those 13 months. It was a really good boost to the industry and most importantly, though, it really helped a lot of small business borrowers.

The regs were written in such a way that we can only refinance somebody who had previously gotten a conventional commercial mortgage, and they had to have been a performing loan for the preceding 12 months. So arguably, these are some of the best loans that the SBA has made in a long time. I don’t know of anybody who’s had a loss yet from any of those loans that were refinances back in the fiscal year of 2012.

You have probably seen some of the numbers like I have – the amount of the 10-year ballooning commercial mortgages that will be due in 2015, 2016, and 2017 are the largest amount that has ever been in the history. Not all of them will be eligible for SBA 504 but a disproportionate amount will.

It will be a real shame if we as an industry can’t get together and convince the folks on Capitol Hill that this is a great program and when you are able to have longer terms, you are able to give some cash back for legitimate business purposes from improvements that were made after closing and you are able to lock in lower interest rates that will create jobs which is of course always the issue about the 504 program. It is supposed to be about job creation and economic development. I think it is a great thing and you can be rest assured I’ll be championing this

Charles H. Green: The 504 program lending volume has sunk significantly since that short-lived refinance privilege ended at the end of the fiscal year 2012. In your opinion, what state picked up interest back to the 504 program?

Chris Hurn: Well. There are a couple of things. Part of it is refinancing – if we can get refinance back in 504, I think that will make an impact certainly. I think we are going to be entering into a rising interest rate environment. I don’t know when since I don’t have a crystal ball, but I suspect it is going to be sometime in the next 6 – 12 months. You will see some short-term interest rates rise, and when that happens, the difference of the 504 versus some of the other competing products out there, I think the 504 really shines in that environment.

But I also think that people who are in the industry have to understand that we need to collectively do a better job of educating the marketplace about this product. I’ve often called it the best-kept secret in commercial real estate financing. I also think the secondary market has dramatically decreased, roughly 90% from its peak in 2007 and 2008.

I know that there are a lot of good folks out there who are trying to bring some secondary market solutions to the 504 space and I think when you do that, I think there will be a demand. I believe that there are a lot of portfolios that a lot of lenders would like to be able to sell off, and when they do that, they will have some more liquidity, they can go out and re-lend as well.

But I feel like we’re starting at a good time and I do think you are going to see volumes increase from here. We will certainly going to try our best for sure.

Listen to this interview on SBFI’s YouTube channel here.

~End of Interview~

[The transcript of this interview was edited due to space constraints]

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NSBA Issues 10-Point Priority List for 114th Congress

By Charles H. Green

As has been their practice for many years, the National Small Business Association (NSBA) issued their top ten priorities to the U.S. Congress, at the beginning of a new legislative session.  NSBA members gather at their own ‘Small Business Congress’ every two years to discuss issues of vital concern to their membership and publish the resulting agenda of their wish list for the next two years.

Celebrating its 78th anniversary in 2015, NSBA continues to advocate on behalf of National Small Business AssociationAmerica’s entrepreneurs. A staunchly nonpartisan organization, NSBA’s 65,000 members represent every state and every U.S. industry and lay claim to be the nation’s first small-business advocacy organization.

This year, their top ten priority list includes the following issues:

1) Corporate Tax Reform and Small Business;

2) Improve Access to Credit and Capital;

3) Deficit Reduction & Entitlement Reform;

4) Rein-in the Costs of Health Care;

5) Capital Gains and Dividends;

6) Tax Extender Permanency;

7) Export-Import Bank Reauthorization;

8) National Regulatory Budget;

9) Immigration Reform;

10) Strengthen The SBA Office of Advocacy;

Much of this list seems intended to be fraternal in nature, that aligns the association with other conservative interests in Congress, while not drawing indelible lines around sensitive issues that could be retreated from easily, such as with immigration, tax reform and health care costs.

Their their priority list largely mirrors most other business advocacy groups, such as the U.S. Chamber of Commerce and the Business Roundtable, but it’s interesting to note how many items on their agenda–particularly in the area of capital access–runs directly counter to some recent public statements and actions in the House Small Business Committee (HSBC).

What concerns do commercial lenders have?

Like most of the House of Representatives, this committee has increasingly veered into extreme right-winged territory since 2011, and like many other House committees, has become seemingly hostile to many business interests, unlike the traditional position of the majority Republican Party. These changes are probably best illustrated in the area of capital access, in light of the insurgent Tea Party wing’s hostility to the banking bailouts during the financial crisis and subsequent economic stimulus efforts of the federal government.

NSBA’s priority list expressed a full-throated support for the U.S. Small Business Administration’s recent initiatives to improve small business access to financing loans less than $150,000. Specifically, they mentioned the agency’s recent renewal of the guarantee fee waiver on small loans for the second consecutive year.

NSBA also gives credit to SBA for trying to simplify the loan process–possibly in reference to SBA’s outreach efforts and new technology lender search tools–and for endorsing SBA’s efforts to open more business lending authority at the nation’s credit unions. The HSBC has been especially critical of the former.

For its part, the HSBC has spent most of the past two years grumbling about SBA’s every move. New chairman Steve Chabot (R-Ohio) and the ranking minority member, Nydia Velazquez (D-NY), have wasted no time to renew their criticism of the agency in the new Congress, for acting on big ideas without Congressional mandates.

In addition, NSBA is pressing for Congressional and executive pressure on the Securities and Exchange Commission (SEC) to act on crowdfunding provisions, so to ease the rules of raising equity among small investors, and has offered a strong endorsement of renewing the Export-Import Bank charter before expiration in June. That latter position is counter to a full war many HSBC and Tea Party members are waging to shutdown the Ex-Im Bank.

It remains to be seen what lies ahead, but I predict another frustrating year ahead of arguing what’s really best to promote small companies.

Read more at NSBA.

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Improved Loan Delivery Demanded by Business Borrowers

By Charles H. Green

According to Claude Handley, as published in the American Banker, small-business lending is in need of an overhaul at most community banks. He correctly points out that the lending process at most of these institutions tends to still be paper-intensive, cumbersome and inefficient for both borrowers and bank personnel.

Handley points out that prospective borrowers are required to provide far more Commercial Loan Officerdocumentation than is actually necessary for prudent underwriting. Most banks employ the same application and underwriting checklist for all loans, regardless of the size or complexity of the request, or the characteristics of the borrower.

But, the simple economics of small-dollar loans are both the largest barrier to solving the problem and in fact the majority of the problem. Management of small business borrowers needs to be streamlined and highly automated, but as important, such improvements cannot come at the expense of sacrificing customer service.

This column has advocated for lenders to explore a large array of technology platforms already on the market that can simplify the loan application-underwriting-approval-and boarding process, but that will require some time and expense to convert to, and many smaller institutions are hesitant to let go of a good thing, seeing how their results are reflecting a much rosier picture.

What rosy picture?

According to the FDIC’s recent quarterly profile, community bank profitability was up on average 28 percent last year, with more loans funded to small businesses and the list of problem banks sinking to its lowest level since 2009. And these statistics come in the face of a rising tide of online, innovative lenders who are scratching market share away from banks in several product lines from consumer debt to SME working capital loans.

But that’s today, and we all know tomorrow is another story. Handley notes that ‘dissatisfaction with credit services’ is among the main factors that lead small businesses to switch their primary banking relationships, according to fourth-quarter 2014 survey data from Barlow Research Associates.

The survey also found that the number of days banks spend responding to a credit request is longer than what small business customers expect.

Last year’s results provide no assurance of the results any bank can expect next year. Best advice-keep improving your process or you won’t have customer complaints to deal with, or customers for that matter.

Read more at American Banker

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FDIC Report Card Reflects Good Semester for Community Banks

By Charles H. Green

The Federal Deposit Insurance Corporation (FDIC) released their Quarterly Banking Profile recently, that reflected a positive report on the commercial banking sector. Banks and savings institutions insured by FDIC reported aggregate net income of $36.9 billion in the fourth quarter of 2014, down $2.9 billion (7.3 percent) from earnings of $39.8 billion that the industry reported a year earlier.

However, they quickly note that the earnings decline was due to a $4.4 billion increase in FDIClitigation expenses at a few large banks. More than sixty-one percent of the 6,509 insured institutions reporting had year-over-year growth in quarterly earnings. The unprofitable banks in the fourth quarter fell to 9.4 percent from 12.7 percent a year earlier.

While there was a continued decline in mortgage-related income, most banks reported higher operating revenues and improved earnings from the previous year. In addition, the pace of bank lending rose, balance sheet quality improved, and the number of banks classified as ‘Problem’ institutions dipped to its lowest level since 2009.

FDIC Chairman Gruenberg said, “Community banks performed especially well during the quarter. Their earnings were up 28 percent from the previous year, their net interest margin and rate of loan growth were appreciably higher than the industry, and they increased their small loans to businesses.”

The report also noted that the industry’s full-year ROA tallied up to 1.01 percent, the third consecutive year that this metric exceeded 1 percent. As a group, nearly two-thirds of the nation’s banks (64 percent) enjoyed a higher net income in 2014 than in the previous year.

FDIC’s list of “problem banks” dropped for the 15th consecutive quarter, declining from 329 to 291 in the fourth quarter. That’s the lowest since the end of 2008, a full 67 percent below the post-crisis high of 888 at the end of the first quarter of 2011.

Read more at FDIC.

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Lendoor Ready to Crowd Into Small Business Financing

By Charles H. Green

Readers of this page should be familiar with the rise of innovative ‘marketplace’ funding, and as such, the term “crowdfunding” should be old news. Made prominent by peer-to-peer pioneers Prosper.com and Lending Club, these platforms originally gathered lots of small checks from individuals or “peers” to finance consumer loans for cars, schooling or even refinancing more expensive credit card debt.

The rest is history, as Lending Club issued an IPO last December with a market value Lendoortotaling $8 billion, and dozens of offshoots, me-too’s and other clever ideas have emerged to capture a portion of this market or create another niche.

One fledgling company who’s working on the next big niche is New York-based Lendoor, which intends to apply the crowdfunding business model to the already most raucous sector of American finance: small-business lending.

This company plans to introduce a platform for local businesses to borrow money from their customers and other individuals they can attract online. It’s the latest effort by a technology company to disrupt functions that traditionally are performed by banks.

The company states that their mission is to “help startups and small businesses nationwide get crowdfunded loans from friends, customers and supporters — instead of bankers — with terms that work for both sides.”

Although their game plan is promising, Lendoor’s mission is on hold, awaiting final adoption by the Securities and Exchange Commission (SEC) of rules pertaining to small investors, which were provided for in the JOBS Act of 2012.

Crowdfunding for business purposes really took off after Congress passed the JOBS Act, lifting a ban on startups publicly asking for investors capital. But the entire provisions of the act have not yet taken effect due to the deliberative process being conducted by the SEC to finalize these rules.

Presently, only “accredited investors,” those with a minimum of a $1 million net worth (excluding their primary residence) or annual income over $200,000, are eligible to participate in equity crowdfunding deals.

The SEC is reviewing Title III of the JOBS Act, which would open the universe of potential investors in crowdfunding to anyone who is able to risk money in the market.

Meanwhile, Lendoor is standing by ready.

Read more at Lendoor.

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Legacy Banks Warming up to Innovative Lenders

By Charles H. Green

Whether it’s a case of ‘keeping your friends close–but your enemies closer’–or maybe the recognition of the old axiom, ‘if you can’t beat ‘em, join ‘em,’ but there seems to be a lot of movement from the traditional banking industry toward working cooperatively with rising upstarts in the innovative marketplace funding sector.

Familiar names including Citibank, American Express, SunTrust, Wells Fargo, and even Innovative Fundingthe mammoth credit card payment processor Master Card, are doing deals through a variety of arrangements with the leading–as well as some literal start-up–financing and payment companies that have emerged since the financial crisis.  These novel lending companies have created disruptive business models that are scaling faster than anyone predicted, and are more clearly seen as encroaching on growing swaths of market share from banks across a number of credit and payment products.

“We are open to any and all conversations,” Garry Lyons, the chief innovation officer in Dublin for MasterCard, told the NY Times. Although “disruption is a potential threat to established companies,” he added, “we’re open to working with new emerging companies” to serve customers’ needs. He said MasterCard and its customers could both benefit from “access to external thinking.”

In late 2014, Wells Fargo launched a business accelerator to support enterprises working on tools for the financial services industry, while Citigroup is funding venture investments in companies with the potential to produce disruptive transformation in financial products and services.

American Express has gone so far as to open a technology office in Silicon Valley focusing on mobile payments, cloud computing and big data.

What does this mean for commercial lenders?

This new found love of innovation among the venerable large banks may puzzle many observers, who are more accustomed to the growth strategies exhibited over the past fifteen years, primarily driven by the expansion of leverage and bank consolidation. But faced with a rapidly changing marketplace, it’s a safe bet to assume that many are putting up capital to stay in the game–whatever that game turns out to be.

Today, consumers and business owners seem to be getting new financing options every month. While the competition is fierce, profits are scarce due to the high cost of funding associated with these operations. Enter the banking industry as a partner, with many advantages, not the least of which is cheap, reliable funding.

Many lenders can expect to wake up someday in the near future and learn that one of these dazzling new disruptive financing alternatives is on their list to sell that day.

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Kauffman Foundation: Entrepreneurship is in Decline

By Charles H. Green

Just as the economic news keeps getting better, jobs are growing at the fastest rate in a decade, wages are finally starting to unthaw, and the Federal Reserve is getting ready to boost interest rates, the respected Kauffman Foundation drops a bomb: entrepreneurship is officially in decline.

According to an account by the Washington Post, new research shows that the country’s sutb_figuresrate of new business creation, which peaked about a decade ago, plunged more than 30 percent during the economic collapse and has been slow to bounce back following the recession. And that’s despite the fact that, over the last few years, the portion of the U.S. population between the ages of 25 and 55 – historically the prime years of starting a business – has been expanding, according to data compiled by the Kauffman Foundation, an entrepreneurship research organization.

The research is graphically explained by Kauffman’s in the Post through five measurements that demonstrate their conclusions:

  1. New business creation has only recently bounded back from decline following the financial crisis, among both the prime age (25-54) and working age (15-64) entrepreneurs.
  1. Since 2008, business deaths have outpaced new business startups.
  1. Older firms (16+ years) represent a majority of U.S. firms.
  1. New firms are responsible for virtually all new job creation.
  1. Millennials (ages 20-34) aren’t starting new businesses at the rate that Baby Boomers did. In fact, the only demographic not in decline today is in the age category from 45-54.

Bottom line

To offer context around their assertions, Kauffman’s report points out that as a group, Millennials have a low home ownership rate, which is          a traditional source of savings and potential collateral to support starting a business. In addition, many are financially strapped these days, having left college with an impressive upper-level degree that was very expensive, and paid for with education loans.

Kauffman urged policy makers can make conditions more favorable to entrepreneurship for more Americans of all ages and backgrounds.

“Unless we see more entrepreneurship, the kind of economic growth we’re seeing now will not continue,” said Mark Zandi, chief economist at Moody’s Analytics.

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Traffic Signal Helps Business Owners Navigate to Funding

By Charles H. Green

One of the perennial challenges in commercial lending–for lenders and borrowers–is getting the right loan application in front of the right lender. In the lending community, we know how credit organizations break down between the various financing products they offer, such as C&I loans vs. CRE lending, or ABL vs. government guaranteed lenders, etc. But many prospective borrowers know one word for all of them: bank.

Collectively, lenders haven’t done a good job of educating the marketplace about the Traffic Signaldifferent financing products available and how to clearly identify the range of companies available to fund their requests. The results are thousands of meetings arranged annually with mismatched borrowing prospects and lending sources, wasting time and effort. And most lenders coming out of these meetings probably miss the chance to offer a sufficient explanation as to what–and who–is needed and why.

 

The site employs a short list of questions to qualify the kind of funding needed and provides a simple solution for time-constrained business-owners to find the right funder to contact, without requiring any personal contact information to use the site.

The business represents a unique collaboration of several market-leaders for the primary forms of alternative business funding for small business finance. These lenders represent funding for short to long-term loans, debt, equity; even retirement account self-investing management providers are included, and they expect to grow the list of participating lenders.

The loan applicant’s experience is visual and to the point: favorable opportunities are represented with a “green light,” while dead-ends, based on applicant responses, are represented with a “red light.” “Yellow lights” mean more information is needed to clarify an opportunity.

It’s a great tool–check it out and look at the questions for yourself to get a sense of how they sort loan applicants into specific, more targeted funding streams. We’ve got some catching up to do on this side to provide such an effective, collaborative tool to search the small business marketplace.

Read more at AlternativeBusinessFunding.

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Is Credit Risk Creeping Up In Your Portfolio?

By Charles H. Green

So your bank survived the financial crisis, maybe with some borrowed money or maybe your own. Your credit box got dialed in and you doubled down on managing workouts to maximize recoveries and lower loan losses as best as you could. After a few false starts, the economy finally moved into recovery last year and now its time to make some money, right?

For the first time it seems in a decade, you finally convince your CCO to make a credit Changing Metricspolicy exception and approve a loan that’s just outside the comfort zone–but in a small, marginal way. And you learned that a peer was given the same consideration for another loan to a coveted client prospect.

And what happened? The sky did not fall, the earth did not quake, and the bank’s assets weren’t seized by the regulators.

So you were back a week later asking for one more small policy exception, that really didn’t affect the debt repayment, just a side issue of little consequence really. And then another one…and another…until your bank was in full swing ‘risk creep.’

Risk creep happens to commercial lending when you get bored with the status quo of the business you have and start looking on the other side of the fence (where the grass is always greener). Or you seemingly can’t compete with anyone else because your credit policy seems to be unreasonably tight, and you have to walk away from almost every deal you work on.

So, you slowly move just a toe over into a riskier terrain. After all, any credit by its nature carries the risk of non-payment, so what’s just a little more flexibility?

When everything goes well with that change in terrain, everyone concludes that things must be safe. So we push the envelope at little further. Then some more. And then, we recognize that we’ve got this risk thing down pat, and it’s time to ramp up the game.

In some banks, the seeds of future failure get sown this way, as credit risk creeps in incrementally. It’s so subtle, that we rarely notice it. Talk to some bankers who lived through a failed credit operation and you hear the same stories:

“I made a number of mistakes”

“We ignored some obvious red flags that all should have been clear signs to pull back from certain loans.”

Many bankers I’ve spoken to look back on their mistakes and see all the obvious warning signs, so obvious that they openly admit how dumb it was to miss them.

The cause? Risk creep, that starts with a plan offering a clear margin of safety, but then slowly, the collective sense it to take just a bit more risk. No one calls it that, and most of the time they don’t even recognize they’re doing it.

As things go well, the perception of risk seems to go down. Lenders start to feel safe and as a result take one small step into territory that was previously labeled out of bounds. And the process repeats. Take a small risk. Things go well. Increase risk. Repeat until failure.

As business development starts heating up in this new year, it’s a great time to examine your credit policy and recent portfolio additions for signs of risk creep. The remedy for risk creep happens to be what some would argue is the most important word in the English language: remember.

Just remember what it was like to watch as your loan losses rose by 100 percent (or more) in 2008. Or what it was like to decline a loan to your best client because of your  banks’ balance sheet, not theirs.

Then take a close look at where your bank is in terms of risk creep and remember: things change.

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