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30 Year Car Loan? Why loan amortizations differ

Uncategorized Apr 16, 2024

Ah, the allure of lower payments—a siren song to the financially weary. One of the 5 C's of Credit is Capacity; so by stretching out the loan amortization, it lowers their payments, and makes the loan more affordable, right? But before we strap every loan to the back of a turtle and call it a day, let's chat about why we bankers aren't popping champagne over 30-year car loans like we do for mortgages.  There is one over arching idea to keep in mind: You don't want your loan to outlive the collateral, and this can show itself in two ways.

The first one is pretty easy to understand, and we will use our 30 year auto loan as an example.  Even though that 90s era LaBaron convertible was pretty sweet, automobile values are notorious for how quickly they fall, and that doesn’t match well with a long amortization of 30 years.  Let’s work through the math on our loan.  If we were to setup that vehicle with a 30 year amortization, their payment...

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How to determine Income: 3 Filters

Uncategorized Apr 11, 2024

 Determining a borrower’s “qualified” income is an extremely important step when reviewing a loan (because your ultimate goal is for them to be able to pay the money back ;).  Not all income is created equal, and your role as a Community Bank is to be able to determine what portion of an applicant’s income you can count on to repay your loan.  There are three quick “filters” through which to view a borrower’s income.  If the borrower’s income meets all three filters, then include it.  If it does not, then exclude it.  Only use qualified income to make your decision (believe me, that is a mistake you will only make once :).  The three filters to use are: Stable, Recurring & Likely to Continue.

 

Stable

This one is pretty obvious, but it will be much easier for someone to make their loan payments when their income is stable.  Much of the time, bankers look at annual income.  One of...

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Equity Types: Not Created Equal

Uncategorized Apr 02, 2024

Let’s imagine you have two prospective borrower’s in front of you, you can only choose one, and all you have to make your decision is their balance sheet.  To make matters even more difficult, the amount/type of assets and the amount/type of liabilities are identical.  How do you choose?  Aren’t they the same?

A balance sheet is essentially a summary of all past decisions jumbled together, but one key attribute of a balance sheet is that it is as of a specific point in time.  So what difference does that make?  Well, think if you are looking at a businesses income statement, and you only had one to look out.  Is their revenue good?  I don’t know.  How about expenses (raise and lower shoulders)? Net income?  Not a clue.  The basis of financial analysis is to look at trends, and it is impossible to see a trend in an income statement without at least one (preferably two) other statements to compare against. ...

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Borrowing Base Certificate (BBC): The monitoring you wish you had when a loan goes bad.

Uncategorized Mar 22, 2024

Picture this, you are a young banker, and at this point, everything is going well.  Customers businesses are doing well, your boss is pleased, and you are happy.  Then you get a notified that one of your customers is struggling and contemplating shutting down.  The first question you have, what does this mean for my loan.  Lucky for you, at origination of this customer’s line of credit, you setup a monitoring system called a Borrowing Base Certificate (BBC) to monitor the loan balance and underlying collateral.  In this case, you are in a good position to prevent a loss, but you wonder what this could have looked like if you had just given the customer a line of credit with no monitoring, and you had just sent them off until next year’s renewal?  That would have been an unwelcome surprise.  Usually what happens when a business is struggling is it slowly burns through the assets that collateralize your loan.  The customer...

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Deposit Accounts: Why your customer doesn't want to and why you should

Uncategorized Feb 10, 2024

The term banker is synonymous with the term loan officer, because that is often where most of a banker’s attention gets focused: loans.  This is unfortunate because by placing so much attention on loans, we basically skip half of a business’s banking needs.  I have a coffee roasting business, and a bankers focus on loans is similar to if I only focused on sales.  That doesn’t sound like a bad thing, and it isn’t, but by doing this, I may be unintentionally skipping other VERY important aspects of the business, like the cost of the coffee I am selling.  By placing an emphasis on these costs as well as potential sales, I could make more by actually selling less.

 

Today we are going to cover the Top 3 Reasons a banker should want their loan customer to have their deposit accounts at your bank, the Top 2 Reasons a customer may not want to have their deposits at your bank, and potential ways to attract deposits.

 

Top 3 Reasons a...

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SBA 504 - How a community bank can offer big bank terms

Uncategorized Jan 23, 2024

The SBA (Small Business Association) gets a bad wrap because of some additional forms to fill out and boxes that need to get checked, but the benefits of the SBA’s 504 program could mean the difference between winning a deal or losing it.  When used, the 504 program can lower a bank’s risk, lower a borrower’s interest rate, protect a bank’s net interest margin, and offer terms otherwise not possible by a community bank.  Let’s find out how to use this valuable tool.

 

What it is

The 504 program is a loan program offered through the Small Business Association to help the financing of small businesses.  The SBA has two overarching programs, 7a and 504 (yes, horribly named, I know).  Today, we will focus on the 504, and we will talk about 7a in a later blog post.  The main difference between the two programs is that the 7a provides a guarantee to a bank if a loss were to occur; whereas in a 504 the SBA lends a portion of a...

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Your Network: A Banker's Hidden Superpower

Uncategorized Jan 14, 2024

Bankers have a superpower that many of them don’t realize they have.  As a banker, you connect with customers across industries as well as up and down supply chains.  Many times bankers purposely target prospects in different industries/supply chains as a way to diversify their portfolio, and as a result, bankers know a lot of different businesses.  Why does that matter?  Because there will be instances when you can lean on this network to benefit one of your customers, and it leads to a tremendous amount of value being created.  Maybe you have a contact who has gone through whatever your current customer is going through.  Maybe your contact makes the widget needed by your contact.  Maybe your customer is thinking about jumping into an industry where your contact has had success.  The potential reasons for these connections are expansive if you are paying attention to them.  Let’s explore the Top 3 reasons why bankers...

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What a Banker Should Be: A Financial Confidant

Uncategorized Jan 10, 2024

Business owners are searching for someone, and I’m not talking about new customers (but they’d probably like them too :).  Business ownership can be lonely.  How is this true?  Businesses can consist of many employees and customers; how can it be lonely?  Because many business owners do not have someone they can talk to about the inner workings of their business.  As a business owner, can you talk to your staff about worries of meeting payroll in two weeks?  Or can you talk with your team about the debt load your business has as a result of past mistakes?  If you can, great, but if you are like most business owners, you can’t.  There are somethings you cannot share with your team because your team lacks the full context, and if they misunderstand what they’re told, at best they keep working and at worst, they leave and tell your customers why.  When an employee hears “I’m worried about making...

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