The Changing Face of Relationship Banking

On Thursday, January 28, Vermont Family Business Initiative members had a unique opportunity to gather with four banking and finance experts in Montpelier. The events of the past two years related to banking and the economy has left many business owners wondering what the New Year will bring. While the focus was on “relationship banking,” many topics would be discussed throughout the morning.

Tom Pelletier, President of Northfield Savings Bank, opened the panel with a brief economic outlook for the State of Vermont. Restating the theme of the morning, he added a disclaimer, “Relationships matter and they can be disrupted.” To avoid this, make it a point to keep the lines of communication open with your banker; good communication equals good service. It is not unreasonable to meet quarterly with them and to continually assess the fit of the relationship and plan for succession of banks or bankers if necessary. Underlying the banking relationship are the 5 C’s of banking: collateral, capacity/cash flow, capital, conditions and character. Loan decisions ultimately focus on cash flow, and cash flow is still King.

Jo Bradley, CEO of Vermont Economic Development Authority (VEDA), had additional wisdom to share from her perceptive as an alternative lender. Quite often, VEDA’s  relationship is often directly with the bank and provide additional leverage on certain deals that the bank may find marginal. With a plethora of programs available, VEDA may enter into the relationship at either the bankers or borrowers request.

“Small to medium sized business are alive and well in Vermont, and this is still a great place to be” says Michael Seaver, President of Chittenden Bank. Chittenden, with roots in Vermont, was recently acquired by People’s United Bank, a move that reminded many in this state that we are not completely immune to the changes and consolidation in the banking world. Seaver admitted that while some small to medium size businesses are “not feeling the love,” cash flow prospects and deal attributes truly matter now. Despite what may have been said in Washington of late, however, there still needs to be serious work done to make more credit available to those business owners. Currently, the only change has been increased regulation and tedious paperwork.

Union Bank, based in Morrisville, has been serving Vermont businesses since 1891. President Ken Gibbons, agreed that while much has changed, much still remains the same. Regulations have become much more specific and restrictive of deals that might be exposed to risk. Banks are subject to CAMELS rating employed by the regulators to rate the relative health of the bank. The CAMELS are capital, assets, management, earnings, liquidity and (interest rate) sensitivity. While banks are still eager to make loans and do business, there is caution to refrain from “bad loans” from the regulators.  Internally, banks are using their own rating scale to determine how to move forward with a loan. From the business owner’s side, accurate and thorough financial records are still keys to success in both personal and business transactions.

The flip side of the banking relationship, is receiving the calls when you don’t necessarily want to answer them. For many owners, the past year has seen their cash flow tighten and their bottom line shrink. Remaining optimistic, one owner stated “business is down, but good, and capital is needed.” Banks, along with an alternative lender like VEDA, will still do all in their power to be there, especially when the existing relationship is strong and the prospects are realistic and positive.  Seeking additional advice from the US Small Business Administration may also open new sources of capital as well.

In family business, succession planning is a key strategy for success. Planning for succession in a banking relationship is also necessary if the fit is not right, or circumstances have changed dramatically. Avoid surprises, both good and bad, with your banker by keeping lines of communication open and expecting exceptional service from them. With the arrival of several new players in the local market, owners have choices too and should benefit from the increased competition. Ultimately, cash flow is King, and if you have done your homework with diligence, the deal will get done.

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