Fleet Financial Group Inc. has deployed a potent defense against the credit-quality problems that plagued many banks during the last recession.
The Boston-based banking company has assembled 51 managers to watch over the shoulders of loan officers, check financial statements, review collateral, and evaluate repayment sources before loans are made.
"This is like paying an insurance premium," said David L. Eyles, Fleet's chief credit officer. "Without it, losses clearly would be substantially higher."
And loan officers, rather than bristling at the new level of supervision, appear to welcome the guidance.
"A young lender has the benefit of talking with someone who has 'been there and done that' and can effectively communicate the ramifications of each credit decision," said Virginia C. Roberts, a senior vice president for large middle-market loans at Fleet's bank in Providence, R.I.
All of which makes the Fleet program a model for other banks. Increasingly, regulators are pushing banks to adopt formal risk management practices. And the Fleet program for credit risk, which began to take shape five years ago, clearly contains ingredients the regulators like.
"This is exactly the kind of risk program that we see a lot of desirability in," says Scott Calhoun, who heads up risk evaluation for the Office of the Comptroller of the Currency.
Markets change so quickly, he said, that banks no longer can wait to review loans after they are made. Instead, they need programs that independently assess credit quality before a loan is written.
The Fleet approach isn't cheap. Though officials would not specify the program's cost, observers peg it at more than $7 million a year. Almost all of that cost is for people.
Mr. Eyles says the program is easily paying for itself, having helped drive down the company's nonperforming assets to $700 million from $5 billion in 1991.
Though most of the decline was produced by an improving economy, Mr. Eyles says the risk managers' contribution cannot be minimized. Even a $100 million drop in nonperformers translates into a $7.5 million boost in annual earnings, he notes.
"There is a clear, significant benefit to doing it," he said.
Fleet's risk managers pay especially close attention to corporate credits of more than $1 million. They scrutinize these loans to determine whether the borrower has the financial and managerial resources to repay, according to Harris S. Berger, a credit risk manager at Fleet Bank of Providence.
Mr. Berger said he is most interested in a company's financial statements, which are summarized in a credit offering memorandum. He skips over profitability, focusing on sales and revenues. Those items, he says, are keys to the growth of a business.
"I know what the risks are," he said. "You can look at the financials and see the risks in the cash flow and margins based on the industry."
Mr. Berger said he also examines covenants, the requirements a borrower must meet to get the loan. "They discipline a company," he said. "They make sure that what we underwrite is what the company will go out and do."
He then sizes up the company itself, looking for the unique risks it faces. For instance, the company may be dependent upon a single supplier for its raw materials.
"If there are risks in the deal, it doesn't mean we can't do it," he said. "But they must be incorporated into the covenants and the price."
Fleet's risk managers also must rank all proposed loans on a scale of 1 to 11. The ranking is an evaluation of the company's management, industry position, and financial condition. It is used to set prices and loan-loss reserve requirements. The higher the ranking, the greater the interest rate and the more the bank sets aside in reserves.
Like loan officers, risk managers must get out of the bank to do their jobs. Mr. Berger said he visits applicants several times a month.
"Lenders can't review credit quality without kicking the tires, and neither can I," he said.
Fleet's preemptive strike against poor credit quality was a radical departure for the company. Before 1991, it had relied on its loan officers to uphold credit quality. Also, a credit review team annually evaluated the quality of each division's loan portfolio.
Fleet has taken some clear steps to ensure that the new level of risk management is effective.
For one thing, risk managers all work for a holding company affiliate, Fleet Corporate Administration-to ensure their independence.
And to make sure they don't clamp down too hard, Fleet also has established an appeals process. Loan officers may directly appeal a risk manager's decision. Also, the president of each bank may overrule a risk manager in order to make a loan, although these exceptions must be reported to Fleet's board of directors.
Mr. Berger said the appeal process is rarely used and that Dean Holt, president of the Providence bank, has overruled him just twice in the last 1,000 transactions.
Indeed, Mr. Berger enjoys strong support from senior management.
"Harris represents an objective set of eyes on the portfolio," Mr. Holt said. "I count on him to keep me informed when we are pushing the envelope on a loan. We will make adjustments to the credit to ensure we can all reach an agreement."
On a recent afternoon, two lenders entered Mr. Berger's office to discuss a borrower who wanted to expand a letter of credit and get a mortgage to buy the company's headquarters. Debate quickly focused on the financial statements; Mr. Berger was adamant that the borrower not exceed a maximum ratio of debt to income. He also requested a cash-flow analysis on whether the company would save money by buying its headquarters rather than leasing.
"Lenders visit me or grab me in the halls," Mr. Berger said. "I encourage them to communicate, and I never kill the messenger."