National Yardstick Helps Assess Risk

    GRAND RAPIDS — At the dawn of the 20th century, a successful local banker had to know his town’s businesses nearly as well as he knew his own.

    Thus, when farm families or feed suppliers sought loans from the bank, a lot of depositors’ savings — like his livelihood — depended upon the quality of the credit information the banker carried in his mental files.

    But according to Ken Stienstra, the 20th century saw industry become so diversified and subject to such fluid change that local commercial bankers simply were unable to personally know all that they needed to know about the businesses they served.

    “We bankers are generalists,” he said. “We can know a little about a lot of industries,” he added, “but we can’t be experts on any of them.”

    But Stienstra, a senior vice president and senior commercial loan officer with United Bank, said he and all his colleagues have constant access to a sophisticated international database that helps them weigh loan applications fairly accurately.

    He was referring to a thick compilation of what are called statement studies issued by the Risk Management Association (RMA), a Philadelphia-based entity founded in 1914 to help bankers communicate credit info back and forth. Stienstra is the president of the Michigan Chapter of RMA and the former president of RMA’s West Michigan regional chapter. The current West Michigan president is Bill Kaluke, a relationship manager for Standard Federal Bank.

    Stienstra said RMA provides a means for 3,000 banks in North America — and most recently on the Pacific rim — to assess the risks they take when lending money to nearly any business, from wholesalers and warehousers to tool and die makers and manufacturers of mattresses.

    “Hundreds and hundreds of banks across the country send in a little spreadsheet each year,” he said.

    And what comes back to member banks is the 2-inch thick compilation of spread sheet averages for every industry, broken down according to its SIC codes. (The material also is available in CD-ROM.)

    And the tool of greatest value to lenders, Stienstra said, is the comparison of those averages and their ratios with information provided by clients applying for loans.

    “What we do,” he explained, “is compare you with your peers.”

    He concedes that no comparison is exact, but when a lender looks at national averages for like-sized companies in the same industry, that lender gets some insight into the financial health of the business that is seeking working capital or the money to expand or to modernize its equipment.

    By way of example, he said the current averages for the tool and die industry are based on information from 685 firms sorted in six size categories according to assets and separately sorted by sales volume. The database identifies none of the firms.

    “The averages we really look at are balance sheet ratios, current ratios,” Stienstra said. “They tell us how fast you’re turning your receivables, how fast you’re turning your inventory, how fast you’re turning your payables.

    “When we’ve got three years of historical balance sheets from an applicant, why, we can pretty well tell if our guy — and this is compared to his peers, now — is carrying too much cash or too much receivables or too much inventory or too much fixed assets.

    “You can tell right away if they’re too heavy in equipment,” he said. “That may mean they may not be using equipment at capacity. The debt-to-worth ratio helps us see how leveraged they are.”

    The RMA studies even contain a ratio showing owner’s compensation as a percentage of sales.

    He stressed that RMA studies are by no means the end-all and be-all of commercial lending, but he said the database does alert the lender to areas that — by comparison with peer firms in the industry — seem to merit further investigation before making a loan.

    And if a red flag should pop up in the lender’s eye as a result of the comparison, he said, clients are often glad to know this information. “It helps them see where they might need to make some changes.”

    Stienstra stresses that for the last three years, RMA has been laying considerable stress in its monthly magazine, the RMA Journal, on the need for credit quality in banks’ loan portfolios.

    “RMA tries to stay abreast of what’s going on in the industry,” he told the Business Journal. “Before the economy started slowing, they were trying to warn their constituency to be ever-diligent for credit quality. They were saying, ‘The good times aren’t going to last forever.’”

    “RMA’s role in the financial services industry is expanding,” he added, noting that more recently the RMA Journal has been carrying articles about the necessity for solid accounting practices, not only within banking itself but also among clients.

    The publication also is covering terrorism insurance issues and new, more general insurance issues. It also has established guidelines for ethical practices to permit the flow of information between banks while also protecting confidentiality.

    “Say a lease company sends us a credit inquiry with a signed authorization from our customer,” Stienstra said.

    “We’ll release things like whether credit is outstanding, secure or unsecured. We’ll talk about any insufficient fund history, when the loan relationship started, and balances in terms like a ‘moderate six-figure number’ or ‘a high six-figure number.’ And if I have a real deadbeat customer and another bank calls saying, ‘Your customer has come to us and wants to pay you off. How would you rate this customer?’ I must give a true rating.”

    Stienstra explained such a request would be an opportunity to give the deadbeat a good rating and get rid of a bad loan at the other bank’s expense. But he also said it’s an “out” that is not only unethical, but also could lead to widespread distortion of the consistency of RMA data.

    The past five years, he said, have brought another change.

    “It’s remarkable,” Stienstra said, “how many people — attorneys, probably more CPAs, certainly business consultants, auctioneers, title companies, insurance types — have begun to join RMA in order to have access to this information. And anybody can join that serves the financial services industry.

    “And that’s pretty much in line with RMA’s mission, which is to stress networking with other people in the industry,” he added.

    “In fact, if you read mission statements on RMA’s Web site (, you see that a key phrase is that it is the only financial services professional association that specializes in lending and credit risk information and research and training.”

    He said that both RMA’s Michigan and West Michigan chapters sponsor breakfast seminars several times during the year. 

    For a time, he said, the West Michigan chapter was inactive, but he said he helped restore it to active status. “This is all volunteer stuff,” he said. “RMA’s only paid staff is at its headquarters in Philadelphia.”

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