Ask Me MD: Medical School for the real world
Ask Me MD: Medical School for the real world
Josh Burleson - Commercial Banking 101
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Josh Burleson of Affiliated Bank joins Dr. Verret to discuss all of the terms and processes associated with commercial banking.
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Ask Me MD, medical school for the real world with the MD Dr. D.J. Verret.
D.J. Verret, MD, FACS:Greetings, and welcome to another episode of Ask Me MD, medical school for the real world. I'm Dr. DJ Verret, and today we're talking commercial banking with Josh Burleson of Affiliated Bank. We'll talk to Josh, right after this.
Commercial:Commerical insterted here
D.J. Verret, MD, FACS:Welcome back to Ask Me MD, medical school for the real world. I'm Dr. D.J. Verret. And today we have the pleasure of talking with Josh Burleson of Affiliated Bank about commercial banking. Josh, thanks for joining us.
Josh Burleson:Thank you. Thank you. I appreciate you having me on. And I'm look forward to sharing more about commercial banking affiliated bank and myself.
D.J. Verret, MD, FACS:Well, and I had you I invited you on you guys have been real helpful for me personally. And I know what I've been doing commercial banking for the last 12 years. But when I got started, and even along the way, I learned some things that are that are fairly different from personal banking that I think would be important for some of our physicians to learn. So to start with, though, can you give us a little bit of tell us a little bit about yourself and your background?
Josh Burleson:Certainly. Yeah, my name is Josh Burleson, and I'm the director of commercial banking for affiliated bank. I've been in banking for a little over 15 years, and been with affiliated bank for about three years. share a little bit about affiliated bank, we're a community bank based in Arlington, we have locations in Fort Worth garlin Round Rock, Bedford. And really one of the key things that makes us different and unique compared to say, a chase or bank of america is we're a community bank, in that we're about 1.1 billion of assets. But we're a community focused bank. You know, we have about 200 employees, and really where our niche and where we do the best job at serving clients is commercial clients. Our decision making is local. And we also have a mortgage group and kind of the consumer finance side.
D.J. Verret, MD, FACS:So just to give people an idea, you say 1.1 billion, that sounds like a really big operation. But in banking, that puts you on the smaller side, correct,
Josh Burleson:that 1.1 billion that that puts us really kind of a smaller, smaller, smaller size, especially compared to you know, the chase B of A Wells Fargo Wells Fargo's share of national platforms, even the large regional banks are typically 25 billion to 50 billion. As far as community banks, it probably puts us right in the middle, we're not a small bank, and you know, 250 million of assets, but 1 billion of assets, that's a really good niche size Community Bank, it gives us the capacity to do loans up to 10 to 15 million, but really, our fairway loan size is really loans and that, you know, 500,000 to $5 million range is our our typical type loan, which really covers about 95% of the market. As far as small businesses and physicians that we focus on.
D.J. Verret, MD, FACS:You mentioned that your decision making process is local, in and can you kind of take us through what you mean by that in the loan approval process and kind of how that works.
Josh Burleson:Absolutely. So our loan approval process comparative to, you know, a large national bank that they have very set parameters processes, to do it, which we have the same processes. We have a lot of delegated authority out to the lineage officers, including myself that I can approve loans up to a million dollars just just by myself, and then really to do, you know, loans up to 8 million, it only takes two additional signatures. And it's the same individuals making the decision every time it's not that we have a separate, you know, credit approval process and a different state. It's all local here in Arlington, Fort Worth and Dallas. So it gives us a lot of flexibility. We know our customers very well.
D.J. Verret, MD, FACS:So in terms of commercial education, commercial banking education, I'm going to throw out a few terms for you. And if you could help us understand what they mean, I think it'll kind of provide a basis for some of the other discussion. And in the first one I would throw out there is fight go score and how that affects commercial banking.
Josh Burleson:Certainly, so Phyto score is your personal credit score. There's there's three major credit bureaus that give your personal credit score, and so on commercial loans, comparative to say mortgages we rely on The personal credit score, but it's not an ultimate decision makers, we use it as one of the many criterias when making a loan decision. But typically on the commercial side loans were not strictly based on that comparative to say a mortgage mortgages are highly driven by that personal credit score. So we use as one of the factors based on a deciding factor.
D.J. Verret, MD, FACS:Now, I know a lot of people know about he locks or home equity line of credit, is there an analogous lending program for commercial businesses as well?
Josh Burleson:Certainly. So he walked home equity line of credit, that's a consumer product, the individuals get just have line of credit against their house, on the business side, kind of our comparative product and offering is we provide business lines of credit, business lines of credit anywhere the size of 50,000, to really about 5 million or larger, I always recommend for businesses to have a line of credit, just because you never know when you may need it. And when you do need it, it's usually easier to get a line of credit when you don't need it, versus when you actually do need it, I just always think it's good to have a line of credit in place that says backup liquidity facility. You know, especially if you look back over the pandemic, over the last six months, if, if you had a lot of credit setup prior to it, maybe you could use it to help you get through the pandemic. So it's really a safety net and kind of an insurance little bit of an insurance policy to have in place.
D.J. Verret, MD, FACS:How exactly do lines of credit work? I mean, is it you'd let you sign up for a line of credit and you get a lump sum amount of money? Or is it you get approved for a loan, and then you simply take out money when you need it? How do they actually work?
Josh Burleson:A line of credit, how it works, we you know, we determine the line of credit amount, you know, visiting with with the customer. And so we'll set up a line of credit, say, for example, $500,000, we close the line of credit, it's like you're closing any other loan, but you do not you have it available, but you do not pay any interest on it unless you use it. So if you never use it, there's not any interest. And so when you do need it, you call the bank and we advance the line of credit and put it in your account. And we can do it same day.
D.J. Verret, MD, FACS:So that the next thing that often comes up in commercial lending are personal guarantees Can Can you talk a little bit about what a personal guarantee is and what role it plays in commercial lending.
Josh Burleson:Certainly, typically, when we do a line of credit or equipment, or building loan will make that loan to business entity LLC, a professional liability corporation, Inc, whatever that may be. So the actual company is the borrower. And so what we also rely on our underwriting and what we typically ask for, as a personal guarantee from the owners of that company. And what that personal guarantee does, it really does kind of two primary functions. One, it helps provide financial support. So if something happens with the business, we know the owners of the business will stand behind the loan.
D.J. Verret, MD, FACS:And to, you know, kind of helps it again, if something goes does not go as planned owners do not just walk away, that they help, you know, help us work through whatever that situation may be. So personal guarantees are important to us and all banks, just because we want our interest aligned with the companies and the owners of the business. And usually we're talking about with personal guarantees. We're talking about smaller companies where there may be a small physician practice where there are two or three physicians or a small LLC may be owned by one person, not a company that would be fully autonomous on its own and operating without kind of a key man. Correct?
Josh Burleson:Certainly, certainly. So typically in the small and smaller business loans. There are personal guarantees once you get up into larger commercial loans, corporate loans. A lot of those loans are not personally guaranteed. But there's a large enterprise that stands behind it that if you know one individual or two individuals was no longer part of the organization, the organization could could continue on its own.
D.J. Verret, MD, FACS:Another term I see quite often, especially when when talking about interest rates on loans is a lie bore. Can you tell us what that is and how that affects more business loans than then say residential loans.
Josh Burleson:Certainly live war is the London enter winter London interbank overnight rate. And so that is just one of the indexes that banks use to price loans. So for example, live word today is about 5015 basis points. So typically, a bank will say live warpless 3%. And so that may be a rate of 315. It's just one of the indexes that banks use. You know, one thing to note Live war is going away in the next couple of couple of years. It's being slowly faded out over the next two years, and there's going to be some other indexes banks, you will use to price loans. One of the other most common indexes, banks use, and we primarily use this wall street journal prime, which is just a rate that's published, published by the banks and the Wall Street Journal journal.
D.J. Verret, MD, FACS:When when I work with commercial banks, they also have treasury management departments. And that was kind of an interesting concept to me. Can you can you explain what treasury management is from a banking perspective?
Josh Burleson:Certainly. So we have the standard deposit products, you know, standard checking accounts, online banking, but many of our companies, especially physicians, and larger companies, they have unique and special needs on the deposit side, for example, a CH for physicians in particular majority of their payments come in a CH, from the insurance providers. So the Treasury, treasury management is has a hard sophistication, more in depth online banking platform that really helps companies and physician physicians manage their deposits. You know, another example is remote deposit, you know, branches or branches are going slowly going away. And so we have the ability to put a machine in the office of a business and they can deposit checks remotely from from their office. Also, in Treasury online, it provides more in depth reports and reporting, versus just the standard online banking.
D.J. Verret, MD, FACS:Can we talk a little bit? You know, I think a lot of people are familiar with home mortgages, they probably have had a home mortgage at some point or gone through the process. But commercial lending is, is quite different than home mortgages. Can we talk a little bit about the process of commercial lending and how it differs than, than home mortgages, and I'm sorry, by commercial lending, I mean, for real property, as compared to a home mortgage.
Josh Burleson:Certainly, certainly, a home mortgage, you know, probably the most unique thing about a home mortgage, what makes it different from commercial lending, is it's a consumer loan that is highly regulated, and what what the regulator's have done if they really try to work and make that a uniform process throughout all banks. So whatever bank you're applying for the underwriting standards, the criteria, it's a very uniform approach between all banks, whereas on commercial lending, each bank really has more, a lot more flexibility and the ability to set their own standards on criteria for what type of commercial loan, you know, rule sets real estate loan they'd like to make. It doesn't, you know, a mortgage, they want a mortgage to fit perfectly into a box. Whereas commercial lending, we just have a lot more flexibility on real estate loans.
D.J. Verret, MD, FACS:And part of that comes from the sale in secondary markets, correct?
Josh Burleson:Absolutely. And then on mortgages, there's really kind of two primary types of mortgages. And we do both of them. It's the mortgages that get sold on the secondary market to investors. So the investors when they buy mortgages, they like everything to be standard, standardized, everything fit in a box. And those are the mortgage that investors buy. And those have the best rates, which mortgage rates today are below 3%, which is kind of why that why that mortgage product has to be standardized. One thing we do as a community bank that's kind of unique, we do those secondary secondary mortgages on the market, but we also do portfolio mortgages. And the primary difference between a secondary mortgage in a portfolio mortgage, we have more flexibility to underwrite mortgages that we hold on our own balance sheet, and that we can set more of the criteria and have more flexibility. So kind of, for example, a lot of our portfolio loans are business owners, that maybe their income changes year to year, for whatever reason, maybe capital gains, were they can't perfectly fit in that box on the secondary market, but it's still a very good mortgage, will originate the mortgage, and we'll hold it on our own balance sheet.
D.J. Verret, MD, FACS:And that's what you mean by portfolio mortgage is that instead of reselling the loan, the bank actually keeps it and services that that loan until it's fulfilled, correct?
Josh Burleson:Correct. Correct. We keep the loan re service it. We do not sell it on the secondary secondary market. We talked a
D.J. Verret, MD, FACS:little bit about commercial lines of credit and real estate loans. Are there other VA loan type vehicles that banks that banks such as yourself would work with commercial commercial entities on And we hear a lot about physician loans where they're Lower, lower down payments on the loans. Talk to us a little bit about some of the variety of loans that you can put together.
Josh Burleson:Certainly, we have the standard commercial real estate loan, which typically physicians we can be more aggressive as far as down payments, for example, because typically physicians have very high recurring income in salaries. And so it helps us maybe have less of a down payment, and a lot more just on you know, that the income, we have lines of credit equipment financing, we also provide SBA financing. So SBA is a unique and a good tool for especially positions that may be starting out or want to make a real estate purchase. SBA provides, you know, some flexible terms, there's really two products, SBA seven A, which, you know, for example, on a building loan, that's typically 90% loan to value on the costs on a 25 year amortization. And then we also offer a loan called SBA 504 loan, which allows long term financing on real estate. And what makes that product really unique and special. You know, the fixed rate those rates today on the SBA 504 loan is about three and a half percent to 4% for 10 years. So the rates on that product are just really at all time lows at this point. So we offer SBA loans, commercial real estate loans, we also have a private bank, which kind of the private bank is really focuses on more than individuals. It's not the consumer side, but it's really just the private bank provides lots of different services, especially for decisions or a lot of our customers in that group.
D.J. Verret, MD, FACS:And when we're talking about those kinds of loans, they can be secured or unsecured correct and kind of explain what that means, if you would,
Josh Burleson:certainly. So, a secured loan, it's secured by the real estate equipment, accounts receivable. But quite often, we'll do an unsecured line of credit, and just an unsecured line of credit. There's no collateral behind it. It's purely based on the company and or the guarantor.
D.J. Verret, MD, FACS:You mentioned, a 25 year amortization. Most people are in dealing with personal loans more or home mortgages, the amortization and the repayment period end up being the same. But that's not always the case with commercial loans. Can you explain the difference between repayment period and amortization and how that kind of works?
Josh Burleson:Certainly, between the repayment typically banks will do a maturity of five to 10 years on the loan, that the amortization may last be longer. So for example, if it's a commercial real estate, the bank may do an amortization of five to 10 years, say a 10 year maturity, and a 25 year amortization. And what that means is the end of year 10, for example, the company has to, you know, refinance it, or the bank has to renew that loan for a longer maturity, whereas a mortgage, it's a 30 year, you know, 30 year term 30 year amortization, there's there's no maturity.
D.J. Verret, MD, FACS:And when you say amortization, can you can you go a little bit more in depth about the calculation involved there? You know, because when when you look at the, since the amortization and the repayment are the same, and in mortgages and home mortgages that people will be familiar with, that that's not quite the same process, even though the payments may look like it's a 30 year loan. That's not how it works all the time and commercial lending, correct?
Josh Burleson:Correct, correct, that payments may be made, you know, the payments are based on it, say 25 year amortization. But the note at the end of for example, five years or 10 years, it matures and it has to be 100% of that note balance has to be paid off. And so what typically happens in those cases is either a the bank you know refinances renews it for another five to 10 years, or the borrower has to pay that loan off through refinancing it with another bank or through personal means.
D.J. Verret, MD, FACS:When when you're looking at commercial lending, you know, the, again most people I think are familiar with the mortgage process and what documentation is needed. In commercial lending, though it can be a little bit different. Walk us through kind of the initial application process and what that looks like for commercial lending. Certainly.
Josh Burleson:So together initial processes are typical process it as we you know, will meet with the customer, learn about the business learn about what they're looking for. And they'll provide us with a with a loan application and all the financial And we'll go through the financials with the company, determine what they need, what they're trying to look for what we're trying to help them with. And then we'll issue a term sheet, which outlines all the terms. You know, interest rate, amortization, personal guarantees, will issue them a term sheet of what we're proposing how to finance, finance, the building, or the equipment or the line of credit. And then once they're, you know, kind of approved the term sheet for us to move forward, you know, we'll go into full underwriting and approval process, you know, typically timeline, typically, it's about a 30 day process for us to completely underwriting and approve alone.
D.J. Verret, MD, FACS:And when you talk about financials, you're in the smaller practices in particular, you're talking about both the personal finances of all of the owners as well as the business finances, correct?
Josh Burleson:Correct. Correct. Well ask for all the financials on the business. And then we'll ask for personal financial statement, and personal tax returns.
D.J. Verret, MD, FACS:In my experience in dealing with community banks, which has been great is oftentimes for additional loans, the process ends up getting a lot easier and quicker, because the relationships been built. And those financial statements are fairly current and updated every year, correct?
Josh Burleson:Correct. Correct. You know, we can move once we have a relationship, and we have all the information and files and file if there's a follow on request, you know, maybe an increase in the line of credit, or a new equipment loan, or a new building loan, we already have that relationship. And know that person, and we have all the financials and we have all the business entity documents, we can move much quicker once we already have an existing relationship.
D.J. Verret, MD, FACS:Josh, is there anything else that we missed in our discussion that you think our physicians would be interested in?
Josh Burleson:I would say just just because this is so important, right now, I've been a hot topic for the last six months, it'd be PPP payroll protection program. We affiliated bank, we really went on the offense with it. And we are very successful in the program. We did over 1600 loans, for about over $200 million of PPP loans. That forgiveness process is now coming up. So just be aware of that being contact with your bank about the PPP forgiveness. And more importantly, and something that we're really following very closely, is there's been several pieces of legislation proposed and both both the House and the Senate, for there be another round of PPP funds. I think it's very likely that there's going to be another round of PPP funds. And what that looks like it's most likely is where seems like it's going is, you know, there's gonna be another round of PPP, you know, be available to those businesses that were highly impacted by COVID. One of the tests that has been proposed is that revenue is down between 25 and 50%. You can qualify for another PPP loan. I think it's very likely to get passed, it's just taking much longer than, than what we like, just with with the election coming up and politics, everything's taking much longer, but I do think there's gonna be another round of PPP later this year. You know, for example, physicians and physician practices, who they were shut down for 90 days, I would think it's very likely they qualify for another PPP low.
D.J. Verret, MD, FACS:Josh, thanks for joining us a lot of useful information.
Josh Burleson:Yeah, absolutely. Thank you.
D.J. Verret, MD, FACS:We've been talking with Josh Burleson, of Affiliated Bank about commercial banking. You're listening to Ask Me MD, medica school for the real world. I' Dr. D.J. Verret. Until next t me, make it an awesome w
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