Financial entities may be starting to feel cautiously optimistic about the economy, but few people seem to have recovered any complacency with regard to lending – many once-surefire loans no longer get an automatic vote of confidence. That’s where a guy like Carl Famiglietti comes in. A Chelsea native who cut his teeth accounting in industry and then at a Big 8 accounting firm, Famiglietti now heads a CPA and consulting firm. These days, more regional or national financial institutions are coming to his company and asking for help in picking over their loans with a fine-tooth comb.

Carl Famiglietti
Title: Managing Partner – Moody, Famiglietti & Andronico
Experience: Almost 20 Years AT MFA
Age: 51

Q: How does this loan examination process work?

I guess if you have visibility, which is what we can provide through examinations, whether on a pre-loan or existing loan, we can provide insights in terms of really what’s transpiring with that particular borrower…

The difficulty from a banker’s point of view is understanding what’s going on [with the borrower] themselves, and so it can become somewhat oblique. I mean once a year you get financial statements from the CPA which, when you really dissect it down … really don’t tell you a lot. And in addition to that, in a time like this, it doesn’t really tell you how well-positioned the company is to manage sudden changes. And as we all would agree, most balance sheets in corporate America are not designed to take unusual distress for long periods of time, and in this economy … the contraction has hit all segments of this economy, all at once. So [the exam process] gives them insights in terms of their collateral, their cash flows, how management is handling their own financial components of their business.

Q: So a lot of banks and financial institutions simply don’t know their borrowers’ status?

In our view of the world, there are some institutions that have shunned away from exams … It’s really because the [borrower] themselves don’t want them – the borrower doesn’t want to pay for them – they don’t want the inconvenience of them, or just don’t want the intrusiveness of them.

Q: What kind of patterns are emerging as far as borrowers’ trouble spots?

The greatest concern, if I can put one out there as being the greatest, is the amount of credit that the companies themselves are giving out, and without actually vetting the credit. So inevitably, the collateral could become questionable as it ages out.

The company is issuing credit in its trade, creating revenue activity, therefore profit, but the quality of the transactions themselves don’t materialize on the piece of paper, so the examination can look at quality, the amount of dilution that’s expected from the transactions, and dilution in this case is the amount of debts that are doing to be realized in cash.

Q: And you’re getting more clients asking for this in the current environment?

Since about October-November and into January, there’s been a number of institutions now who want the service done – sometimes for the first time.

Q: How many companies are you currently working with?

Eight institutions presently, both national and regional, that are using our services. And that’s up substantially. It would [normally] be down to one or two.

Q: Has that demand helped make up for a dropoff in other kinds of work for the firm? What kind of work were you up to last year at this time, for example?

A year ago today, the market was wide open, M&A transactions were very fertile in terms of activity and you would find us there in the IPO market in the pre-transaction market. And that market, as we know, has come to a screeching halt.

Now, financial institutions are very concerned about the quality of their outstanding [loans], as well as their commitment to future borrowers.

Q: You mentioned that borrowers are sometimes concerned about the intrusiveness of the exam – how do you handle some of these exams delicately?

[It’s about] the means to which you inquiry them, the way you present yourself, the type of questions you ask. … There’s an art and a science and vice versa, and you need to be experienced and you need to be seasoned, and you need to have good traction in financial statements and the areas that influence them, and I think that’s what CPAs can do … because that’s what we do anyways.

Top Five Borrower Trouble Spots Lenders Should Look For:

1.) State and municipalities change their business tax structures often; if a borrower doesn’t keep up with the changes and falls outside of the law, it could leave them exposed to tax liens.

2.) Lenders should eb on the lookout for borrowers’ deferred taxes – when an economic contraction hits, those taxes might come due.

3.) Playing hide-and-seek with deferred taxes: they are hidden in the stockholders’ equity section, not as liabilities on the balance sheet.

4.) Lenders have to ferret out borrowers’ concealed losses.

5.) "Trust but verify" – doublecheck everything.