Insurance Agency Insights
Insurance Agency Insights
The Lending Landscape, part 2, with guest, Mike Wagar, SVP at Westfield Bank
Peter and Mike discuss what it means to be a traditional lender, like a federally chartered bank. They talk about the importance of finding the right borrower-lender fit over the course of your agency's lifespan. Mike polishes up his crystal ball and he and Peter talk about the future of lending over the coming 12-24 months, and why it sometimes makes sense to inter-refer clients to other lenders, in the client's best interest.
Welcome to Insurance Agency Insights where we're committed to helping small and medium sized agencies achieve their business goals. We're your hosts, Doug Burke, investment banker and advisor to the insurance agency industry and with me is
Peter :Peter Friedman, CEO and president of AgileCap, a specialty lender focused exclusively on the insurance agency industry. At AgileCap, we believe agency owners can only take control of the course of their business when they have a thorough understanding of the financial aspects of their agency. Over the last 20 years, through the ups and downs of the US economy, AgileCap has advised agencies on borrowing money, acquiring new businesses, and investing in their future. Every other week, we'll bring you insights on how finance and capital can and will impact your agency's future.
Doug :Throughout an agency's lifespan, there are several ways that you, as the owner, might want to build, grow or evolve your agencies. These can include the startup costs, the working capital for marketing and equipment and other things, hiring employees or other top producers, refinancing for improving your cash flow, acquiring another book of business or another agency, buying out a partner, building a property or purchasing a property, paying off your tax liabilities, or even an agency perpetuation strategy. Unless you're sitting on a pile of cash that you can use to fund your plans, or you have friends family or access to private equity that will provide you with the money you're going to need, you're probably going to have to borrow money. Peter, how should an agency owner think about borrowing money to grow or start up their agency?
Peter :Well, Doug, there are lots of lenders out there. Everything from large national banks to local community banks, SBA lenders and specialty lenders. Each one has its strengths and weaknesses. When it comes to getting the right fit for you and your borrower and goals, it's important that you look at all the lending options out there, so you make an informed decision. It's a little like matchmaking, we thought it'd be worthwhile to take some time to introduce our audience to some of the lenders who we know, respect, and trust, and we work with...referring business back and forth, when it's the right fit for them. Today we're going to talk with Mike Wagar from Westfield Bank. Westfield is one of the leading insurance lenders in the country. Westfield is a traditional bank. They offer lots of products, but Mike and his team focus exclusively on the insurance industry. So welcome, Mike. Maybe you could tell us a little bit about your background, and Westfield Bank.
Mike Wagar :Yeah. Thanks, Peter. And Thanks, Doug for having me on the podcast here. Great to talk with you guys this morning. So a little bit about Westfield bank and myself. So Westfield bank...we are a little bit unique, I would say in the landscape, where we are wholly owned by an insurance carrier: Westfield Insurance. Now Westfield Insurance was founded 175 years ago; about 20 years ago decided to diversify a little bit into some financial services and started the bank from scratch. And so we're approaching our 20th birthday here in February of 2021. To date, we've grown to $1.6 billion of assets, primarily through organic growth. We have done two small bank acquisitions. We are based in Northeast Ohio, brick and mortar wise. And we've done two small local acquisitions over the time, but the majority of our business has been organic growth. A significant niche of our business is agency banking, as we call it. We thought that was a natural fit as being owned by an insurance carrier. As I mentioned, that's a bit unique, and where you usually see banks owning insurance agencies, or those companies who are kind of the opposite way. We started early on as a way to help our parent company start financing insurance agencies. We've had a great experience into it, and has it grown from there. So the team that I manage and I'm part of, all we do is work with insurance agencies all across the country. As I mentioned, we're based in Northeast Ohio, but we're a federally chartered bank, so we can do business in all 50 states. Still searching for that great agency in Hawaii to go take a road trip to some time; but we do business in all 50 states. I think we currently have customers in over 35 that we work with here from our base in Ohio. So we're unique again, in that we have the mindset locally of a community bank - you know, with a few locations, and we're servicing our community in Northeast Ohio - but then our agency businesses nationwide, all across the country. We do focus on independent agents. And so that's really what we're targeting that group. My background, I've been with the bank for 16 years, I've spent 10 of that in our agency business. One of the benefits, I think, of our structure is that our team is embedded in the industry and that we only work with, you know, the independent insurance agent. So we understand the industry. We understand the structure of agencies. We understand the opportunities and the great benefits of being an agency, as well as some of the challenges they face from traditional lending aspects, helping them leverage their most important asset and their most valuable asset, their book of business.
Peter :Great. Mike, can you give us a little bit of insight as to what you're seeing going on in the lending arena around insurance agencies?
Mike Wagar :Sure. Traditionally, insurance agencies - from what my perspective - has been an underserved or underbanked industry. Obviously, one of the great benefits of being an insurance agency is the residual income and repetitive business from your book of business as you grow. And most traditional lenders struggle with using that asset as collateral. Whereas we - early on - figured out a way to help an agency leverage that book of business as collateral and almost treated like real estate, so they can collateralize that, borrow against it and grow. So a lot of what we see in the landscape these days, and I guess a lot of the ways that we have operated, have been acquisition, ownership transfers or perpetuation, new producer hiring, and - at the end of the day - we always go back to "what does the book of business look like"? And those landscapes have treated us very well. We have grown our business tremendously in this arena; had a great experience with them, and we're looking to keep growing with it. So current market conditions - you know, obviously, there's a lot of M&A going on, even in the midst of a global pandemic. We've not seen a tremendous slowdown of it. There's still a strong amount of activity and we're as busy as we ever have been. Certainly a unique time in our country in our economy. But insurance once again proves to be a bit resilient. And so we've seen insurance agencies continue to perform pretty well throughout the first, you know, few months of this pandemic. And our forecasts remain, for the most part positive for the remainder of the year, as we navigate through this. As I mentioned, M&A activity is still strong and general activity for lending is still strong with agencies.
Peter :You brought up the pandemic and the impact of COVID. A couple things that we have seen, and I'm curious what specifically you've seen in this COVID impact. 1. We've seen valuations continue to be high. Sellers are not really ready to come down, so there's a bit of a pricing disconnect. Another thing we've seen is the SBA - and you can correct me if I'm wrong, but I don't believe Westfield Bank is an SBA lender - but SBA and PPP loans are tying up all the SBA lenders. And the last thing we see is that cashflow, which is always critically important; it's even more important during a pandemic. So I'm kind of curious how you think of the impact of COVID. What are the some of the themes that you have seen at Westfield? And what do you think the implications are?
Mike Wagar :Yeah, great questions. So we have been watching it very closely in our insurance portfolio as well as general bank portfolio. So far, the impact that we have seen to the agency force has been pretty minimal, unless they were highly concentrated in those highly affected industries: tourism, hospitality, travel, those types of things. For the most part, we have seen agencies been able to navigate through this, okay, and in some cases actually write a lot of new business out of it. So we are watching very closely, we've had constant dialogue with our clients. One of the things that we did early on was, go through our portfolio, and just call and check in. We have a pretty sizable business of lines of credit, and so we call our customers to assure them that we're going to be here for them and make sure that they were okay - you know - that they and their families and employees were healthy and safe, and let him know that we're going to be here for them. Because we do feel this is a partnership. Moving on to the SBA: you are right, we traditionally are not an SBA lender. As a matter of fact, all the loans we provide agencies are conventional, which in my view is the plus that allows us a lot of flexibility. But we did participate in the PPP program. We did a fair amount of of those PPP loans to agencies. And from our perspective on that, you know, the way the program was structured it was, I think, smart and prudent of most agencies to take part in that, and many businesses to take part in that, the way it was structured. So it did tie us up and slow down some turn times and other deals, you know, in that April-May timeframe. But we've emerged from that, and we're, you know, I guess back to business as usual, as much as we can. And when we had those early conversations with our clients, one of the things we counselled them on was, make sure you're in constant contact with your carrier partners, how they're reacting, what they're doing. We saw in the news, where some carriers gave credits for premiums to customers; you know, understand how that's impacting you. And also watch your expenses. Cashflow and cash reserves are as critical now as they ever have been. And so we encouraged our agency owners and CFOs to go down their P&L, look at those line items, make sure that they've got those buttoned up, and make sure you have some flexibility so that if things do go south in a hurry, that they have the ability to manage through that. The last piece you touched on was the valuation piece. I just read an article last night, Brown & Brown, one of the largest agency brokerages in the country announced their second quarter earnings. One of their comments in there was that valuations seem to be impacted very little by this...so far. I think early on, what we saw was that a lot of deals were put on hold. You know, the ones that were close to closing did close. But the ones that were in process maybe slowed down quite a bit. And there's been a bit of a shift in some of those deals to where there's a little less upfront cash and a little more back-end financing, or payouts or earnouts. So I think it's been a bit of a hedge by the active buyers to, you know, again, kind of keep a little bit liquidity and not expend as much cash. And then also, you know, ensure that the retention of the book they're buying is as important as ever and that the seller has got an appropriate amount of skin in the game to make sure that happens. So I think what we've seen so far is that M&A levels have, you know, after that temporary pause, have come back strong. And it seems to be continuing on throughout this. So interesting times for sure, something we're watching very closely, but it seems as though things are moving on, pretty strongly.
Peter :Interesting. Would you expect the historically high M&A multiples to continue, then? It sounds like you're not seeing any material weakness in that part of the market?
Mike Wagar :Yeah, we really haven't. You would think that there would be a short term impact that would have some strength to it, and we really didn't see that. Deals were still going on at what have been all time high multiples. The deal count maybe down slightly, based on kind of that pause in the, you know, late first early second quarter, but that seems to have picked back up from all the metrics that we're seeing. And, you know, certainly our pipeline is as full as ever has been for deals to get done. So, you know, I think a lot remains to be seen, and again, we're keeping a close eye on it. I think one of the impacts could be what renewals look like in the fall; September-October seem to be an active renewal time. So watching that closely. And employee count could be off quite a bit, depending on what the breakout of their book is. And then what do contingency payments look like in a spring of 2021, as carriers kind of weigh the impact of credits and growth; organic growth is probably, you know, going to be down by any metric. So how that affects that those bonus payoffs in the spring. So we're keeping a close eye on it, but things continue, at least presently and for the short term, to be moving along to where they were.
Doug :Mike, do you have any view of what the election impact might be, should we have a party regime change and capital gains rate possibly going up? Do you think that will impact M&A activity into the fourth quarter, with people trying to get deals done before perhaps a new regime comes in - obviously, no one can predict the outcome of the election at this point.
Mike Wagar :No it's a great point. We do think there's a lot of impact, if there is regime change. I think there will be a number of deals that are inked and hinging a bit on that election. And if there is regime change, then I think there will be a mad dash towards the end of the year to get some things in. I think almost every economist, to a tee, will say that the tax rates are going to go up to maybe help recoup some of the stimulus that's gone on, regardless of the outcome of the election. But I think obviously, the potential severity of the impact on capital gains, if there is a shift, will make the activity pick up quite a bit towards the end of the year. So I think in the long run, it wouldn't impact things necessarily too much. But there will be a short, you know, run on these types of deals to get done before things change.
Doug :But what can owners do to prepare for that possibility? If there is a flood of activity in the Q4 period, what can you do to put yourself at the front of the line now?
Mike Wagar :Yeah, so if you're considering a transition, whether it's internal or external, I would suggest to start talking to lenders who are going to be partnering with you to do that, now. I mean, so here we are - close to end of July, early August - although this could be the longest year on record, it's moving pretty quickly in some ways. So I would suggest that, you know, start getting your ducks in a row as far as, "Here's kind of what I'd like to see out of a sale, some target numbers, how you want to structure the deal". Call your lender or your partner in that process right away and start saying, "Hey, you know, we're working on this deal. It's not done yet, but we have it kind of formulating. Can I get you some information to start the process, to start looking at this?" The earlier you get in the queue, so to speak, the better.
Peter :Interesting. It's going to be a wild ride this year, without a doubt, with all that's been going on. And you alluded to the fact that the insurance industry is "muted", when it comes to recession - which has been great - but there ARE going to be some long term impacts and, to be honest, I think we all don't know.
Peter :Changing gears a little bit on you, we see the lending landscape from traditional bank to credit card, specialty lender, and the mix, as each lender plays a role in the life of an agency. And, as we alluded to before, it's a little bit of matchmaking. You're trying to find the right lender for you at this time, and it very much depends on what you're trying to achieve. It's the stage of the agency, that you're in, the purpose of the funding, your personal credit picture, how quickly you need money, and what's going on in the macro world - as we just kind of talked about. And so, you think about what are the critical factors that make a good match with a lender and a borrower? What are the things that you at Westfield think about?
Doug :Every time we have a conversation with an agency, it looks to be, "Let's start by getting to know each other a little bit". We'd like to know the history of an agency, where they've been, what their present structure is and where they want to go. So banking and lending is very much about numbers, but it's also very much about the story, and the qualitative piece of it, and understanding what the ultimate goal is. So, you know, when we're looking for an agency, we're looking for somebody who has a well diversified book, experienced management, a pretty well thought out plan and strategy, you know, solid financial management, the ability to share financials, and most importantly, what the future plan is. One of the critical things we look at when we're lending to our partners is, what's the next step? So if you're making an acquisition right now, where does it take you in a year or two? Are you looking to do more acquisitions? Are you looking to this one, and then potentially sell the business? So getting that true landscape is really important to us. We don't always have all the answers for it either. All those things I just mentioned are things that we like to know, but they may not have the interest for that, and that's okay. We want to just have that conversation with them to help them start thinking about those items. But a lot of the other pieces we look for is, you know what the purpose of the borrowing is. You know, if you want to take a term loan for $250,000 just to have cash, I'd probably council you that's not the greatest use of credit that you can do. But if you'd like to have capital for a rainy day, then the line of credit may be more appropriate. So another thing that's important is understanding the ownership and what the owners look like personally, and their strengths and the way they manage the company. You know, again, getting that full landscape of the story is important to us. And, Peter, you're right. There's a lot of different lending sources: banks, finance companies, specialty lenders, credit cards, and depending on what your goal is, really determines on where you go for those funds.
Doug :Mike, you mentioned a diversified book and early on, you talked about your unique insights into the collateral base of in agencies. Tell me what's a high quality collateral base? What are the elements of a diversified book that you like to see in a loan prospect?
Mike Wagar :Yeah, good question. So what we like to see in general is not a heavy concentration in any one spot. That could be an industry, for example. So if you if you're an agency that wrote nothing but restaurants, you're probably not having a great year so far. And, regardless of the industry, if we came across a client that was, you know, heavily weighted in one industry, to me, that is a risk factor, because what if something occurs like we've experienced, where that industry is adversely affected and what's potential outcome of that? So we'd like to generally see a well diversified book amongst not only different industries, but commercial, personal lines, what's your mix of that versus employee benefits? You know, if you're heavy in one or the other - commercial or personal - it's not necessarily a bad thing. Just understanding what that looks like. We also like to see not a heavy concentration with any one carrier, you know. To quantify that, I would say a heavy concentration, may be 50%. Certainly, I think a lot of agencies have core partners where their writing the biggest chunk of their business with, you know, five to seven carriers, and I think it's important to have those core carriers. But if someone has all their apples in one basket and that basket gets spilled over, obviously, it's not a lot of fun. So those are some aspects of it, but just heavy concentration in any one spot. Again, customers industry carrier; we like to see those little bit more diversified to insulate that agency against, you know, the unknown.
Peter :Great advice and great insight. Appreciate that. Maybe you can talk about... you talk to lots of borrowers on a regular basis, maybe some calming of concerns that you get asked or questions that this audience may say, "I wanted to ask that question, but I didn't know if it was a dumb question". The classic example or things that as a borrower, you may not know, that you at Westfield find important.
Mike Wagar :I always say I guess it probably sound like a schoolteacher when I say this, there are no dumb questions. I mean, we like to try to go into every conversation on both sides with eyes wide open. If there's something on your mind, you know, now's the time to ask, as we're kind of walking through this process. So, you know, common questions are, "How much do I qualify for?", "How much can I borrow?", "What are my guardrails?", "What should I borrow?", "What are the things I should be thinking about?", "If I'm doing an acquisition, can you help give us advice on what the best practices are?"
Mike Wagar :Peter, as you know, and Doug as you know, that, I think one of the fun parts about lending to insurance agencies is that although they all sell insurance, not every agency is alike, not one is repeatable. So there's different structures, there's different cultures, there's different specialties, and different personality sources. And I find that to be the most fun part about that is, you know, the diversification of the people that we see. I find joy in helping those who are trying to make a deal that really swings their businesses. And so, to that point, you know, the common questions are again, just helping them walk through what the loan process looks like, how long it takes, when's my payment due, what type of payment structures are available, what kind of rules are there in place with the loan...every loans got covenants, ours are no different, you know, so how much can I spend? How much cash flow do I need to maintain? One of the covenants that we use frequently is a debt service coverage ratio, which, you know, basically just is a cashflow measure to make sure there's enough cashflow coming in to pay your debt, pay any distributions out to owners, and have a little bit left over. And so a lot of our time is spent counseling the borrower on how you calculate that, what to look for. EBITDA is a big thing for us and I think for all agency lenders. Walking them through how we're calculating the EBITDA, what to look for and how they can manage that. Certain benchmarks to work towards. So there's a lot of little things that come up in those conversations. And, you know, to that end, we are definitely not consultants, but we try and provide advice to our partners as we walk through the process.
Doug :I think you bring up a great point. It's a myth that the insurance and the lending industry is not full of fun people. You guys are wild and crazy. So I know that you and Peter have a great working relationship and that you refer clients to each other when it's appropriate. But can you tell me - or give me a sense of - when you would tend to refer a prospect to a specialty lender, like AgileCap?
Mike Wagar :Sure. A lot of it is going to be, you know, the purpose of the borrowing and where they're at in their agency lifespan. So, as I mentioned earlier, we're a conventional lender, and so we don't have a lot of the rules maybe that an SBA lender would have. But having said that, while we are very flexible, there are just certain cases where it's not the right time for us. An example would be if someone is doing a lot of acquisitions in a short period of time, that gives us a little bit of discomfort in that it's hard to see...did those acquisitions you've done previously pan out? Or if there is, someone may be with poor credit individually...there are some times there where we just aren't able to make that work. One of the pros and cons, I guess, on both sides of being a bank is we do have a heavy amount of regulation. And so, even though we are very flexible in our underwriting, we do have to be able to document a lot of different things. And some of those cases just, you know, provide some challenges. And Peter, as a specialty lender, has a unique set of guidelines and can maybe pitch in on some of those things where it's not a great fit for us at the time. So Peter and I've worked very well together, referring people back and forth. I think we've worked pretty well hand-in-hand and you know, something we foresee doing a lot more of in the future.
Peter :So you bring up the future, Mike. And I understand it's hard to help to predict - especially with everything that's going on - but I'm, I'm fairly certain a lot of our listeners are interested to understand what your view is on kind of the key factors of rates and terms to our borrowers. And what you see is going to happen over the next 12 to 24 months.
Doug :Yeah, good question. So, I do wish I had a crystal ball for some of these things. That would certainly be helpful in a lot of ways, personally and professionally. But you know, rates right now or at near all-time lows. You know, a year ago at this time rates were climbing, and there had been a sustained, low rate environment for a long time before that. We thought that we were kind of climbing back out of that and things turned dramatically back downwards. So right now we foresee rates staying low for the near future. We haven't forecasted any - or see any - signs that the Fed will increase rates any time soon. Especially with the uncertainty of the pandemic, and the economic impact of that. So I think rates will continue to be low. From a term standpoint, I think term, generally that insurance agencies are going to continue to be strong, because of the performance of the industry, at least in our book and in our viewpoint. We've had a really favorable performance with our book of business and we want to continue to grow that book of business. So we're out looking for deals and looking for partners, and we're offering really competitive terms, low rate. We're very well capitalized and we have money to lend out we're out seeking those partners to do so.
Doug :Fantastic, Mike, I've got to thank you. This has been very insightful coming here on Insurance Agency Insights, and we'd love to have you back again. And if you're ever in Park City at the World Headquarters of AgileCap, please give us a look.
Mike Wagar :Well I can't wait to get out to the world headquarters of AgileCap. Hopefully, when we're allowed to travel freely again, we can do that. And it was a pleasure joining you guys and talking a little bit and I'd love to come back on any time you want to.
Peter :Thanks Mike. For our listeners, if you could just give them your contact information so they can reach out directly if they have questions. That'd be great.
Mike Wagar :Yep. Our website is www.Westfield-bank.com. My office line direct to me 330-661-6079. And my email address is mikewagar@westfield-bank.com.
Peter :Great. Thanks, Mike. For our listeners, please continue to follow us on Twitter @ AgileCapFunds or on Facebook, @AgileCap or www.agilecap.com where you can sign up for our newsletters and get more information. Thanks again, Mike, and we look forward to speaking to everyone. Please stay safe as we go through these difficult times. Thank you