Lender's story of a troubled customer's comeback in progress underscores key basics

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My inbox this week brought greetings--and comments--from a fellow banker with whom I collaborated on a project probably 15 years ago. I'd not heard from him in quite a while and he wanted me to know how he personally related to the recent blog on the hazards of making a personal friend into a customer. ("Can A Banker Have A Business Friend?," June 17's blog.)  

Pete was sensible enough not to be the account officer on the credit. But even so, this was a boyhood friendship. It wasn't easy to split friend and customer into two separate spheres.
 
The man's real estate construction business was successful through the years and he was a large credit, relative to the bank's legal limit. About three years ago, there occurred significant changes to two of the Cs of Credit: Both Conditions in the local economy and the Capacity of the borrower's company changed.
 
Conditions deteriorated as the real estate business dried up and that in turn impacted the company's Capacity.
 
What remained constant was Character.
 
The customer and his wife persevered. While their business is not yet healthy, it has survived, and has earned the bank's loyalty, in a workout sense. There may yet be a happy ending for everyone, though this isn't assured just yet.
 
Character: A delicate balance amongst the "Cs"
I thought how often these stories--my own experience with being cautious about banking friends and Pete's similar caution--are really commonly understood but not always carefully observed.
 
Such stories serve as illuminating anecdotes to the enduring lessons of the Cs of Credit.
 
Note that as lenders progress through difficult times it's usually the progression through the Cs of Credit, starting with Conditions, that successively impairs Capacity.
 
Don't be surprised if Collateral is inadequate, as rarely are loans made with complete reliance on collateral liquidation. This is one of the reasons why collateral is often insufficient when things turn sour.
 
Forget Capital too. When a workout is well in progress, the capital is inaccessible except in liquidation, and even then it's rarely enough.
 
The constant is Character.
 
If the Character component is strong, there is more likely to be a satisfactory resolution.
 
If Character is shaky or questionable, then mutual trust is broken and it's very hard to put "Humpty Dumpty back together again." 
 
Hard?  No, it's impossible.
 
A close personal friendship with the borrower doesn't doom the relationship when problems set in. But it can make doing the necessary things to protect the bank on a timely basis very difficult. The ground rules of the relationship are much better laid when the business relationship turns into friendship than if it occurs the other way around.
 
Character as a looking glass
My email exchange with Pete reminded me of something else in a recent column. Remember my suggestion of several weeks ago that maybe we should evaluate ourselves as lenders in terms of the Cs of Credit? ("Credit C's C's Can Be A Useful Mirror," June 9)
 
Pete went on to tell me that he expects a strong rating in his bank's exit conference with examiners later this week. He also noted that he and his lending staff have increased loan outstandings by about 10% over the last two and a half years. The bank, an independent institution surrounded by some of the familiar national names, has acquired the reputation of trying to get things done rather than create hurdles for the borrower.
 
There's no marketing budget in the world big enough to buy a bank a reputation like that.
 
How do you manage these considerable achievements in the environment that we've all lived through and shared the last few years?
 
There's no magic solution.
 
But at the core of stories like these, I bet you'll find that there are two common themes: discipline and consistency.
 
Note that it's not about the bank's wonderful credit policy or what a super-duper credit analysis department the bank has. It's how well the bank and its staff do what they are supposed to do, day in and day out.
 
That's the discipline part.
 
The consistency is doing the right things.
 
A strong credit culture is the sum total of lots of little things and the discipline to do them consistently all of the time. Yes, Conditions, Capacity, and Character ARE present in the lender too, not just the borrower.
 
Pete apparently learned all this along the way. As a result I bet he's one banker who still loves his work.
 
The secrets of success are often hidden in plain view--if you look.

About Ed O'Leary:

Veteran lender and workout expert O'Leary spent more than 40 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending.

    O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools.

    Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses and has been a frequent speaker in ABA's Bank Director Telephone Briefing series. You can hear free audio interviews with Ed about workouts here. You can e-mail him at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . O'Leary's website can be found at www.etoleary.com.

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