Jeff Judy

Jeff's Thoughts - August 4 , 2010

Who is Talking to your Customers?

I've asked Brad Stevens to return to share his ideas in a guest column for this issue. Brad's long experience in banking allows him to put recent and current events in perspective, and in this edition of Jeff's Thoughts, Brad notes that some banks are letting the media do all their talking for them, which is not in their best interests. More about Brad below.

It is an understatement to say that the banking industry has changed dramatically in the past three years. Stress caused by the current economic cycle, declines in the credit quality of bank loan portfolios, and increased attention from regulators have all had impacts on the way we handle credit.

These factors, and shifts in lending practices, have also received a lot of attention in the media, with the result that the general public, and many of your customers, may have formed the impression that banks across the nation are no longer in the lending business. In addition, politicians who have accused bankers of not lending in spite of all their efforts to loosen credit make sure they get plenty of attention.

Unfair? Only if you sit back and let the media and the politicians explain your position to your customers. If you are not willing to make the effort to share the reasons that banks have reduced lending over the past couple of years, to show customers that the factors driving the availability of credit are more involved and complicated than reflected in sound bites from Washington, you are in no position to complain.

Admittedly, you probably are not going to enjoy every credit conversation with every customer. Some of them are going to be less desirable borrowers than they were just a couple of years ago, and they may not be very happy with your explanations.

But without an understanding of how the credit landscape has changed, how will those customers be able to work to enhance their own creditworthiness? Meanwhile, you want all of your credit customers to understand that rather than a simple either-or question -- either banks are lending, or they are not -- it makes more sense to look at different segments of the credit portfolio and how they have changed over time.

After years of unsustainable loan growth, most banks have found themselves with multiple levels of unacceptable risk. Consider industry risk. Many banks got comfortable lending to industries that they might have avoided prior to the last decade. While industry risk was always evident, it was ignored until the economy changed, hitting high risk industries harder than others. Examples would be developers, builders, golf courses, and any business related to the hospitality industry. Clients in these and other risky industries who were once courted by banks do not understand when they are now turned down by banks that are returning to more traditional, more prudent risk profiles.

And regulators are focusing on concentration risk like never before, as a result of many banks making too many loans in relation to capital, to specific industries, economic sectors and/ or types of collateral. Examples would be a preponderance of residential loans, residential development loans or commercial real estate loans. Sadly, when a client that wants to expand their plant is turned away because a bank has a concentration in commercial real estate already, the bank gets painted with the broad brush of "not lending" when, in fact, they may have plenty of ability to lend in other areas such as equipment or lines of credit.

And do not forget credit risk. The decline in the economy over the past two years has taken its toll on clients in all banks. Significant losses over the past two years has left client balance sheets tipped to a point where the bank may have much more invested in some companies than the clients do. Worse, clients that did not maintain earnings in the firm during the good times may actually be insolvent after losses. Clients complain that when they need the bank most, the bank refuses to help. But the real key is that lending more money to a client who has a limited ability to repay, who has insufficient equity and is unable to properly secure the new loan, is simply not prudent or in the best interest of the client.

Broad generalizations and black-and-white simplifications will continue to be prominent in the media for some time to come. Left unchecked, they will encourage your customers to view your bank as an adversary, rather than as a partner looking for ways to work together to your mutual benefit.

But if you are not willing to take the time to explain the finer details of your own credit landscape, and where your customers fit within that landscape, do not blame the press or the politicians because they will not do your job -- communicating with your customers -- just as you would like.

About Brad Stevens

Brad Stevens began his banking career at Norwest, being given 60 accounts and being told 40 needed to "go away". The initiation to the work out world led him eventually to being the senior credit officer of two banks that were troubled. In 2008 Brad quietly left the workout side of the banking industry to focus on building strong relationships with clients, recognizing that the best way to avoid a workout credit is to structure loans properly to begin with. Brad has taught and is available to teach courses on credit analysis and analyzing financial statements, as well as strategies for effective workout of troubled credits. He is currently a Relationship Manager with Alerus Financial. You can reach Brad at