Jeff Judy

Jeff's Thoughts - February 26, 2014

Character Vs. Numbers

"Character" is something of a bad word in credit language these days. It is customary to shake one's head when thinking back on the blighted days of "character lending." That's a reference to the practice of giving significant weight in the credit decision to the banker's personal trust in the borrower. Borrowers who came across as good, honest, reliable people had an advantage in requesting credit.

These days, character is much less of a factor. We tend to scoff at this kind of subjective assessment.

For one thing, the credit decision process is often more fragmented, with a banker and a credit analyst and one or more pieces of software all examining different pieces of the relationship, if you will. For another, analysis tools have become so efficient and so powerful that more and more of the credit decision is a numbers game, calculating ratios and cash flow and comparing the results to the bank's thresholds.

It could be argued, in fact, that the pendulum may have swung a bit far. Character is not a major basis for lending these days, but that doesn't mean it shouldn't enter the equation. After all, a few years back there was a little company called Enron that had terrific financial numbers, to all appearances. But more than a few people would suggest they fell a little short on the character component.

A similar shift has taken place in hiring practices at credit institutions, especially among community banks. At one time, staff were commonly recruited from the local community based largely on their accomplishments and personalities. We hired people who were known in the community, perhaps because of exceptional athletic or academic ability, perhaps through community service of some kind. They were good at interacting with their neighbors, easy to talk to, and we taught them the number and analysis skills they needed.

We looked for people of appropriate character and turned them into bankers.

Now we tend to hire bankers, in a sense, and try to teach them how to work with customers. We value quantitative skills, and even selling skills, but treat both of these abilities as technical skills rather than as true relationship development skills. Our current crop of bankers is good with technology and comfortable with reports of credit analysis, much more so than the bankers of a generation ago.

But what about their character? Does it fit the bank's culture? Do they place the same value on customer service that bank leadership does? Are they inclined to take shortcuts and cover up problems to make a sale?

Will they tend to create hidden problems that get passed along to someone else when things go bad? Will they make decisions, especially when there is no hard and fast rule for the situation, that fit the bank's values and standards? Or will it be a constant battle to keep them on the straight and narrow?

If a borrower lacks the character that leads to trust and open communication, there is little you can do to improve their character, although you may be able to manage their behavior to some extent. If a new employee's character doesn't fit your bank, you may be able to manage their behavior, but it is going to take a lot of time, work, and probably stress to get the job done.

Whether dealing with credit decisions or hiring decisions, character is just one factor, certainly. But it is still a factor, and explicitly examining character can prevent a lot of hassles further down the road.