Jeff Judy

Jeff's Thoughts - March 21, 2018

Lost Your Pruning Shears?

I have long been an advocate for “pruning and planting” in the credit portfolio. Now, the notion of “planting” is usually pretty familiar to the credit staff I work with around the country. Especially these days, growing the credit portfolio is on everyone’s mind. All credit institutions are working hard to plant more assets in their portfolios.

This kind of “plant only” mentality is common during the upside of the economic cycle. We get locked in on growing the quantity of credit assets. Then, years later, when we have a downturn, we rediscover the virtues of pruning. Unfortunately, when business conditions are poor, it becomes much harder to unload those weak credits.

Successful gardeners know that there’s a season to pruning. In credit, right now may be good pruning season.

Pruning and planting is not just about growing the quantity of credits in your portfolio. It is about growing the quality of your assets. Rather than just planting more and more and more, this approach involves shedding some credits and replacing them with better customers.

Why prune now? Because your competitors will be happy to take your weaker credits off your hands. In a time when so many institutions are obsessed with growth, and with the strong economy making almost every business look good, at least for now, it is the best of times for moving credits out of your portfolio.

Of course, this takes commitment and discipline. First, you have to commit to the belief that your long-term portfolio quality can be improved by removing and replacing credits. If you just cannot make the decision to let go of any customers, you will be missing an opportunity to strengthen your institution’s future.

And it takes discipline to review your credits with an eye to how they might fare in a downturn. You need good analysis by your staff to recognize which borrowers may look decent in the current strong economy, but whose fundamentals place them at risk when the good times end.

Finally, it takes some guts to actually pull the trigger and help those borrowers make their exit. Whether you subtly raise their pricing to nudge them to move on, or whether you diplomatically explain that they just don’t fit with the plans you have for your portfolio, it takes some determination to execute the pruning phase.

But after more than forty years in the credit business, I have repeatedly seen the impact of the ups and downs of the economic cycle. And I have decided that the institutions that do the best job of weathering the hard times are the ones who prepare for those hard times during the good times.

We are all excited to be working in this strong economy. It may be less exciting to think about a downturn and to take action to prepare for it. But a little pruning now will prevent a lot of pain later.

‘Tis the season. Get out your pruning shears!