Advice to a young lender

Though I don’t consider myself to be an “elder statesman” in our business, I am occasionally asked the sorts of questions that possibly indicate that I have, through dint of experience and longevity, achieved “Sachem” status.

A question seriously posed to me recently was how I would counsel a young lender who was about to make his first presentation on a credit to his bank’s board of directors.

First, let me put you in the picture.

The bank is not particularly large and its directors want to personally review all credits that exceed the house limit that in turn is set at 60% of the bank’s legal limit.

The young lender is a homegrown product of the bank and is considered to have a bright future. The bank’s internal structure is relatively hierarchical in the committee sense.

But the lenders operate with considerable autonomy once they “graduate” to the direct handling of their own assigned accounts. The lender was recently assigned to an important relationship due to the protracted illness of the officer who had handled the account for the last few years.

Let’s take it step by step, friend

Here’s the counsel I gave to my young lender friend.

1. Do not overstate or understate the key elements of credit risk.

Too much discussion can be as lethal as too little. Complexities of the credit should generally be avoided. But the directors should also have the sense that if there are complex elements in its structure or administration, there are adequate resources in the bank to administer the loan properly.

2. Convey a clear sense to the directors how the credit works.

This sounds pretty basic but a couple of examples illustrate the potential issues involved.

• A line of credit should have a defined repayment source.

Often this is from the seasonality of the borrower’s business but sometimes it can represent a stretching out of the payables’ turnover. That could indicate that the facility may be “evergreen” and needs to be termed out.

• A residential real estate development credit is repaid by the sale of finished lots to builders. There are no other reliable or predictable sources of repayment.

3. Convey the quiet sense that you are a business peer of the borrower.

A 30-year-old banker is seldom the social peer of the 60-year-old borrower. But in the business sense, there’s an equality of position that’s implied in the relationship. But name-dropping is neither appropriate nor necessary.

Consider too that some of the directors may be acquainted with the borrower and already know his side of the story before you even start your presentation.

4. Make your presentation both orally and in writing—with equal attention to the quality of each.

The loan needs proper documentation in summarizing what the directors are approving and it’s a written record with a lender’s fingerprints on it in a conspicuous way.

Your formal presentation should both look and sound very professional. This seems very basic but I’ve seen over the years a disparity between the written and the oral word in credit presentations.

The written record endures long after the oral presentation is forgotten. Yet the oral presentation contains its own nuances and can be remembered for some “wrong” reasons.

5. Don’t assume the board “got” your written proposal in full.

If the written presentation is distributed in advance with the expectation that it be read prior to the meeting, make your comments summary in nature while not assuming that the written word has been carefully assimilated.

As chairman for several years of my bank’s credit committee, I never assumed that each member had completely done his homework. On the other hand, I never considered it the responsibility of the lenders to deliver orally the same volume of words as contained in the written record.

Oral summaries are useful and respectful of the listeners’ time.

6. Speak of what you know and avoid speculation.

The responses to some questions may involve a degree of conjecture but generally that is best avoided where possible. Board members will not always hear (nor remember) the same things in exactly the same ways.

7. Emphasize the relationships involved both in both historical and prospective terms.

There’s an old-fashioned idea that one of the prime reasons for lending money is to develop and retain sources of deposits. Loans are repaid while the deposits continue.

We’ve lost our sense of urgency in recent years about the value and importance of core deposits. But that will change and we may be seeing the early signs as commercial loan demand begins a sustained recovery.

8. Maintain a certain detachment in the tone of your presentation.

All presenters, young or old, are anxious to see their loans approved. What should be avoided is the appearance of certitude in representations of a particular deal that has not yet been earned by experience.

9. But don’t worry about betraying some youthful zeal.

Sometimes young lenders in their enthusiasm do not exhibit sufficient “gravitas” that is often expected of bankers, and lenders in particular.

I don’t worry about that though, as we should all be enthusiastic about what we’re doing.

A youthful demeanor can be a breath of fresh air to the deliberations of some committees. It can also be a tonic and help some of the “graybeards” regain a sense of enthusiasm about community banking as we emerge from the long tunnel of pessimism and frustration following this recent recession.

A word to young lenders: I’d like to hear from you on this. If you have questions, or experiences to share, post a comment in the comment section below. I’ll do my best to answer your questions here, or in a future blog.