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The sixth C of credit

Add this essential to traditional five Cs

Blogger Ed O’Leary says it’s a critical time to keep up with your borrowers’ vital signs. Blogger Ed O’Leary says it’s a critical time to keep up with your borrowers’ vital signs.

I once interviewed for a senior position in a large community bank in the mid-west. The bank’s marketing officer was a retired marketing professor from the major state university and he took the collection of marketing information to a new level of inquiry and specificity.

His idea was that all information had use and value. If a family member of a customer was ill, what implications could that have for the business?  If a divorce action was undertaken, how might that impact the individual and his or her business?

Everyone in the bank was encouraged to share community news of interest. I remember being impressed with the business value of some perfectly mundane and apparently irrelevant news that was carefully factored into competitive assessments of customers’ potential behaviors.

This “connective intelligence” comes to mind in reading a prominent article in The Wall Street Journal earlier this week. It reminded me that we need to be proactive in keeping track of our borrowers’ situations.

The article noted that there is “softness” developing in the volume of orders by some mid-size and large businesses that this could prove to be a leading indicator of a decline in economic activity before many months have passed.

You can’t just go by what they tell you

Usually, our customers behave transparently.

I’m not referring to the near-paranoia exhibited by smaller businesses that are extremely proprietary about their financial information. Rather, I’m thinking about borrower behaviors—small and medium sized businesses—in how they deal with us, their customers, vendors, suppliers, and the general public.

They are usually reasonably predictable and like most of us, creatures of habit to a degree. They are consistent, in other words.

But if business is turning down, will our borrowers step up and tell us about their issues on a timely basis? 

How will we know if any of them are in particular distress? 

Customer mindset not what it was

I’m not sure in all my years in the business that borrowers are necessarily the best communicators of negative information. And that sort of goes along with our own basic optimism as lenders. We are not always the quickest to see gathering storm clouds.

It seems to me that the severity of the last recession has left vivid impressions on many bank customers. Some of these impressions probably reflect negatively on many of us—a combination of a very difficult business environment, coupled with an effort by examiners to tighten the screws down on banks and bankers.

As the full extent of the recession became known, this combination produced draconian effects within some banks. That had to have been seen and appreciated for what it was by our customers.

How will their reactions to another business slowdown, no matter how mild it may ultimately be, affect their future interactions with us?  If their financial results reflect a  deterioration in sales or profitability, will we the first to know . . . or the last?

Questions to ask

I think our assumptions right now should be careful and conservative. How can we be sure if the severity of our customers’ experiences since 2008 will alter behaviors?

Let’s assume that they likely may. What are some of the telltale signs that we should be looking for? 

• Will the financial statements continue to arrive in the same timely fashion? 

• Has there been a change of accountants? 

• Are you doing appropriate due diligence on collateral whose “turns” are necessary to preserve your principal source of repayment? 

• Are the parking lots of your retail-oriented customers as full as you expect them to be on a Saturday afternoon? 

• Are you seeking changes in average account balances or in overdraft frequency?

Good practices to adopt (or continue)

To be proactive with your borrowing customers is always prudent.

• Do you meet face to face on a regular basis? 

• Are you at least an occasional visitor at the borrower’s principal place of business? 

• Do you fully understand the borrower’s financial statements? 

• Do you have questions about the numbers or the business plan that would in hindsight be embarrassing to you if the answers are problematic or troublesome?

Move forward with open eyes, ears, and minds

Remember that story about the professor turned marketer, and his ideas about information. I think it’s time once again in the business cycle that we be particularly sensitive to information of a general community nature.

If we have been underwriting our credits more carefully in the last few years—and most of us are—then the likely issues that will impact our customers negatively are probably concentrated in the C of credit standing for Conditions.

This after all is the potential significance of the news that commercial companies are cutting back on their ordering. To the extent that this becomes widespread, it will have ripple effects impacting many of us.

Bank lenders are usually pretty bright people. They know how to analyze numbers and can make sense out of complicated business issues. But each of us will do his or her job better if we are constantly curious.

That’s why I think that a Sixth C of Credit should be Curiosity.

And right now is an excellent time to be regular practitioners of this valuable human trait.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. 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. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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