Character Matters
July 1 2023
The last few articles I have written for this newsletter have been about objective loan underwriting, such as loan to value calculations, debt service coverage ratios, working capital, etc. I wanted to take some time to discuss one of the most important, if not THE most important underwriting criteria, character. Character is more of a subjective criteria when underwriting a loan. Will the customer do everything possible to make payments in a timely manner?
As lenders, we try to judge whether a loan can be repaid in a reasonable timeframe, depending on the type of loan. We use historical income information and future projections to determine whether we believe a loan can be repaid in the future. Sometimes, current income does not live up to past income or future projected income expectations, which can cause loans to become past due or problematic loans. This is where character comes in. Most customers will find creative ways to make payments when income expectations are not realized, some will not. Determining how customers will react during tough times is not easy unless we have experience with the customer in the past.
Lending is an art, not a science. The ability to judge character is a great example of the art of lending. We use the credit report score to help determine character, but sometimes this method is not reliable. In community banks, we typically know our customers or potential customers, and we have a good idea of their character by the actions we observe in the community.
Unfortunately, circumstances arise where a business or individual cannot make the payment due to some outside influence that cannot be controlled. In these cases, I always ask my customers to communicate with me. We can solve almost any problem if we are communicating with each other. When communication stops, we cannot work through any problem, no matter how simple. As bankers, we want to find solutions to problems so both parties are satisfied.
Your Bruning Bank Banker will work with you through good times and tough times. Communication is key to having a good relationship with your Bruning Banker, so we can help you “Build, and Maintain Wealth”.
- Ken Mehlin, Chief Credit Officer