Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
Article synopsis: Times aregetting tougher, and the role of the Special Assets department will becomeincreasingly important.The article offers thought about the department'sorganization, staffing andfocus.Experience, battle scars, good process and clear goals are essential ingredientsto a strong Workoutoperation.
As non-accruals climb and foreclosures mount, the role of the workout department becomes more pivotal. Below are some thoughts on getting your workout group ready for the increased volume ahead.
Assemble a workout group. Given the golden age of the past 16 years, many banks do not have a workout group at all. Others have a very small group. Putting a group together, comprised of experienced workout people (who are a breed apart, and possess a unique skill set and personality), is the first step toward success. This is easier said then done, since many workout professionals retired and the new generation has not experienced a downturn yet. Experience and personality are key to this position, so dont compromise on either, and, if necessary, entice a retired pro to join your team for the next couple of years.
Reward early warning. Many banks dont have a culture of early warning among their RMs. Some even shoot the messenger, which ensure NO future warnings. Explicitly expecting and rewarding early warning by the RM, before the first covenant is broken, will communicate your support for bringing the message in early enough to work with the borrower toward resolution, protecting the collateral and enhancing both the lenders reputation and the borrowers opportunity to succeed.
Keep the RM involved. Putting your RM in charge of the entire workout may not be a good idea. Many get personally involved in the process and end up throwing good money after bad. Yet, the RM is the best person to keep open communication with the client, explain next steps and build an atmosphere of cooperation. There are other benefits to keeping the RM involved: they will learn from the situation and are less likely to repeat it. Further, the more time they spend on workout, the less time they have to spend on revenue generating activities, where their primary responsibility (and incentive compensation) lies and therefore have less opportunity for incentives. Last, workouts are generally unpleasant; an RM will be more inclined to avoid them if they experience the pleasure first-hand.
Coordinate and limit the number of law firms. Even if you have in-house legal staff, outside firms are often involved in workouts. Many banks dont know how much money they spend on the activity, since they have many attorneys assisting. The first step is to identify all the firms working for the bank on workouts and the compensation they receive. Step two involves narrowing the field to a choice few, such that the bank becomes an important client to these firms and gets commensurate service and rates. Third, expect reciprocity of business volume from the firms, including their operating accounts and client referrals.
Workout is not an event but a process. Recognizing this early on will help you manage the process more proactively, much like you do with other processes in the bank, such as application processing, sales and other major and complex activities. This implies setting clear definitions of success, measurable goals and milestones, and frequent progress check-points to build a sense of urgency.
Remember sometimes your first loss is your best loss. One cant get emotional about this process, whats fair and whats truly owed the bank. The main question is, whats the minimum damage that can be caused in the least amount of time to get out of the bad credit. Some folks say they have never seen a problem asset improve. This might not always be the case, but, if it looks that way, cut your losses and move on.
Watch out for empire building. Staff functions tend to balloon during demanding times. Compliance, for example, had a carte blanche to hire people in many banks after SOX 404 was inflicted upon us. The workout area faces similar dangers, and careful management will ensure that it is amply but not over-staffed.
Encourage competition between the line and the workout group on problem resolution. At one bank, the RM gets first shot at the problem credit, and has 60 days to reach resolution. If progress isnt made, the credit moves to Special Assets, and the specific officer in charge of the credit has 90 days to make meaningful progress. If they fail to do so, the credit is moved yet again to a third party. The timeline and clarity of goals contribute to the sense of urgency regarding resolution.
Be prepared to sell bad loans. Build a war room with all pertinent loan files and information so that any interested buyers can come and take a look at the loans at any time (this great idea came from Bill Richgels, CCO of FirstMerit). The responsibility for loan sales should be centralized, and only one person should have the authority to make the decision to sell loans at a discounted price. That person should not be the originator or their chain of command, or the workout area. The CCO, or another objective authority, can serve that function.
There are many benefits to allowing buyers to peruse the loans. You get a sense of what they are worth in real time and frequently. You are also at the ready to sell if need be, since the loans are already packaged and fully documented. Understanding the liquidity and price positions of your problem credits is useful.
Conduct monthly special asset meetings. Having frequent meetings to track progress is a basic process management tool. It is even more effective if a member of executive management, such as the CEO or CFO, attends.
Be careful that Special Assets doesnt become a dumping ground. Putting loans in Special Assets should not excuse the originating RM from responsibility and accountability for the asset and its workout. Otherwise, credits will find their way to Special Assets prematurely, and lenders will continue to originate similar credits in the future.
I hope you wont need any of the ideas above, but, if you do, I trust they will become handy in working out your problem assets in a relationship context as speedily and completely as possible.