Commercial Loan Automation
Small Business Banking
BirdsEye Viewmore on asset quality
I'm busy putting together my outlook for the remainder of the year and 2010. There are green chutes peeking out from the bleak landscape, which is exciting! The outlook will be published in the next BirdsEye View edition.
On the personal front, things are pretty crazy: in the past two weeks we sent Paul off to New York, where he is working at a bank in the summer; Gil was home for a week and is now back at UCLA taking courses and working as an alumni phone solicitor; Liat is home and taking off with us to Bhutan next week, where she will be studying the local medical practices for her pre-med thesis; Arik (and his girlfriend, Dick and I) spent some time in the emergency room getting stitched up after a football mishap during football camp; and we celebrated Isabella's fourth birthday (pictures on the website). Arik also got a very drastic haircut, which revealed he looks just like his brothers (very handsome, I say, as a purely objective mother).
Enjoy summer, for Fall
will be upon us before we know it!
MORE ON ASSET QUALITY
The economy continues to show uncertain performance, and the bottom is yet to be found. As we all struggle, here are some thoughts on additional leading and lagging indicators of asset quality which will serve you well not just today, during these tough times, but even more so in the future, when the pressure to loosen up will intensify and many an RM will tell you, "This is what the competition is doing and we will lose this great customer if we don't match."
I have written before about early warning signals. The ones below are additions to that list.
Where should you look for brewing trouble in the early stages? One sure trouble spot are highly leveraged transactions that are under-collateralized. I'd keep an eye on those and revisit monthly.
Certain policy exceptions are another strong leading indicator for future issues. While not all are critical, identifying the ones that can lead into trouble and scrubbing your portfolio for those is an effective way to catch problems early on. I find, surprisingly, that more of those exceptions are found among the largest borrowers, who represent your greatest risk in the first place. That combo - large loans and critical exceptions - is a bad one.
Experience and quality of loan review staff is another element to your asset quality equation. I wrote before about the "green" RMs who have never been through a downturn. This limitation is even more impactful on loan review staff. I'd look for a scarred Texas banker, loan review staff or examiner. They'll know it when they see it!
One way to enforce early warning is to debrief your RMs as soon as the loan enters the watch list. Find out whether they made promises you haven't heard of, and how deep and intimate their relationship is with the borrower. Audit the entire file at this point, even though it might seem too early. This is the only time you can truly fix problems and recover both assets and the relationships. Capitalize on it.
Establish firm benchmarks for specific actions as classified loans in a region, portfolio or a specific RM's book of business reaches certain percentages of capital. For example, when Joe Jones' classified assets reach 20% of capital, have him write a plan on how he plans on fixing the problems. As the portfolio deteriorates further, intensify your expectations and oversights. The benchmarks have to be firm, as are the actions and consequences.
Many of you are building workout departments. How about reviving the special assets committee as well? Unfortunately, even the strongest banks could make use of this oversight. It might sound harsh, but weekly reviews of all classified loans are effective preventative measures for further deterioration of collateral and collectability of loans.
Better data quality is another challenge we all face. Incorrect SIC codes, loan classifications etc. are the bane of loan maintenance and administration, yet without them the risk assessment is inevitably flawed. Investing the resources to ensure data integrity of your loan files and portfolio documentation is a high priority at any time, but especially today. Summer interns (I know most banks have discontinued those programs) are very handy with data examination and input.
Administration is another key to minimizing losses. Examples such as interest reserves that expire way before their due time are abound. Effective administration will prevent such digressions from occurring.
Understanding the desired outcome of a classified loan is also important. Bucket your loans into saves, loss mitigation and credit exits, then handle them appropriately.
Once a loan has been classified, creative methods for asset disposition are the order of the day. It might make more sense to move the asset directly to OREO instead of reserving against it and prolonging the agony. Selling toxic asset pools can be fatal to your health, since market discount range from 60-85% and the capital implications often catastrophic. Interesting alternatives include guerrilla marketing to OREO property neighbors and other possible interested parties. Effective execution calls not only for a strong sales force to create the sales opportunities, but also a real estate maven to identify the likely interested parties and properly value the asset. Look for strategic buyers who are going to eventually use the property. Retailer real estate professionals aren't too busy these days, and some are jobless. A real estate expert can be pivotal to bring about effective and timely asset disposition in today's non-existent markets.
Also, when you consider asset disposition pricing, remove the emotions from the equation. Remember: your first loss is your best loss. Plus, maintenance costs even on the least expensive of OREOs often run 2% a year, and the capital bleeding and sapping of organization energies can be fatal.