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Managing Loan Portfolios

September 23, 2010

By: Jim Swanson

 Managing loan portfolios, it's what lenders do, right?  It's a part of their job.  In reality, however, is this true?   Let's take a closer look.

When times are good, isn't lenders' time often monopolized by prospecting, underwriting, and closing new loans?  After all, there's money to be made and growth to be had.  Monitoring risk in portfolio's? - a forgiving economy generally takes care of that.  When occasional problems do pop-up, there's always the refinance button that can be pushed, and the problem is gone with little effort and brain damage.

When tough times hit like in the past couple of years, surely lenders are monitoring portfolios then, right?  After all, they're not spending much time making loans, and even less time prospecting for new business.  But again, is this true?  For community banks with limited or no Special Assets resources, workout responsibilities often fall heavily on the shoulders of the line lenders.  As you know (or are now learning), the time it takes to properly service and resolve a problem loan is exponentially higher than a performing loan.   As a result, lenders servicing a significant volume of problem credits may find little time left over after managing their problem accounts and handling day-to-day responsibilities to be proactive in monitoring the remainder of their portfolios.  In such cases, the portfolio management approach becomes that of a firefighter - turning attention to whatever is burning the hottest at that moment, and relying extensively on past due loan status, typically a lagging indicator of emerging problem loans. 

The longer the economic recovery takes to gain a sustained foothold, the greater the risk that performing credits in your bank's portfolios will eventually show signs of stress and deterioration.    Although vigilant monitoring does not necessarily prevent problems from emerging, the earlier a problem is spotted the more likely the prospect is for a successful workout.

When evaluating if your bank is adequately monitoring its performing loans, a key consideration is whether or not lenders have the time it takes to do the job.  If the answer is no, maybe it's time to consider bringing on some Special Assets or credit analyst help.  While this will increase personnel costs at a time when many banks are looking to cut costs, perhaps the real question is can you afford not to?

Another consideration is how effectively are lending staff obtaining and analyzing updated borrower  (and guarantor) financial information - this is the first line of defense in proactive portfolio monitoring.  Even if staff are reviewing the information when it is received, if the information is not provided or received timely, the effectiveness of the efforts will be significantly compromised.   If your bank's financial exception levels are high, it's time to get more aggressive in obtaining missing information.   Sometimes borrower reluctance to provide current financial information is a warning sign, in and of itself, of an emerging or existing problem credit.   If you haven't already done so, it may be time to shelve those "Federal regulators require us to get this information" letters and educate your borrowers on the real reasons why the information is needed, and their obligations to provide it based on the loan documents they've signed and if they desire to maintain a true long-term banking relationship.

Even if current borrower information is not available, there are other proactive steps lending staff can and should consider as appropriate to gain insight into current borrower financial capacity:

  • Pulling updated credit bureau reports,
  • Monitoring real estate taxes, or subscribing to continuous records search service for ongoing monitoring,
  • Updating lien searches,
  • Conducting business or property site inspections,
  • Monitoring trends in borrower deposit levels and overdraft activity.

Also, do not forget to ensure that your bank's risk management practices include a sound and objective internal and/or external loan review function.

Managing loan portfolios - it's what lenders need to be doing now, more than ever, given the current environment.

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Mail: 75 S. Joyce Street, Golden CO 80401

EMail: Jim@bankstrategiesllc.com