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Approaches to Managing Problem Assets


April 12, 2011

By: James A. Swanson

Given the stressed economic conditions present over the past couple of years, odds are your bank has experienced elevated levels of classified and nonperforming assets.   Depending on the severity of your bank's problem asset levels, you may already be utilizing the services of an experienced special assets officer, or at least wondered if you might benefit from one.  There are many variables that impact the decision to utilize dedicated special assets support, obviously starting with the overall level of problem assets your experiencing.  This article is not intended to cover all of the variables, or provide a step-by-step decision tree in determining the appropriate scenario for your bank.   Rather, the focus is to outline the more common approaches community banks are using to manage problem assets, and some of pros and cons associated with each approach. 

Option #1 - Line lenders are responsible for handling problem assets in their respective portfolios

Pros:

     Easy - requires no additional staffing or organizational restructure,

     Servicing officer should be the most knowledgeable of the customer and the overall relationship,

     Servicing officer might have the most influence with the borrower in a workout situation,

     Working problem assets should help make the officer a better lender going forward.

Cons:

     Servicing officer may lack the experience or skill sets to effectively manage problem loans/assets - costing the bank time and money in a number of ways as they learn on the job.

     Servicing officer may be less effective or willing to play the  "bad guy" role or exit customers that they worked to bring into the bank,

     Officers inexperienced in problem loans often rely more heavily on external legal counsel for assistance/training, which is usually very expensive.

     Increased risk for lender liability claims due to limited officer workout experience,

     Problem account management can monopolize the officer's time, limiting time available for normal job functions.

Option #2 - Converting servicing officer to a dedicated special assets officer position

Pros:

     Relatively easy - avoids process and uncertainty that comes with recruiting/hiring an external candidate,

     Increased likelihood the officer will have some familiarity with the problem assets,

     Provides dedicated support to special assets,

     Full time devotion to special assets function should create efficiencies in handling, special assets, and accelerate development of the officer's experience,

     Provides for better separation of problem assets from performing ones, allowing other lenders to operate in a more normalized environment.

Cons:

     Officer may lack objectivity if servicing accounts they originated or previously serviced,

     Officer may not have the skill sets or experience to be effective in the role, at least initially,

     Officer may have reservations about their new role and begin looking at other employment opportunities,

     Can limit educational opportunities afforded by lenders handling their own problem accounts

Option #3 - Hiring an experienced special assets officer

Pros:

     Experience often translates to greater efficiency, enhanced loss mitigation, and reduced carrying costs for problem assets,

     Should be able to handle a larger volume of accounts, including more complex ones,

     Provides objectivity in managing accounts and determining appropriate strategy,

     Provides dedicated support to special assets,

     Can reduce reliance on external legal counsel ,

     May help reduce of risk of lender liability related to handling of problem loans.

Cons:

     May be in short supply during tough economic times,

     Can require a higher degree of empowerment to be effective, which can be difficult to give to a new employee,

     Can limit educational opportunities afforded by lenders handling their own problem accounts.

Option #4 - Utilizing an experienced special assets contractor

Pros:

     Experience often translates to greater efficiency, enhanced loss mitigation, and reduced carrying costs for problem assets,

     Should be able to handle a larger volume of accounts, including more complex ones,

     Good solution if problem asset volume does not warrant full time staff member,

     Provides objectivity in managing accounts and determining appropriate strategy,

     Can reduce reliance on external legal counsel,

     May help reduce of risk of lender liability related to handling of problem loans.

Cons:

     Contractor availability may be limited due to other commitments,

     Potential for conflicts of interest if working for multiple banks in same market.

Option #5 - Problem assets jointly managed by line lender and special assets officer

Pros:

     This option combines many of the pros in Options 1-4 outlined above

Cons:

     The primary risk in this approach is it tends to cloud who has overall responsibility for the account and who is making the important decisions.

As you can see, there are a number of approaches to be considered in managing problem assets.  Our observations at Bank Strategies LLC are that many banks initially rely on Option #1, largely because of the line lenders' knowledge of the problem accounts, and in an effort to first address the problems with existing resources.  In many cases, banks are experiencing excess lending capacity due to reduced lending activities, but don't necessarily want to let key staff go in anticipation of resumed lending activity in the future, while at the same time, having to turn around and hire special assets help.   In some cases this approach has worked, but in other cases, banks have ultimately realized they are better served with an experienced and dedicated special assets function.   Again, each situation is unique and there are many variables that should be considered when determining the approach that is best suited for your bank's situation.   However, hopefully you will find this information beneficial as you go through the thought process and consider your options. 

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Contact Information

Phone: 303-903-9369

Mail: 75 S. Joyce Street, Golden CO 80401

EMail: Jim@bankstrategiesllc.com