Jeff Judy

Jeff's Thoughts - May 26 , 2010

Problem Loan Workout: A Team Project

My guest columnist for this issue is Brad Stevens, whom I've known for many years. A considerable portion of his long experience in banking has focused on workout of problem loans, and in this edition of Jeff's Thoughts, Brad applies that experience to some current patterns he sees as banks try to dig their way out of the problems that have cropped up in the last couple of years. More about Brad below.

In the past 24 months there has been a rude awakening on the credit side of the banking house. Reviewing the call reports throughout the nation reveals exponential growth in the number of loans that are now classified or worse. Many banks are looking to change or add staff specifically to address these problem loans.

In today's environment, missed opportunities in the workout process cost banks an incredible amount of money in legal fees, as well as lost recovery amounts. But without careful thought about their staffing needs around this issue, many banks will unnecessarily prolong the workout process.

Speaking to a number of recruiters recently, I found that many banks are looking for a single credit officer to help them work their way out of their issues. They fail to recognize that it took a team of people to get them into this mess, and it will take a team of people to get them out. Bank leadership needs to acknowledge that the number of classified accounts on the surface may be hiding much deeper problems which will emerge later. One or two staff members can easily be overwhelmed by the work involved with classified assets.

The right Credit Department structure will include a team of staff answering to the Senior Credit Officer. The Senior Credit Officer should report directly to the Board of Directors, but no less than the President. Independence is crucial. Any other reporting structure is bound to cause conflict in the organization.

A strong Loan Review Officer needs to review 100% of the loan portfolio over a specified period, the shorter the better. Too often banks delay or minimize reviews, following the "What I don't know won't hurt me" approach. Sadly, the credibility of the credit department will crumble when month after month, quarter after quarter more dollars are required for the ALLL as more issues percolate to the surface. The Loan Review officer has to be tough, knowledgeable, and have a depth of experience in lending. This is no place for a clerk or low level credit analyst, as it takes more than just the financial statements to tell the tale of the client.

Likewise, an experienced lead in the loan operations area is crucial. Classified loans will typically have at least one documentation exception that was missed or needs correction. Early recognition of these corrections can prevent greater loss and shorten workout process.

And remember, the lender who brought in a deal that goes bad is not the person to get you out of it. Too many banks make the mistake of leaving the originating banker in charge of working out of the now problem loan.

A good team of experienced workout bankers has the fortitude to plow forward when the process gets bogged down. Hire workout lenders based on the volume of loans that are expected to be worked out. Compensating them on the recovery percentage as well as a decreasing bonus over time may make some sense in this area.

A successful credit department will save the bank more in recovery and avoidance of loan loss than they cost. Right now, the problems are large, and the response has to be substantial. One more person, guiding existing staff, won't get the job done.

The sooner you invest in a team with the skills and perspectives you need to move through the workout process rapidly, efficiently, and objectively, the sooner you can get back your core, positive banking business.

About Brad Stevens

Brad Stevens began his banking career at Norwest, being given 60 accounts and told 40 needed to "go away". This initiation to the workout world eventually led him to become the senior credit officer of two troubled banks. In 2008 Brad quietly left the workout side of the banking industry to focus on building strong relationships with clients, recognizing that the best way to avoid a workout credit is to structure the loans properly to begin with. He is currently a Relationship Manager with Alerus Financial. When not in the office Brad can be found in the woods hunting deer and other wild game as the seasons allow.