As nonaccruals climb and foreclosures mount, the role of the workout department becomes pivotal. Below are some thoughts on getting your workout group ready for the increased volume ahead.
Given the golden age of the past 16 years, many banks do not have a workout group; others have very small ones. So put a group together comprising experienced workout people as the first step toward success.
Reward early warnings. Many banks do not have a culture of "early warning" among their relationship managers. Some even shoot the messenger, which ensures no future warnings. Explicitly solicit and reward early warnings. Communicate your support for bringing the message in early enough to work with the borrower toward resolution, protecting the collateral, and enhancing both the lender's reputation and the borrower's opportunity to succeed.
Keep the relationship manager involved. Putting your relationship managers 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 relationship manager is the best person to keep communications open with the client, explain the workout's steps, and build an atmosphere of cooperation.
Coordinate and limit the number of law firms. Even if you have in-house legal staff, outside firms are often involved. Many banks do not know how much they spend on the activity, since they have many lawyers assisting. Identify all the firms helping the bank with workouts and the compensation they receive; narrow the field to a choice few; expect reciprocity of business volume from the firms, including their operating accounts and client referrals.
A workout is not an event but a process. Recognizing this early on will help you manage more proactively, much as 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 checkpoints to build a sense of urgency.
Remember that, sometimes, your first loss is your best loss. One cannot get emotional about what is fair and what is truly owed the bank. The main questions are: What is the minimum that damage can be limited to, and what is the shortest period needed to get out of the bad credit?
Watch out for empire building. Staff functions tend to balloon in demanding times. The workout area faces similar dangers, and careful management will ensure that it is amply but not overstaffed.
Encourage competition between the line and the workout group on problem resolution. At one bank, the relationship manager gets first shot at the problem credit and has 60 days to achieve resolution. If progress is not made, the credit moves to special assets, and the specific officer in charge of the credit has 90 days to make meaningful progress.
Be prepared to sell bad loans. Build a "war room" with all pertinent loan files and information so that any interested buyer can come and take a look at the loans anytime. The responsibility for loan sales should be centralized, and only one objective person should have the authority to sell a loan at a discount. Hold monthly special asset meetings. Having frequent meetings to track progress is a basic process management tool. It is even more effective if a top executive, such as the CEO or CFO, attends.
Be careful that special assets does not become a dumping ground. Putting loans in special assets should not excuse the originating relationship manager from responsibility and accountability for the asset and its workout. Otherwise, credits will find their way to special assets prematurely, and lenders will keep originating similar credits.
I hope you will not need any of the ideas above, but if you do I trust they will come in handy in working out your problem assets as speedily and completely as possible.
