Is it Time to Re-engage Special Assets?

While our current state of the economy is optimistic, we are seeing articles regarding a turn from those bullish thoughts.  There is a cycle to business.  At times profits are growing, and portfolios are growing and performing how they should. Then there are those times when there just doesn’t seem to be enough to go around. Recently, there has been a lot of talk about which direction the economy is headed. Depending on who, what, and where you get your information from, you can come to your own conclusion. It does raise the question in my mind—do we need to refresh those relationships with our friends in Special Assets?

Each Financial Institution uses its own methods and nomenclature, but the Special Assets name generally includes one of the following terms: Workout Department, Corporate Recovery, Troubled Credit, or Collections.  No matter the name, it is where the FI closely monitors the performance of loans that are a cause of concern. FIs have learned a lot over the last decade. The Great Recession and its ensuing recovery will change the role of banking for many years (CECL).  As regulations change and FIs re-evaluate their systems, it made me wonder. Again, is it time to kick the dust off the Special Assets Department?

One of the lessons from the last downturn is the importance of the role that this department plays within the FI’s risk management processes. The ability of these bankers to help guide borrowers through challenging times becomes an essential risk management tool. Engaging this discipline sooner rather than later may be beneficial for both FIs and borrowers.

Management of troubled credits starts with good Loan Review and Portfolio Management processes (PRM). Whether they are performed by the Relationship Manager or a Portfolio Manager, these managers should have an in-depth knowledge of the customer. They should know the struggles the customer has and how those effect the performance of the business. Once signs of trouble start to emerge, this becomes the first line of managing the risk presented to the institution.

When credits migrate to Special Assets, the tools at that department’s disposal are typically laid out in the loan documents. Loan agreements outline certain covenants. Violation of those covenants could be an event of default and may give the lender the right to take certain actions to protect the FI. As a Borrower, it is important to understand what those actions could be. As a Banker, knowing when it is appropriate to invoke those rights is a critical step in managing the risk to the bank.

Strategies for managing a special asset should involve the customer.  Determining a customer’s willingness and ability to bring payments current is a strong indication of a successful workout and can direct the Banker as to which actions to pursue. Customer involvement leads to easier, gentler forms of repayment and is often the solution best for both FI and Borrower. Unfortunately, that is not always the case, and collection remedies outlined in the loan documents must then be used.

Management of a problem loan can present many twists for an untried lender. Review your procedures thoroughly before rushing to work out a problem loan. While the current economic state is positive, being prepared and having a proper strategy in place before a need arises are critical to the success of loan recovery. As you review your portfolios, make certain that those triggers are in place to get in front of those credits that pose the highest risk to your institution.

Author Bio

As a Senior Business Process Architect, Kevin Dooley guides implementations for new and existing clients. Dooley relies on his 20 years of Commercial Banking and Special Asset experience to support client success. He provides both strategic and tactical recommendations regarding current credit philosophy and assists financial institutions with implementing and executing credit evaluation and portfolio management strategies.

Dooley earned his bachelor’s degree from Purdue University in Political Science and his master’s degree in Finance from Indiana University’s Kelly School of Business.