Work out is coming back. Despite a cash infusion from the federal government designed to keep small businesses afloat, many will struggle to survive this ruthless pandemic economy. More loans will become more troubled and focus will shift from normal operations to work out. It’s inevitable.
To be most effective, work out requires a trench mentality. It’s a tough fight, but everyone involved needs to work together, to come out of it as whole as possible. I’ve spent 13 years in the work out trenches and learned a few things along the way. As we enter the work out phase of this crisis, keep these tips in mind.
Focus on forbearance
Generally, the work out process is divided into two phases: forbearance and foreclosure. Forbearance is your best chance to get out of the trench with the least injury. It requires a combination of the hard skills bankers excel at and the more difficult to master soft skills of communication, dispassionate negotiation and tactful honesty. Combined, these skills go a long way toward establishing the kind of trust and engagement that are necessary to work together on a solution. Assuming your customer is equally engaged in the process, finding ways to restructure loans, reduce rates or identify additional collateral to help them save their business will save banks money and time in the long run.
The fact is, everyone loses when forbearance gives way to foreclosure. Customers lose their business or their property. They frequently enter bankruptcy proceedings, which will adversely affect them in multiple ways for years. Banks lose too. Losses mitigated by resolving the troubled loans are frequently increased by attorney and property management fees, as well as a prolonged asset disposition process.
Although it requires more time and effort, focus on forbearance first.
The typical community bank doesn’t keep a work out specialist on staff. In the usual course of business, loan officers are tasked with managing problem loans as they materialize. But, in the era of COVID-19, it may never be “business as usual” again.
Banks are currently besieged by COVID-19 related customer issues. Getting ahead of problem loans is likely on the proverbial radar, particularly in preparation for regulatory exams. But the reality of the sheer volume of loans that will require work out has probably not fully set in. The magnitude is likely going to be of a higher order than we’ve ever seen before – even after the financial crash of 2008.
Managing loan work outs is going to be beyond the scope and abilities of current staff. Yes, there will be less lending in this troubled loan environment, freeing up loan officers to take on additional workload. But banks are going to need more soldiers in the trenches for this battle – work out specialists with more skills and experience to navigate and expedite the process, to ensure a high level of customer service and to best serve the needs of the bank.
Now is the time to begin shoring up those additional resources.
Keep your eye on the long game
Dedicating time and resources to effectively manage the work out deluge that community banks will almost certainly face in the coming months will do more than just get them through a difficult period. If done well – at optimal staff levels and with a focus on forbearance – it will help smart banks both retain customers and gain new ones. It will also set them apart from competitor banks – big and small – that haven’t made the same commitment to troubled loan work out.
People seek out community banks for their personal touch – because they want to be more than an account number. They expect that kind of personal service from their community bank in good times and bad. Especially bad. There couldn’t be a better time than now to overdeliver on that expectation.
Working closely with a borrower to resolve their loan issue with the best possible outcome – fighting in the trenches with them – will yield dividends of good will and reputational equity for years to come.
Artisan is here to review, discuss and assist with work out planning or any other initiatives that this crisis necessitates. We’re ready to jump into the trench and guide you through this challenging time.