“Unexpected and unpleasant surprises may be lurking behind what could be interpreted as an initial rebound after such an unprecedented year.” In a recent opinion piece, this was the solemn conclusion my colleague Jeff Voss reached when he offered his evaluation of the state of community banking, once the COVID-driven government intervention completely recedes.
For many community banks, those unpleasant surprises may be lurking in a significant segment of their loan portfolio – real estate. The hospitality sector, particularly restaurants and hotels, along with office space and retail strip centers suffered substantial losses throughout the pandemic and are still struggling to recover fully. The recent extension of the eviction moratorium compounds the issue, as landlords’ ability to meet their loan obligations could be adversely affected by their tenants’ inability and disincentive to stay current with rent payments.
And, once uncovered, these troubled loans will likely open the door to work out plans. To be most effective, work out requires a team-centered approach built on trust. And, by employing the three general guidelines I’ve followed throughout my career as a work out specialist, I think you’ll find that strategic work out plans benefit both the bank and their customers. When done well, work out can actually improve that relationship.
Focus on forbearance
Generally, the work out process is divided into two phases: forbearance and foreclosure. Forbearance 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, as we’re all learning, it may never be “business as usual” again.
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 may ultimately 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 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 may 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 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 guide you through this challenging time.