Community banks and similar institutions often run into problem assets for which they are unprepared to manage. Often, long-time loan officers and bank managers consider CRE and other asset sales as an admission of defeat and failure, rather than as a normative part of the process for non-performing and charged-off loans.
Below are questions that may be useful for any asset manager to ask themselves about selling CRE loans or other assets.
- Are you a loan officer, or a collector? What is better for you and your book of business – to try and manage the collections on a loan that takes too much time and energy, and results in little to no profit for you and your institution, or to go out and make and manage more good loans?
- Are assets worth more than what the market states? If you are sitting on a piece of commercial real estate that was overvalued when the loan was made and cannot be sold for what is owed, why not cut the loss and move on? Is it costing your institution legal fees, taxes, and thousands of dollars monthly with no return? Why let the “asset” keep costing you and your institution?
- Is it truly admitting defeat to cut out a relationship that is not working? If an asset is costing your institution money with no real return and no near-term potential for recovery, why let it continue to be a problem?
- Is it truly a “customer service” problem to allow problem assets to be sold off, or is the fear of backlash from a problem loan an excuse to not consider a sale an option?
Admittedly, there are some accounting gymnastics to be done by unhealthy institutions because of FDIC accounting practices. Some large nonperforming assets cannot be sold for their true value because of how off-balance it may throw certain ratios. However, should FDIC considerations completely negate the use of CRE or other asset sales? Would the sale of other nonperforming assets free up the right capital or help balance ratios in other ways so that the worse loans could be sold?
Asset managers at banks and other institutions have to wear many hats and often take on roles for which they may not be entirely prepared. For some, asset sales represent a hard paradigm shift from the admission of failure or defeat on a loan rather than a part of the process in handling nonperforming or charged-off assets. Though we want our bankers to typically think in specific ways so as not to extend undue risk, sometimes keeping certain business processes as closed options may prevent both future profits and good, productive work.