Navigating Problem Assets: A Guide for Community Banks and Institutions
Community banks and similar financial institutions often encounter problem assets that they are unprepared to manage effectively. It is common for long-time loan officers and bank managers to view the sale of commercial real estate (CRE) and other assets as an admission of defeat rather than a standard part of managing nonperforming or charged-off loans.
Critical Questions for Asset Managers
Here are several questions that asset managers should consider when evaluating the sale of CRE loans or other assets:
Loan Officer or Collector?
Should you spend your time and energy managing collections on a loan that yields little to no profit, or would it be more beneficial to focus on originating and managing more profitable loans?
Asset Valuation
Are your assets valued more than the current market price? If you possess overvalued commercial real estate that cannot be sold for the amount owed, is it not wiser to cut losses and move on? Are ongoing costs such as legal fees, taxes, and maintenance eating into your institution’s profits?
Admitting Defeat or Strategic Decision?
Is it genuinely an admission of defeat to discontinue a relationship that is not financially beneficial? If an asset is continuously draining your institution’s resources without any return or potential for recovery, why let it remain a burden?
Customer Service or Fear of Backlash?
Is the reluctance to sell off problem assets really about maintaining customer service, or is it more about the fear of backlash from acknowledging a problem loan?
Regulatory Considerations
Admittedly, the need for accounting adjustments due to FDIC practices can complicate the sale of significant nonperforming assets. These assets might not be sold for their real value due to the potential impact on financial ratios. However, should FDIC considerations completely prevent the use of CRE or other asset sales? Could selling other nonperforming assets free up necessary capital or help balance financial ratios in ways that would allow for the sale of worse loans?
The Role of Asset Managers
Asset managers at banks and other institutions often need to adapt to roles they may not be fully prepared for. For some, the concept of asset sales represents a challenging shift in perspective from viewing such actions as failures to understanding them as part of effective asset management.
While traditional banking practices discourage undue risk, maintaining flexibility in business processes could prevent potential profits and hinder efficient, productive work.
Conclusion
CRE loans and other assets can become burdensome for banks that have traditionally managed them as part of their lending portfolio. Recognizing the sale of such assets as a normative process in the life cycle of nonperforming or charged-off loans is crucial.
The questions outlined above are designed to help any asset manager make more informed decisions about proceeding with the sale of CRE or other assets. Have you considered selling your charge-offs? What factors should you consider before making this decision?
Engaging in this dialogue can help shift the perspective from viewing asset sale as a failure to recognizing it as a strategic financial management tool.
