Weeding the Loan Portfolio

One reason we have a house in the woods with a little land is that I hate yard work.  I am a big fan if I can do all of it sitting on a tractor.  In fact, the time I enjoyed mowing the most was when I had my Ford 8N with a six foot grooming mower.  Now yard work is a balancing act between how long I can let the yard get and yet be able to see any snakes from the woods. 

Last week, as I was walking through the yard with my dogs, I noticed a healthy crop of weeds, lush and green, from two to six inches high.  I had attempted to use some herbicide, but it seemed to make the weeds grow faster.  No, the only way to get rid of these pesky foliage is to grab them at the root, give a slight twist, and yank them, root and all, out of the ground.  So I began to pull weeds and after 40 or so, determined the yard was at least tolerable to my lax yard standards.

As I pulled weed after weed, I began to think about how a well-managed loan portfolio often requires a lot of constant weeding.  But I would not treat the loan portfolio as easy as I do my yard.  Portfolio management requires constant and consistent maintenance. 

Many lenders have the tendency to concentrate on new opportunities and often neglect the actual performance of the existing clients they have lent to.  Financial statements and tax returns become more items to stick in the file rather than tools that reveal the performance of the organization.  Oftentimes, a good study of the financials may show you the roots of weeds growing inside your client’s company before they get out of control.

Another possible weed is the company that is growing too quickly for its capital base.  If you have one of these in your loan portfolio, you can see there may be a tendency from the company owners to focus only on the future growth without any concern about having the necessary resources to continue the growth.  Additional leverage does not scare them as they believe sales will constantly provide more revenues than the additional debt requirements.  They also make no provisions for a decrease in revenues.  These companies are a fast growing weed with little root to them. 

Some loan officers may be in the habit of not requesting adequate financial information in order to accurately assess the risk of the company.  They may think that since the credit is performing as agreed, there is no need to inspect the firm.  This habit can be ignoring the possible hidden weeds that may be in the portfolio.  By the time, they are dealt with, they may be in a critical stage that could have been avoided with early intervention.

One thing about weeds, if they are addressed early, a lot of time and energy can be saved.  Allowing the weeds to grow will mean they will thrive and choke out the remaining time that you have for new productive business.  If you have not experienced the time drain from poor credits, ask someone who has worked through a problem credit or worse, a problem portfolio. 

As we are getting into the season of getting updated tax returns from our clients, I would encourage each credit officer to take some time to inspect and pull a few weeds.  The time you invest now, can save you a lot of effort in the future.