We completed our agricultural and rural business class in Miles City, Montana last week with twenty students. It was a great class and we had good interaction with the students. The theme was very timely as we focused on working with loan management and working with troubled credits. This year there is a substantial amount of these as we have a drought in the Dakotas and Montana coupled with lower commodity prices. On the price front, we expect another 3-5 years of dismal prices.
The Kansas City Fed surveyed a group of bankers in their region. Depending upon the state, between 18-40% of these lenders expected some level of carry over debt after the end of 2016. The Minneapolis Fed expects 96% of lenders to be dealing with levels of carryover debt. As an aside, I want to explain what is meant by carry over debt. This is money still owed on an operating line, after all the agricultural product is sold that said line funded in this operating cycle. If a farmer ends the year with a balance on the operating line of $100,000, but he has wheat in the bin worth $500,000, you do not have carryover debt. You now have an inventory loan.
The question came up several times dealing with department structure for a business and agriculture department. Whenever times are tough, as they are in the agriculture sector, credit managers tend to assess if they have the right people fulfilling the proper roles in their institution. This question popped up several times in our class in different ways.
Sometimes, when it comes to dealing with a problem portfolio, having a different officer manage the collection process may be beneficial as the field officer may be too close to the borrower. This may be very true in a tight knit community where you may see your borrower at the store, church function, kids’ baseball games, or school events. In some rural banks, they may switch loan officers to different branches that may be a hundred miles from their hometown. Sometimes that geographical break is all it takes to manage the problem credits. When the crisis is over, they often move back to their home area.
Adding managers and when need be attorneys is another strategy that is important as we work with problem credits. Sometimes, having the other person there can also help the officer from saying something they shouldn’t. Two sets of eyes will get different views on the condition. Remember once the visit is completed, pull off the road and collaborate on a memo that describes what was observed.
Many larger institutions will have their own special asset group (SAG). SAG will work with the field lenders but will take over the main responsibilities of interacting with the borrower in most cases. Sometimes, some SAG duties may be outsourced to a contract loan manager or resource like Pactola, to assist in the workout. Having an outside set of eyes may shed a quite a bit of value to the situation.
We also had some discussion with the role of field officers and analysts. There seems to have been a push in the examiner world to want to separate these tasks completely and never shall the two encounter each other. Now, in some smaller institutions, this is impossible where the commercial lender may also fill in as a consumer officer, mortgage producer, and mow the lawn when needed.
For institutions that are large enough to operate with a complete division of field people and analysts, to do so makes your team weaker overall. If a field officer does not understand the ins and outs of judging credit, you will end up with field people who find any opportunity and throw it against the wall to see if it will stick. This wastes time and resources. It also weakens your status in the community as your CU will be known as one who cannot provide substantial value to their business because of a perceived lack of competence among your team. The field officers need to be so well versed in understanding credit that they can spot strengths, weaknesses, and trends in the business. They are often your first line of defense on the credit.
If you chain the analyst to the desk and all they understand are the numbers, they will be paralyzed in working with the people who actually own and operate the business. Generic suggestions like you need to decrease your inventory on hand or speed up your receivables collection time, while good on paper and necessary, are much harder to implement. Seeing the business firsthand by the analyst is a key to making sense of the numbers. Also, if you keep your analysts in the office, they may never understand what the equipment looks like, if they have the inventory they claim they do, or the condition of the growing crops.
When the time for managing problems in the credit, it is important that officers have good analyst skills and analysts have good officer skills as well for the best well rounded approach to working through challenges. One CU mentioned they have a team approach where officers and analysts are forced to work together, see customers together, and analyze credit together. This is a good team strategy.