A Commercial Interruption

RICHARDSON, Texas — Just as the extent of the residential real estate crisis was beginning to dawn on the financial industry, Credit Union Liquidity Services started to overhaul its commercial lending portfolio management system.

In late 2007 CULS instituted a number of new procedures to mitigate risk on its balance sheet as well as for its clients. That plan included meticulous and consistent reviews to ensure every loan in its portfolio was assigned the appropriate risk rating and monthly meetings between portfolio and credit managers and senior management to make appropriate changes to allowances for loan losses.

"CULS generates portfolio reports, updated weekly, which identify those loans that are delinquent (even by one day), in addition to all loans maturing in the next 90 days," President/CEO Mark Morganfield told Credit Union Journal. "These standard portfolio reports are reviewed by our team in regularly scheduled meetings in order to formulate (and) update resolution strategies."

Every loan in the commercial real estate portfolio is subject to a full review on an annual basis, but those loans that are classified as Pass/Watch or Special Mention are reviewed quarterly for any changes, and every loan that is maturing in 60 days gets labeled Special Mention. Substandard, or worse, loans are reviewed monthly and written up in performance reports every quarter and in status reports during the interim months.

Those poor performing assets usually trigger the involvement of legal counsel to assist the CUSO in coming up with the best possible resolution and impairment analyses per FASB 114 on loans with a 5 risk rating, which are updated monthly.

CULS also has a stringent policy on advances for construction and development loans; the chief assest manager and president are the only individuals who can approve advances. Morganfield said the policy "ensures that outstanding 'tickler' items are properly tracked and collected."

After just under two years, the new portfolio management approach is paying serious dividends. The changes resulted in 36% fewer loans in the managed loan portfolio over the last 21 months and external third party reviews have determined the processes and procedures CULS uses "far exceed industry standards." One annual review in particular gives the CUSO "high commendations" for its "systematic detailed and proactive approach," Morganstern told Credit Union Journal, adding that the loan review firm adopted several of CULS's policies as industry-wise best practices.

DALLAS — Here is CULS' Loan Classification Scale (Risk - Characteristics)

3-PW (Pass Watch). While performing and in compliance, this loan has historically or may potentially exhibit characteristics associated with Special Mention assets

4. Special Mention. Loans with this rating have existing or potential credit weaknesses that could, if not corrected, lead to a more severe classification. The weaknesses may be in documentation, repayment ability, performance, the condition and/or control over the collateral

5. Substandard. Loan is inadequately protected by the current net worth and paying capacity of the obligator of the collateral pledged. Loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

Best Practices CUJ 2009
Best Practice: Monitoring Health of Portfolio
Vendor: Internal