Summertime Lulls, Non-Performing Asset Charge-Offs

Welcome to this week’s member Q & A at distressedpro.com. So, the first thing I wanted to say before I get into the question (we just have one question to address this week from a member) is that you might find that right now, it’s a little quiet out there. 

What you’re going to find in every year’s cycle is that all the bankers, attorneys, and everybody who’s involved in getting stuff sold go on vacation. You’ll find that that happens pretty heavily in late July and into August. Don’t let that deter you from your work because after we get past Labor Day, usually, it goes right off the hook. 

So it’ll be all of the pent-up, built-up stuff, especially with the moratoriums and everything else that we’ve had, that’s sort of now shaking out, and then add on a bunch of built-in vacation time because people have just been dying to do something now. 

Last summer was kind of shot, and this summer, people are definitely busting out there. Even when we don’t have a pandemic, vacations happen, especially this time of year. Then, we come into Labor Day, and I think what you’ll find if you’re making your calls and you’re out there talking to folks like you should be, that it really takes off in a big, big way after that.

If you are still sending emails and making calls this time of year, you should be doing that. But you might find a lot of out-of-office replies; just remember that the party does stop. Everybody comes back to work, and that really happens in just a few weeks from now.

So don’t relent. And expect that when everybody gets back, from there on, it’s going to be a race to the end of the fourth quarter (usually) to get done everything that they wanted to get done for their year. So that’s just an aside. Let’s go into this week’s question.

Are there advantages to a bank selling a non-performing asset over taking charge-offs?

Yes. So, imagine I have an asset; we’ll just say it’s a note, and I’ve got it at $100,000 on my books. If I’m going to take a charge-off, then I look at it, and I say, is this really worth $100,000 because of all these other factors? (Don’t worry about what the other factors are right now.)

I’ve got this on my books at $100,000 but based on all these other factors, I think it’s probably only worth about $90,000 right now. Well, you haven’t gained anything. You’ve reduced what you have on your books in terms of a liability, but you haven’t received anything. If you sell that, now you’ve received money.

Let’s suppose you even sell it for $70,000 or $80,000. Now you’ve actually received the cash of $70,000 or $80,000 on your now $90,000 on the books used to be a $100,000 asset. And yeah, there’s a big difference between just taking charge-offs and selling the asset. 

So ideally, what you do, if it’s way over-valued, then you charge off, and when I’m saying “you,” I’m talking about the banker – if you’ve got something way overvalued, you charge off a little bit each quarter to get it more in line with what the real price, the market price really is, and then you sell it. So instead of having to take a big hit all at once, you’d take some little hits through charge-offs, and then you receive a cash influx from having sold the asset. And that’s typically how that works. 

I’ve got a story from a bank in, I think it was Lubbock, Texas, where I dealt with exactly this scenario, and the bank actually put off selling the assets for some time while they got their books in line for the sale.

But at the end of the day, they still need that cash. A charge-off doesn’t create any cash. It just relieves a little pressure. So that said, I hope this made sense to you. 

Keep pushing; look for after Labor Day to really start seeing a pop and then a big rush through the end of the year. Typically this is the way these things roll, especially now with all of the forbearances, moratoriums, all the craziness, all the fed intervention, the CDC, all that – it’s rolling up, and it’s going to be a good selling time, as far as I can tell. 

So that’s it – let’s make it a great day. Thank you for being a member. And thanks for listening to this week’s Weekly Q & A.