ABA Banking Journal - July 2008 - (Page 28)

COVER STORY many of today’s younger loan officers, too. They came up during the unprecedented boom times for the industry that have only recently passed. As a result, many have never seen the down-side of the business cycle. “A lot of these folks are ‘good times’ bankers,” says DeVine. Nicholas Ketcha, a former top FDIC and New Jersey banking official, is now a senior consultant with FinPro, Inc., Liberty Corner, N.J. He talks of a client with some loan trouble who is worried about the near future. “He doesn’t have one loan officer on his staff now who has ever so much as charged a loan off,” says Ketcha. By no means are many banks facing the brink, and in some banks there isn’t the trouble that has become commonplace in other regions. Ketcha notes that of his firm’s clients, western institutions are having more difficulties, while northeastern banks, which didn’t have as much opportunity to load up on commercial real estate, are not in the same straits. Nevertheless, he says, even in the Northeast there are pockets of trouble. Overbuilding in the New Jersey shore resort region, for instance, is one. Ketcha says some major projects there will never sell for what builders and lenders expected. And Ketcha predicts there will be failures where construction lenders got in over their heads. In April, during an ABA telephone briefing concerning commercial real estate lending, Steve Fritts, FDIC associate director for risk management policy and examination oversight, touched on the need to be able to handle commercial real estate workouts. “Bankers need to be sure that they have the infrastructure in place to perform loan workouts,” Fritts told listeners. He suggested that the costs of rearranging talent, or hiring additional talent, to handle workouts, and setting up processes and procedures, would be balanced by savings for those banks that make the effort. (To order a CD of the ABA event, go to www.aba.com/ teleweb/tb042208.htm.) “There is a shortage of workout specialists,” Ketcha says. “So there will be a scramble for them, and people with that type of experience are going to be getting premium salaries for a while.” But, then, for some community banks, adding staff is out of the question. “I’m the workout department,” observed one CEO recently. For many institutions, workouts will be accomplished by existing staffs, who will become experts through training in the school of hard knocks. To help those facing that education, we sought out the voices of experience: bankers who lived through the oil patch and commercial real estate crises of the 1980s as workout officers; Ketcha, who served FDIC in those days; and attorneys with extensive credit litigation experience. We present what we learned from them in question-and-answer fashion. • Q.Where A. begin? “The 1980s helped us learn that.” Evans, chairman and CEO of $13.5 billion-assets Cullen/Frost Bankers, Inc., headed workout efforts at the San Antonio, Texas, bank through the oil patch crisis of the 1980s. Many banks shut down their “special assets” departments after the sweeping problems of that period were gone—along with many banks—but Frost has never shuttered the workout door. “Although,” admits Evans, “it’s a department that I always hope isn’t busy.” Evans insists that successful workouts find their foundation in banking fundamentals. “You must think all along of the kind of portfolio you want to have,” says Evans. Frost Bank makes a science of relationship banking, and doesn’t like a dealmaker mentality. Once the bank has taken on a credit relationship with the kind of borrower it likes to do business with, keeping eyes and ears open plays a tremendous role. “The solution to dealing with special assets is in heeding the warning signs,” says Evans. Evans likes to tell his lenders that credit trouble is like treating a cold, versus treating pneumonia. If you catch a common cold, he explains, the drug store has 100 nostrums to cure you. But if you catch pneumonia, he continues, there are only two or three medications that will work—“and you might die.” So the lesson is, early detection leads to easier, and surer, cures. does workout Actually, it starts all the way back at the beginning, when a bank proposes, and then underwrites a commercial loan, according to veteran banker Dick Evans. “It’s not something you start and stop. Workout is a continuous process,” Evans says. Q. A. What’s the most important skill involved in workouts? Arguably, it’s communication. And communication, or lack thereof, constitutes not only a skill, but a warning sign that a hitherto performing loan may be on its way to nonperforming status. Attorney Tom DeVine says there are three warning signs of credit going awry: changes in payment pattern or history; changes in personnel or procedure by the borrower; and absolute silence. “Suddenly they don’t want to talk to you,” says DeVine. Suddenly, quarterly financials don’t show up until asked for. Suddenly, a two-way conversation Subscribe at www.ababj.com 28 JULY 2008/ABA BANKING JOURNAL https://www.frostbank.com https://www.frostbank.com http://www.aba.com/teleweb/tb042208.htm http://www.finpronj.com http://www.aba.com/teleweb/tb042208.htm http://www.aba.com/teleweb/tb042208.htm http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - July 2008

ABA Banking Journal - July 2008 Contents Editor’s Column Searching for New Paradigms at BIS Snapshot: C&I Asset Quality 100th Anniversary: Then & Now BofA "Event Concept" Wins Awards, and Customers ABA Resources ABA Chairman’s Position M&A: Beat Today's Market Blues Pass the Aspirin Cover Story: Workout Time Correspondent Banking: No Longer Just a Handshake Business Getting IT Right By Thinking It Through Webnotes Are You "Red Flag" Ready? Mailbox Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - July 2008

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