ABA Banking Journal - July 2008 - (Page 30)

COVER STORY becomes an echo. Internal communication is also very important. “You never want to shoot the messenger,” who brings news of a loan going south, says Evans. “You’ve got to have someone in the organization who will bring it up. That’s paramount. Indeed, you want to reward the messenger, not kill them.” In a related vein, everyone in the organization must be on the same page, when it comes to a credit. Evans says an honest loan rating system is critical. Ed O’Leary stresses the need for realism. He always told his lenders, “ ‘Come clean with your problems, fellas, and there will be amnesty. But if we find stuff that you haven’t surfaced, then we’ll deal severely with you.’ In good times you get comfortable and wink at stuff. You’ve really got to be ruthlessly candid.” O’Leary, now an Albuquerque, N.M.-based consultant, worked in business lending positions in New York, Oklahoma, Texas, Florida, and New Mexico. He ran the workout portfolios at First National Bank of Midland, Texas, and Liberty National Bank of Oklahoma City during the oil-patch difficulties. And it’s up to you to be on top of it to make sure that it’s getting better, not worse.” More generally, Evans observes that “problems come from bad management—personal or business” at a borrower. Signs of such bad management, or other problems, can be gleaned from treatment of funds by the borrower, says Tom DeVine. Indicators will differ depending on the type of credit involved. For instance, a clear yellow light on the lender’s dashboard is the departure of a firm’s CFO, followed by a slowdown in collection of accounts receivable. If the bank has a line of credit with the borrower that is secured by accounts receivable, this means that the bank’s collateral position is deteriorating. A. Q. Does the original loan officer or relationship manager have any role in workouts? Or does the loan Q. A. What are the warning signs we should be watching for? You might think the obvious place is in the bank’s credit numbers. But Dick Evans says that it’s too late to steer a commercial loan away from trouble when it shows up among the past dues. Instead, he counsels, look on the other side of the relationship: deposits. “You can learn a lot by watching deposit flows,” Evans says. Let’s say a company routinely deposits in the range of $100,000 a week, but then weekly deposits fall to $50,000. The company’s relationship banker should be on the phone to the owner or the CFO, asking what’s going on: Are sales down? Is the principle going through a divorce? Are there other lifestyle changes that are siphoning off cash? “My exhortation to bankers is that you’ve got to act quickly, because time is wasting,” says O’Leary. “I used to work for a guy who said that a problem loan gets better, or worse, with every day. 30 JULY 2008/ABA BANKING JOURNAL “Come clean with your problems, fellas, and there will be amnesty. But if we find stuff that you haven’t surfaced, we’ll deal severely with you” have to move to another banker, or to a workout specialist on staff? At Frost Bank, because management stresses relationship banking, officers have some running room to work with a borrower that is in difficulty. However, “when a loan gets classified, it goes to Special Assets,” says Evans. “We draw a line.” The reason is to eliminate emotional involvement on the lender’s part. Tom DeVine says relationship officers can be involved in early, pre-workout help, such as negotiating modifications in the original loan structure. “Rarely does a loan go from performing to nonperforming, and then move to the workout group all in one step,” DeVine explains. Sometimes, he says, a “softer workout” can be handled by the original loan officer. This might take the form of helping the borrower find an alternate lender willing to refinance the loan and take the bank out of the relationship. But there’s more to the decision to leave the original banker on the case or not, beyond that particular credit. Ed O’Leary says managers must make some hard choices. That’s because most banks with troubled loans are still in the newloan business, too. “Maybe you don’t need to form a separate workout group,” says O’Leary, “but you sure don’t need to leave your best credit people, your best businessdevelopment people, having to deal with problem assets in the morning and good credit in the afternoon. After a while, they don’t know which hat to wear, and all they’re going to see is doom and gloom.” Likewise, he advises against leaving a younger lender in workouts too long; it may taint their viewpoint for years. O’Leary advocates establishing two loan committees once workouts represent more than a decimal point of the portfolio. One of his banks maintained both a New Business Committee and a Problem Assets Panel. Officers presenting to the two committees better understood the difference in mission and attitude and it helped lead to better decisions in both categories. What procedural steps should the bank take before putting a Subscribe at www.ababj.com Q. 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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