ABA Banking Journal - July 2008 - (Page 41)

up,” says Frost Bank’s Dick Evans. The CEO constantly has a Blackberry strapped to his hip, he admits, but while “e-mail is good, it is a terrible thing for credit. I do not believe in discussions about credit on e-mail.” Evans insists that his people confine such discussions to the phone or in person. “In workouts,” he continues, “there is the need for more face-to-face communication, and I think technology can be a negative.” Workouts can be complicated and detailed, he warns, and e-mail, which can be faster than the speed of thought, can set up the bank and the borrower for situations, attitudes, and decisions that both will regret later on. There are other schools of thought on e-mail. “Most people tend to be more casual and informal in e-mail correspondence than they would be in writing a letter, and we are becoming a text-message society,” acknowledges attorney Tom DeVine. Blackberry “conversations” can be terse, and words sent this way, without qualifying phrases, can come across harsher than intended. While this is a caution against e-mail, he says it can have a role, when used appropriately. “I encourage bankers, in dealing with distressed credits, to use the same formality as in a letter,” DeVine continues. “Don’t say anything in an e-mail that would raise expectations or signal a willingness to do something for the client that you can’t unilaterally do.” There is a certain amount of legal “boilerplate” that a bank would put into a letter involving a workout, he adds, and this should be part of any e-mail that is necessary to send. “But as the situation becomes more and more desperate, borrowers will read and hear what they want to read and hear,” warns DeVine. So, again, think about calling or meeting. “lender liability,” he maintains. They are sued for breach of contract, for instance, but not “lender liability.” “Nobody thinks lender liability these days,” says Ed O’Leary, “but with oldtimers like me it’s never far from your mind, even though when I use lender liability as an issue in a deteriorating asset environment, people look at me as kind of strange.” O’Leary explains that the risk of liability arises from the change of the bank’s behavior towards the borrower before and after workout commences. Take overdrafts. Suddenly the borrower that routinely had an overdraft of $50,000 or $75,000 without having to clear it has been put into a different category, with the credit committee ordering staff to clean up the overdraft. “Suddenly you are returning the guy’s checks to Uncle Sam and his mortgage lender,” says O’Leary, “and suddenly he’s in a world of hurt. And all you’ve done is enforced the letter of the contract—which you didn’t do for a year before that.” Alternatively, when none of those strategies work, the bank is looking at liquidation, to protect the lender’s interests. “Liquidation may be the last option,” says Turner, “but often it’s not the best.” Short of that, from the bank’s perspective, workout means such measures as recovering from sales of some assets; advancing additional funds to support a recovery plan; writing off some principal; and reducing interest rates. Ed O’Leary says workouts succeed in about 75% of the cases. “It takes a patient banker, a creative banker,” says O’Leary, “but it also takes an improving economy. A rising tide lifts all ships.” That’s what ultimately happened in the oil patch and with the big commercial real estate downturn of the late 1980searly 1990s period, he notes. Q. A. Q. A. Should a borrower be represented by counsel during workout negotiations? “It’s better off if they have counsel,” says Steve Turner. In fact, Turner sometimes advises his bank clients to advance further money to a troubled borrower so they can hire a lawyer to represent them during the workout, if they can’t otherwise afford one. What does the bank gain from providing such “legal aid”? Turner says having attorneys on both sides of the table can lead to a better deal, and one that the borrower will more likely understand. What are the odds that a workout will succeed? Understand that “success” is a relative term. Attorney Steve Turner works extensively with farm lenders, but his scenario fits most borrowers. “There isn’t any magic to getting out of financial trouble,” says Turner. “They earn their way out, they sell their way out, or they find additional capital.” Q. A. Does the bank face any “lender liability” risk in pursuing a workout? Attorney Steve Turner hates the very phrase, “lender liability.” While commonly used, he says, it is not a legal term. No one gets sued for Q. A. Assuming a workout doesn’t result in liquidation, is there potential for a continuing relationship with a troubled borrower once the workout has run its course? Or is the well poisoned? There are mixed views on this point. Frost Bank’s Dick Evans is very upbeat, based on his experience. “I’ve seen lots of good relationships come out of serious problems,” says Evans. “When someone gets their back against the wall, you see their real character.” Some companies Evans worked out turned out to be headed by people of poor character, and they’re out. But in other cases, the borrowers proved their mettle, survived, and bank with Frost to this day. On the other hand, Ed O’Leary thinks much depends on the institution. “In some credit cultures, the credit people have memories like elephants,” he says, “and they’ll remember a company was substandard way back when, and they’ll think, ‘By God, I’ll never trust that company again’.” At one big bank he worked decades ago, that was the mindset. Sometimes, he says, “when you get the credit rehabilitated, you have to do your customer a favor: Find him another bank.” BJ Subscribe at www.ababj.com ABA BANKING JOURNAL/JULY 2008 41 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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