ABA Banking Journal - August 2007 - (Page 18)

Community Banking Pass the Aspirin talks about how bankers can say “no” without alienating people. See page 21. You gotta know when to fold ‘em Here’s what you need to know about the secondary market for troubled loans DIC’s “C&D” called it “failing to obtain adequate collateral,” among other things. But Ron Whitcomb boils it down to the essentials: “We were financing Ho Hos and Ding Dongs.” Whitcomb doesn’t have anything against these baked treats themselves, but saw them as symbols of a predicament. He found himself up to his ears in loans to people who sold the snacks—convenience stores and gas stations—many of them nonperforming. EastBank, based in Minneapolis, had opened its doors in 2000, and, mostly through wordof-mouth advertising, found a niche lending to such businesses. Unfortunately, this concentration, in time, hammered results, as many of the small businesses got into trouble. Things grew bad enough to prompt the regulatory action and the board’s hiring of veteran banker Whitcomb out of retirement to put the bank back on its feet, and out from under the cease and desist order. Whitcomb had two immediate challenges. First, he had to restore liquidity. EastBank had hit a loan-todeposit ratio in the range of 107%. And it had reached that level with heavy reliance on wholesale funds. Even before things were official, “you started getting street talk,” says Whitcomb, and when official word of the order got out, brokered funds dried up. The second challenge was the sheer volume of troubled loans. More than half of the bank’s portfolio was in some degree of pain. Too many balls to juggle, Whitcomb realized. The solution to both challenges was identical: selling off loans. Liquidity improved almost immediately by selling about 3% of the overall loan portfolio, to reduce that lending ratio and get some dollars into the bank. Then Whitcomb cut his workout challenge to a more suitable size by selling off about 5% of the troubled loans. “We were able to do this at a relatively modest By Steve Cocheo, executive editor F discount,” he says. He shopped the loans selected around the secondary market for troubled debt, and found a buyer. Having cleared the decks a bit, Whitcomb and his staff dug in, and began working out the rest of the bank’s problem credits. “If I hadn’t sold off that pool of troubled loans, we’d still be doing workout stuff,” Whitcomb says. Instead, only nine months after the C&D came down, FDIC saw the improvement and lifted it. Whitcomb says the move was strategic for the $24 million-assets bank. “I needed liquidity and I needed time,” says Whitcomb. Selling off loans brought both. Answers are out there There’s a growing consensus that the well-publicized troubles in the subprime markets may be only the beginning of broader trouble with other types of bank credit, including commercial loans, commercial real estate loans, construction loans, and additional categories of residential credits. This possibility converges, bankers and observers agree, with some other trends. (Cont’d.) 18 AUGUST 2007/ABA BANKING JOURNAL www.ababj.com/subscribe.html ILLUSTRATION BY NICOLE FREDRICKSON http://www.theeastbank.com http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - August 2007

Contents Editor's Column The Unbankers Snapshot: Do Share Repurchases Signal More M&A Activity Sleight of Mind Goals Behind Proposed ABA/ACB Merger ABA Resources ABA Chairman's Position Should You Sell Those Nonperformers Pass the Aspirin Branch Design - Evoking a Sense of Place Two Banks Take the LEED Move Over, Buddy Service Feature: Bankers' Banks Directory Websites: What's State of the Art for Banks? Citi Mobile to Go Strong with iPhone? Date First, Marry Later Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - August 2007

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