ABA Banking Journal - August 2007 - (Page 20)

Community Banking One is that many of today’s lenders haven’t seen bad times, and haven’t had any experience handling loan workouts. “It will be a shock to a lot of younger loan officers who have never seen a downturn,” says Catherine Ghiglieri, president of Ghiglieri & Co., Austin, Texas. Ghiglieri served as the state’s chief regulator in the 1990s and as a senior regulator in the Comptroller’s Office. Another trend is that the market for distressed debt of many types has grown Sources run the gamut, including large players representing themselves and sometimes also investors who want to buy on the cheap and realize the rewards of patience—a luxury banks don’t always have. It also includes those attempting to develop a securities-like market for troubled debt, specialized consultancies who will help evaluate and market loans or pools of loans, and community banks that have made a business out of acquiring and working out troubled loans. Getting over stigma, annoyance For many community banks, selling off troubled debt rather than working it out to a better, or a bitter, end, remains untried ground. But some have been finding the practice represents a kind of outsourcing. You pay in discounts from par value, rather than for services, but you gain efficiencies and quick remedies. Many bankers queried say they see more inquiries from players in the baddebt market, both by mail and cold calls. “It’s a logical process for banks to sell troubled assets, because it’s a chance for them to change their inventory,” says Joel Daste, head of the Gulf National division of Gulf Coast Bank & Trust Co. “Sometimes it’s smart to sell it at a discount and focus on what your bank does best.” The $668 million-assets bank’s division buys troubled debt from other lenders and works it out using the bank’s own staff. Daste adds that larger banks sell off troubled loans quite routinely, having learned that it often makes sense to offload such credit rather than spend staff resources on debt that has gone bad. “It’s a pretty big decision in most community banks’ cultures to sell off a loan,” says consultant Tim Holt, a former banker. However, it can make much sense, particularly if the alternative is sliding down the slope that led EastBank, say, into regulatory trouble. Holt’s Profit Resources, Inc., Sarasota, Fla., recently helped a client, a community bank that determined it had to move a batch of nonperformers off the balance sheet, to find a buyer for the loans. Holt advises thinking in terms of putting the bank’s capital back to more productive use, and of thinking of loan sales as an opportunity for a troubled borrower to gain time, with a new creditor. Time to take the cure? Banks that haven’t gone the sales route often have some gut reactions against it. them outside the borrower’s control. The underlying property, a small shopping center, had had a run of hard luck, including a burst sprinkler system. The owner, involved in multiple properties, had spread itself too thin to ride out the troubles. Dan Hornfeck, executive vice-president and chief credit officer at the $438.3 million-assets bank, says they attempted to work out the loan directly. Refinancing with another lender was explored, as was selling the property. Neither effort came to anything. Hornfeck says the bank considered foreclosing, but the expense of doing so, and the possibility of getting stuck holding a problem property, looked pretty bleak. So the bank decided to begin contacting some of the steady stream of loan buyers that routinely called on the bank. Many factors go into pricing a troubled loan for the secondary market: performance, contract terms, collateral quality, certainty of the lien, and the loan’s “story” –– Lena Motz, CarVal Investors The “I made it and I’ll fix it” argument is one. Another is the fear of losing the underlying customer relationship. Joel Daste counters that a loan that has deteriorated so badly that the bank is entertaining selling it probably really represents a relationship that isn’t doing the bank any good anyway. Another consideration is that some problem borrowers pose reputational traps for the lender. A loan to a pastor with a faithful flock or a loan to a big employer carries baggage. Better than foreclosure Loan selling isn’t just for those with regulatory troubles. Sometimes a bank just has a “stone in its shoe.” Take the experience of Greensboro, N.C.’s Carolina Bank. The bank had a commercial real estate loan fraught with troubles, some of “We knew we would have to take a discount,” say Hornfeck, “because the property wasn’t cash flowing.” In the end, the bank sought formal bids from three firms, and chose a broker who offered a decent price, but who also impressed the bank with its professionalism and its understanding of banking. The final price was decent enough, and within a few months, the loan was off the bank’s books, in spite of some late kinks, such as liens the bank hadn’t known existed. Hornfeck says a lesson learned in the process was that moving to sell sooner might have garnered a better price. Weighing the decision Knee-jerk selling at the first sign of trouble isn’t being endorsed here. Former regulator Catherine Ghiglieri stresses to 20 AUGUST 2007/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.profitresources.com http://www.ghiglieri.com http://www.profitresources.com http://www.gulfbank.com http://carolinabank.com http://carolinabank.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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