ABA Banking Journal - August 2007 - (Page 23A)

COMMUNITY BANKING DIGITAL EDITION BONUS FEATURE Banks find success turning your lemons into lemonade Out of the oil patch and the farm crises of the 1980s and 1990s come business lines for experienced survivors S tephen King’s The Green Mile told the story of John Coffey, a convict who had the mysterious ability to take the pains and illnesses of others onto himself. Coffey removed these evils from others, and, generally, rendered them harmless. New Orleans’ Gulf Coast Bank & Trust Co. goes Coffey one better. The $668 million-assets bank buys up other banks’ troubled debt, and turns it into profits. Joel Daste, head of the bank’s Gulf National division, says many banks in the oil patch learned painful lessons in the energy loan crisis. Those that survived gained the ability to work out troubled credits. Gulf determined that money could be made on that knowledge, and has been buying distressed credits since the days of the Resolution Trust Corp. Today, the bank holds loans of many types originated by lenders in 40 states, most from the institutions themselves, some from the FDIC. “It’s a very, very specialized business,” says Daste. “We’ve bought almost everything at some point. What we’ve been looking at most recently is commercial real estate debt.” While the bank considers many asset types, it has a preference for commercial assets, and generally doesn’t buy troubled credit card portfolios. “We’d rather buy large assets that take a little more effort,” Daste explains. Much of the process, for the buyer, is a numbers game, as Daste explains it. Say a real estate loan of $1 million comes onto the market, with land securing it that is worth only $750,000, and no guarantor on the deal. That means the worst-case outcome is a recovery of the land value, less legal and other expenses of foreclosure, should that be necessary. Anything beyond that amount that the bank can gain through patience and working with the debtor is gravy. Pricing derives from judgment based on those factors. Most assets Daste picks up come from spadework, including following up on news stories of banks with loan trouble and cold calls and other sales efforts. Gulf National will review pools or individual loans for free, make offers on what looks workable, and, where and when they strike a deal, “work them as our own.” Loans most typically transfer on a non-recourse basis. The bank takes the loans into its own portfolio, and this troubled debt is therefore reflected in its own numbers. This impact is controlled through careful management. The organization takes on loans that are far below its own bank’s internal and legal lending limits, and overall levels are maintained carefully. As of June, the bank held about 500 credits, of varying sizes, that were acquired from other organizations. By Steve Cocheo, executive editor National reach from the heartland Prinsburg, Minn., population about 500, is so small that you can’t find it in the current Rand McNally road atlas. But there is one thing the town’s $45.8 million-asset PrinsBank does have in common with Rand McNally. The work of both organizations covers all 50 states. Like Gulf Coast Bank, PrinsBank manages troubled debt purchased from other lenders. In the wake of the ag banking crisis, management at PrinsBank (founded in 1916 as Prinsburg State Bank) realized that that turbulent period had given staff some insights about dealing with troubled borrowers. So in the late 1980s PrinsBank’s President and CEO, Mike Mulder, and some other principals of the company formed a credit management company to take on troubled loans. Servicing of the credits, which have come from every state in the country, is handled by the bank staff, under contract. In time, Mulder and his associates felt the need for a larger partner, so they formed CapFinancial, a joint venture undertaken with CarVal Investors, Minnetonka, Minn. Part of the Cargill organization, CarVal Investors handles nonperforming credits from 30 countries, working through partnerships with services like Mulder’s. It handles roughly $10 billion in assets. Together, the two organizations specialize in taking on community banks’ troubled assets in the U.S. Mulder says some banks bring troubled loans in by ones and twos, while others come ready to unload a good portion of their troubled assets. Deals are nonrecourse, for the most part, and “we take over the loans with very limited representations and warranties,” Mulder says. This is not a business for the impatient. A typical recovery period can run from three to five years. BJ 23a AUGUST 2007 /ABA BANKING JOURNAL www.ababj.com/subscribe.html 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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