
REGION
Say you're a small business owner with a line of credit at the community bank you've used your whole career. You knowthe bank took some hits in its real estate loan portfolio recently, but your lending officer has assured you the problem is well in hand.
On tonight's 11 o'clock news, you learn the Federal Deposit Insurance Corp. seized your bank after hours and shut it down, transferring its assets to a bank you know nothing about.
Well, everyone knows deposit accounts of up to $250,000 are insured, so those are safe. Butyou had a lending relationship that was vital to your business. What do you do about that?
The main thing is to be proactive, said George Millward, a longtime banker who now runs Millward Consulting, an industry advisory firm based in Berks County.
Call the new bank and find out if it acquired your loan, he said. Bank closures can be chaotic, and information may be limited for a few days, but be persistent and you should soon get answers, he said.
If the new bank has your loan, talk to the lending officers, he said. Set up a meeting and begin building a new banking relationship.
"I'd be pretty aggressive about that," he said. "If I'm a new customer, I want to make sure my story is heard and understood."
As was widely predicted, bank failures haverisen in 2010. Therewere 149 nationwide through last week, compared with 140 in 2009 and three in 2007, according to the FDIC.
In general, Pennsylvania's banks have been healthier than many other statesi experts said. The commonwealth saw its first closure of the year Nov. 19, when Allegiance Bank of North America, basedinLowerMerionTownship, Montgomery Countyt, closed.
The FDIC transferred its assets to Vist Bank, based in Wyomissing, Berks County. Vist officials declined to be interviewed for this article.
As a rule, the state Department of Banking advises clients of failed banks to continue making payments, spokesman Ed Novak said.
"As a regulatory agency, our concern is that both parties treat each other fairly and according to the law," Novak said.
Clients with loans at failed banks have little to worry about as long as they have stayed current on their payments, Millward said.
"If you're a good customer and you've been paying off your note ... the bank that buys the failed institution will probably pick up your note as well," he said.
Still, the acquiring bank has the right to change loan terms, decline to renew them, and even shut down lines of credit, FDIC spokeswoman Laluan Williams-Young said.
That's why it's so vital to present your case as soon as possible, Millward said.
If the new bank does want to change or end loan terms, businesses have to be ready to find new lenders, Millward said.
Business customers with credit problems may not have the option of dealing with the acquiring bank at all, Millward and Williams-Young said. The acquiring bank has no obligation to accept a given loan, in which case the FDIC will take it.
If that happens, "you are strongly encouraged to seek a new lender that will refinance your loan and serve as a replacement source of funding," the FDIC says in its "borrower's guide" to bank failures on its website.
"In some instances, the FDIC may offer borrowers an incentive to refinance by offsetting some or all of the associated closing costs," the FDIC says.
Borrowers who cannot find new lenders have to make payments to the FDIC. The agency hires contractors to service its loans until it packages them for resale on the open market, Millward said.
In other words, you are no longer dealing with a local bank that knows you well and has a stake in your long-term success, but with organizations with a primary incentive to maximize the payout of the loan, he said.
Under those circumstances, a business that needs to renegotiate a loan will have very limited leverage, he said.
"Conversations on the workout side will be a whole lot more difficult," he said. "Those are just ugly conversations."
Unfortunately for borrowers, the FDIC never announces bank takeovers in advance. That means all negotiations and decisions about apportioningloans between the FDIC and the acquiring bank are made in advance and in secret, without borrowers' input.
Nor can businesses influence those decisions retroactively, WilliamsYoung said.
Once the FDIC decides to shut a bank, "we put out some feelers" to see who might be interested in acquiring its assets, she said. Prospects are given information about the bank's size and business model, although details are kept vague so it cannot be identified.
The FDIC then solicits bids and accepts the one that will cost the deposit insurance fund the least, WilliamsYoung said. The whole process can take a few days to a few months, she said.
The FDIC typically sellsfailedbanks' assets through a loss-share agreement. That means the FDIC absorbs a fixed portion, usually 80 percent, of the loss on the assets of the failed institution, with the acquiring institution absorbing the remainder.
The agreements limit the acquiring banks' risk, while still giving them an incentive to salvage bad loans, the FDIC says. Loss-share agreements have saved the FDIC an estimated $35.6 billion compared with straight sales of assets, the agency said.
This year's bank failures are the most since the savings and loan crisis of the 1980s.
And in a possible sign of troubles to come, the number of "problem" banks on the FDICs watch list grew from 829 to 860 in the third quarter, according to the agency.
That's also the highest number since the savings and loan debacle. The FDIC does not reveal which banks make its list.
Mostbank closureshaveoccurredin the areas of the country most affected by the housing bubble and subprime crisis, places like Florida, Arizona and California.
The U.S. has more than 7,800 FDICinsured banks and savings institutions. Many analysts believe hundreds more community banks will fail due to commercial and residential real estate loan losses in the wake of the subprime mortgage crisis.
The FDIC is budgeting more than $50 billion for banklosses over the next four years.
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'Conversations on the workout side will be a whole lot more difficult. Those are just ugly conversations."
George Millward, Millward Consulting
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[Author Affiliation]
BY TIM STUHLDREHER
tims@journalpub.com