Banking Law

Experts consulted by Atlanta Business Chronicle reporter J. Scott Trubey tell like it too often is: small banks often wait too long to deal with problem commercial loans and, by the time they do finally address the problem loans, they lack the internal skill set to deal with them properly. Georgia is ground zero for this issue, with 30 banks in the state having already failed and with over a third of the state's banks under regulatory enforcement orders of some sort.

Small lenders, with limited personnel, often do not have talent with the depth of experience to handle the complexity and sheer volume of problems the current financial crisis has thrown at them, experts say.

Some are turning instead to outside consultants who are resorting to creative measures to salvage value out of busted real estate bets.

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?What you?ll find with lenders is they?ll drag their feet and drag their feet until their problems catch up to them,? said Joe Waites, a bank consultant and partner with Minerva Consulting LLC. ?[Small banks] don?t have the talent and in most cases they don?t have the right resources.?

Small banks by their nature are deeply embedded in their communities. Often borrowers and bankers go to the same church or golf club and their children play on the same soccer team. They need independent, third parties to make the hard choices, while not breaking those bonds.

?You can?t convert lenders into workout experts,? Waites said. Lenders spend months and years building relationships with borrowers. When the loan starts to sour, the bank itself may not see that the loan is going south until it?s too late.

?Literally the losses get larger and larger,? Waites said.

As commercial real estate problems continue to worsen, the prospects are only going to get bleaker for those banks that play "wait and pray."

The next wave ? commercial real estate ? will also hit community banks that bet on retail centers and small office buildings.

With vacancy rising and property values falling, many underwater borrowers will need to inject equity to keep projects alive, Waites said.

According to industry sources, many banks have not been proactive and engaging their borrowers to find workout solutions before problems worsen.

This is one area where thinking you can handle whatever comes down the tracks may very well result in you being run over. Even if a community bank with problem commercial loans thinks it can weather the storm without hiring outside help, it might be worthwhile to talk to outside consultants who have a track record of dealing with troubled assets (there are a number of folks who gained much hard-earned expertise during the mid-60-late 1980s and early 1990s and who are still kicking) to see what they have to offer. At the very least, you will be able to say you considered hiring outside help to assist the bank in dealing with its problem loans and rejected that course of action for whatever logical business reasons might be relevant. That's better than facing your board and shareholders with the bank rapidly sliding down the hill into a bottomless pit and admitting (or being forced to admit) that you didn't explore all the alternatives.

Not every consultant will be able to add sufficient value, but it never hurts to turn over all the stones in sight.