In the Press

Recognized as a leading bank turnaround expert, company founder Justin A. Barr is often quoted by publications such as the Chicago Tribune, for which he has produced a series of special reports on the health of Chicago area banks.

Chicago Tribune: December 2, 2009
Chicago Tribune: September 13, 2009
Chicago Tribune: April 12, 2009
Chicago Tribune: March 22, 2009
Chicago Tribune: March 23, 2009
Chicago Tribune: January 6, 2009
Loan Workout Advisers Home

Full size image | Download PDF

Toxic-assets plan leaves local financial community optimistic but with many questions

By Becky Yerak, Tribune reporter
March 23, 2009

We asked local financial industry observers what they thought about the U.S. Treasury Department's latest bank-rescue plan, which commits $500 billion to $1 trillion to buy troubled loans and securities from bank' balance sheets, and here's what a half a dozen of them had to say:

John Canning, chairman of Chicago-based private equity firm Madison Dearborn Partners, is waiting to learn more about the mechanics of the program, called the Public-Private Investment Program.

"But it's pretty clear that it has gotten a favorable response by enough sophisticated investors, such as Bill Gross from Pimco, that there's going to be a lot of interest in it, and that's good," Canning said.

Gross is one of the nation's most-respected bond fund managers and chief investment officer at Pimco.

The stock market also reacted positively to Treasury's plan. The Dow Jones Industrial Average closed up 6.8 percent, or 497 points, partly due to the market's reception of the plan.

Canning, however, doubts that Madison Dearborn will participate in the plan to help get toxic assets off banks' books.

"Not that it's a bad plan, but it's probably not the kind of thing that our investors expect us to do," he said. "This is basically investing in a fixed pool of assets, and we're supposed to be investing in businesses."

It's more suitable for distressed debt funds or hedge funds, he said.

Madison Dearborn owns stakes in such companies as Great Lakes Dredge & Dock Corp., Magellan Midstream Holdings LP and Ruth's Chris Steak House Inc.

"There'll be plenty types of investors who'll be interested, but I just don't think private equity guys will be the ones that'll do it with private equity funds," Canning said.

Jack Ablin, chief investment officer for Harris Private Bank in Chicago, said bankers and private investors stand to gain the most in the program. Taxpayers do have a potential upside, but they stand to lose the most because private investors potential losses are limited, he said.

According to the Treasury, let's say a bank has been trying to sell a pool of residential mortgages with a $100 face value. The bank would approach the Federal Deposit Insurance Corp. The FDIC would then leverage the pool at a 6-to-1 debt to equity ratio and auction it.

Let's say the highest bid were $84. Of that, the new program would issue debt for $72, guaranteed by the FDIC.

The Treasury and private investors would split the $12 equity, Treasury said.

The private investor would manage the servicing of the asset pool.

"This means that private investors would be on the hook for a little more than 7 percent of the discounted purchase price of the assets," Ablin said. "Treasury is taking strong measures to ensure that private investors will come forward and snap up illiquid and troubled-bank assets that are sitting in our largest banks' digestive systems like a chimichanga fried in two-week-old oil."

One local banker agrees that the plan has an upside for banks but is questionable for taxpayers.

Treasury Secretary Timothy Geithner "wants to avoid the Japanese banks' 'Lost Decade,' the 10 years it took for those banks to get rid of their toxic assets on their own and during which time the Japanese economy came to a halt," said Robert Gecht, chief executive of Chicago-based Albany Bank & Trust. "The Treasury plan should accelerate the 'detoxification' process for large American banks, although it is still unclear what the ultimate cost will be to taxpayers."

Another bank said it hopes that the Treasury's program will encourage lenders and borrowers alike.

"We're out in the market talking to customers and prospects, and they are naturally feeling a bit cautious about borrowing," said Mark Hoppe, chief executive of Rosemont-based Cole Taylor. "Though many institutions are now concerned about participating based on a somewhat negative experience with the TARP program, we hope that both the private and public sectors can align their interests and stay focused on the number one priority: turning the economy around."

Mike Moebs, economist for Moebs Services Inc., a Lake Bluff-based financial industry research firm, said one major unanswered question is whether FDIC-insured banks are the only ones eligible for the program.

"What about the 8,000 credit unions?" Moebs wonders, citing pressures on that sector. "We need to know more details soon."

Another industry observer worries that the latest plan to loosen the credit markets will favor big banks as past plans have.

"I welcome the introduction of private sector capital and competitive market forces to the federal bank bailout program," said Justin Barr, president of Loan Workout Advisers LLC, a Northbrook-based bank consulting firm.

But "I remain concerned that the money will only reach larger banks, and that community banks, which make-up a disproportionate share of the banking market in the Chicago area, will continue to bear the brunt of the crisis with no help from Uncle Sam."

Banks trying to cope with rise in bad loans

2.31% of loans nationwide non-current, highest level since 1993

By Becky Yerak, Tribune reporter
January 6, 2009

First National Bank of Brookfield, like many banks nationally, was being hurt by bad loans.

Now it can do something about a big chunk of its bad debt.

On Friday the $268.7 million-asset bank took control of a foreclosed 35-acre commercial real estate parcel in Naperville that accounted for half of its $29 million in real estate loans at least 90 days past due.

Brookfield will try to sell the land at 95th Street and Illinois Highway 59 to recoup a significant amount of the $15 million loan gone bad.

"Today is a big day," Brookfield Chief Executive Jan Schultz said Friday. "Until I had title to it, I couldn't move it, I couldn't try to sell it, so we're excited because there has been significant interest in the property."

As of Sept. 30, 2.31 percent of loans nationwide were non-current, the highest level for insured institutions since the third quarter of 1993, according to the Federal Deposit Insurance Corp. That's up from 2.04 percent in the second quarter and 1.08 percent in the same period in 2007.

Most depositors have little to fear, however, as the FDIC has bumped institutions' coverage from $100,000 to $250,000 a depositor through Dec. 31.

In the quarter ended Sept. 30, Brookfield had the fifth-highest loan-delinquency rate among Chicago-area banks. It also had the area's fifth-highest property-related Texas ratio, which tallies up a bank's past-due loans and bank-owned real estate and compares them with the levels of a bank's core capital, typically shareholders' equity, and the money set aside for potential loan losses.

"The Texas ratio puts a bank's loan problems in the context of its capital levels, so it's a fairly good predictor" of difficulties, said Justin Barr, president of Loan Workout Advisers LLC in Northbrook.

So banks need to lower their levels of souring loans, sell the real estate they have repossessed, raise capital or set aside more reserves for potential loan losses.

Brookfield's Schultz acknowledged that banks likely face the same challenges as any other property peddler these days, namely buyers holding out for lower prices. But "the bank-owned properties are selling because the banks are willing to take discounts that the average homeowner can't," he said.

Schultz takes issue with one aspect of the Texas ratio: It doesn't factor in the collateral in a secured loan.

"You can't just say it's going to result in a total loss," he said, noting that a bank is likely to recoup at least part of a secured loan gone bad when it sells the property.

Community Bank of Lemont tops a list of local institutions with the highest percentage of non-current loans, or those that are more than 90 days past due or that aren't generating any interest for the bank. The $95.8 million-asset bank raised $3 million in capital in September but also has the area's highest Texas ratio.

"We're diligently working on curing those credit problems," CEO Richard Meade said. He said Lemont meets the regulatory standard for "well capitalized."

The 7-year-old bank's past-due loans are secured by real estate, "which has traditionally been good collateral," he said. But "in the declining real estate market such as the one we're experiencing, that collateral value gets stressed."

The bank with the third-highest Texas ratio was Mutual Bank in Harvey. The $1.69 billion-asset bank financed the purchase by the wife of political fundraiser Tony Rezko of a side lot in a deal that enabled Barack Obama to buy his dream house.

"Since June we've infused about $40 million in additional capital" into the bank, said David Laffee, Mutual chief financial officer. "That'll help improve our Texas ratio."

Most of the capital came from the Veluchamy family, which bought the bank in 1998.

At Platinum Community Bank in Rolling Meadows, 21.5 percent of loans were delinquent as of Sept. 30. And, at 151.4 percent, Platinum's real estate-focused Texas ratio was the market's second highest.

But the bank got good news on Oct. 3.

That's the day that Platinum, which had $12.6 million in delinquent real estate loans as of Sept. 30, closed a deal to sell $10.7 million in non-performing residential mortgages to an unnamed investor, according to a regulatory filing.

The loan sale significantly reduced the bank's delinquency and Texas ratios in the fourth quarter, said Michael Linsner, Platinum president.

Heritage Community Bank, which cites "the severe real estate downturn" for its high Texas ratio, said it's "in active discussions with equity investors regarding possible transactions" to raise capital