Maryland Banker 4Q 2011

the

FOURTH QUARTER 2011

b a n k e r SUCCESSFULLY NAVIGATING MURKY WATERS FOR DISTRESSED LOANS

BEST PRACTICES FOR LENDERS

9/11 REMEMBERANCE ON PAGE 4 THE OFFICIAL PUBLICATION OF THE MARYLAND BANKERS ASSOCIATION

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b a n k e r SUCCESSFULLY NAVIGATING MURKY WATERS FOR DISTRESSED LOANS

BEST PRACTICES FOR LENDERS

9/11 REMEMBERANCE ON PAGE 4 THE OFFICIAL PUBLICATION OF THE MARYLAND BANKERS ASSOCIATION

186 Duke of Gloucester St. Annapolis, MD 21401 410-269-5977 / 800-327-5977 www.mdbankers.com

Chairman Mary Ann Scully Chairman, President & CEO Howard Bank

Chairman-Elect Michael L. Middleton Chairman & CEO Community Bank of Tri-County

Vice Chairman Robert A. DeAlmeida President & CEO Hamilton Federal Bank

cover Successfully Navigating Murky Waters for Distressed Loans Best Practices for Lenders

President & CEO Kathleen M. Murphy Maryland Bankers Association

Publication Editor Cynthia L. Gentilcore

Maryland Bankers Association

Board of Directors George J. Behr, Jr. President Arundel Federal Savings Bank

Tom N. Rasmussen President & CEO New Windsor State Bank

Andrew M. Bertamini Regional President, Maryland Market Wachovia, A Wells Fargo Company

Carissa L. Rodeheaver, CPA, CFP Executive Vice President & CFO First United Bank & Trust

Ralph W. Emerson, Jr. Senior Vice President M&T Bank

John A. Scaldara, Jr. Chairman, President & CEO The Columbia Bank

Raymond W. Hamm, Jr. Market Executive PNC Bank, N.A.

Daniel J. Schrider President & CEO Sandy Spring Bank

Michael E. Hough President - Maryland Division Susquehanna Bank

Brantley J. Standridge President, Maryland Operations BB&T

Michael G. Livingston President & CEO The Bank of Glen Burnie

Raymond M. Thompson President & CEO Calvin B. Taylor Banking Company

Philip E. Logan President, Chairman and CEO Slavie Federal Savings Bank

Kelly Whitley Vice President of Public Policy and State Government Relations-Mid-Atlantic Bank of America

Denise L. Pope Market Executive for Mid-Atlantic Market Capital One, N.A

280 Summer Street, Boston, MA 02210 Phone: 617-428-5100

Fax: 617-428-5118 www.thewarrengroup.com

12

Past Chairman J. Scott Wilfong Chairman, President & CEO SunTrust Bank, Greater Washington/Maryland

PUBLISHED BY

Contents

DIRECTORS Timothy M. Warren, Chairman Timothy M. Warren Jr., CEO & Publisher David B. Lovins, President Vincent M. Valvo, Group Publisher

& Editor in Chief FINANCE & ADMINISTRATION Jeffrey E. Lewis, Controller / Director of Operations EDITORIAL Christina P. O’Neill, Custom Publications Editor Cassidy Norton Murphy, Associate Editor ADVERTISING George Chateauneuf, Publishing Division

Sales Manager Richard Ofsthun, Advertising Sales Manager Cara Inocencio, Advertising Sales Manager

4 Observing the Tenth Anniversary of September 11

message from the chairman Taking Our Industry Back Through Member Engagement 5 message from the president Strengthening Relationships

7

message from the Commissioner Community Banking and a Path Forward 8 economic update American Dream Has Shifted, at Least for Now

6

10

departments: news and notes 16 Professional Development Calendar 22

16

EVENTS Sarah Warren, Events Director Emily Torres, Advertising,

Marketing & Events Coordinator DESIGN & PRODUCTION John Bottini, Creative Director Scott Ellison, Senior Graphic Designer Ellie Aliabadi, Graphic Designer

©2011 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210. Call 800-356-8805.

7 Fourth Quarter 2011 | 3

They Will Never Be Forgotten!

I

n observance of the tenth anniversary of September 11, 2001, the Maryland Bankers Association would like to take this moment to remember the 9/11 victims and survivors, and all of their families, as well as all those that rose in service in response to the attacks, including first responders, recovery workers, volunteers, and public safety personnel. They will never be forgotten!

While recalling that tragic day ten years ago, let us never forget the leadership that the banking industry demonstrated here in Maryland. The day after 9/11, MBA member banks teamed up with WBAL TV and the American Red Cross to launch the Baltimore Cares Relief Fund Campaign. Fortynine Maryland banks established accounts for collecting contributions to the American Red Cross and collectively raised nearly $2 million and provided over $200,000 in seed money to open the accounts.

The MBA would like to thank our member banks for what you did on that September day ten years ago and continue to do to this day in serving your clients and communities.

As MBA’s President & CEO Kathleen Murphy said in her November/December 2001 column in The Maryland Banker, “When the sky is the darkest, stars shine brightest. The character of the banking industry is a bright shining star!” ■

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Message from the Chairman MARY ANN SCULLY | MBA CHAIRMAN

CHAIRMAN, PRESIDENT & CEO

HOWARD BANK

Taking Our Industry Back Through Member Engagement

S

omehow Vince Lombardi’s inspirational words ring true for banking these days: “The greatest accomplishment is not in never falling, but in rising again after you fall.”

Three years after the beginning of the worst financial crisis in recent memory, I believe our industry has to move into offense mode rather than the defense mode we have been playing since the summer of 2008. Weighed under by onerous new regulations as well as the prolonged economic downturn, many bankers are feeling victimized right now, but that’s not going to either reset our industry image in the forum of public opinion – or strengthen us from within.

I have made membership engagement with the Maryland Bankers Association (MBA) a top priority in my year as chairman.

Under the leadership of former MBA chairman Scott Wilfong, the 2010-2011 Member Value and Financial Growth Task Force developed a strategy to improve the profitability and relevancy of the MBA’s professional development and member services activities. A very positive outcome of that effort has been to encourage MBA members to be more involved in the MBA; this additional visibility has increased member participation in programs and services.

We welcome this participation in far more than the MBA’s professional development offerings and services. I am convinced that membership engagement is a key to growth and success for banks like mine as well as the association. We know that institutions that derive the greatest value in MBA membership are

those that are most involved. Likewise, the MBA’s success in each of its mission areas – advocacy, professional development, public relations/communications, financial education, and member services – is inherently linked to the involvement in and support from a broad cross-section of members.

With these links, members become stronger. Large banks have government relations staff, but even they can’t keep on top of every state, municipal or local issue.

Small banks have no government relations staff to speak of. The MBA is the avenue through which we in our industry can speak in unison, leverage our individual impact, and strengthen both our industry position and our industry profile. Higher involvement with the association allows us to seize upon our individual strengths and to magnify them. Banks understand better than anybody the positive effects of leverage in the hands of a responsible and experienced banker.

To that end, the MBA has formed the Member Engagement Task Force. Chaired

by MBA board members Brant Standridge, president of Maryland operations for BB&T, and Dan Schrider, president and CEO of Sandy Spring Bank, the Task Force will seek to determine the reasons why some members are more engaged than others and look for strategies for strengthening those ties.

Our first mission is to reach out to members who are already engaged.

Members have different goals for what an MBA membership provides for their institutions. We are all challenged by our busy schedules and competing priorities.

We want to determine how some bankers

manage to stay very engaged, why they are engaged, and how they make their engagement work. So we’ll be asking them why they attend the MBA convention and regional meetings, why they participate in committees and conference calls, and why they join us in Washington, D.C. and/or Annapolis each year.

As important, we also want to learn what we can do differently to promote engagement from those less involved.

In January 2012, we will report the Task Force’s findings to the board of directors of the MBA. The board will then decide what changes may need to be made to strengthen member engagement.

I mentioned in my acceptance speech at the MBA Convention earlier this year that we need to stop feeling – and acting – like victims. We need to get back up and take proactive action. All MBA members, both large and small institutions, can and must unite – to change the message, ensure that public policy decisions are right not only for us but for the country as a whole, and ensure that all of our constituencies understand that the fate of our industry and the fate of our country are ultimately linked.

Former MBA Chairman Scott Wilfong talks about banking being a noble profession. It is. As his successor, it’s my goal to empower our members to take the opportunity this crisis has given us, and be the best that we can be. The first step is getting engaged. Please let me or the Member Engagement Task Force know your thoughts.

■ Mary Ann Scully is the chairman of the Maryland Bankers Association. Reach her by email at mascully@ howardbank.com.

Fourth Quarter 2011 | 5

Maryland Banking School Graduates Next Generation of Leaders Student Financial Education Awards Most Consumer Education Presentations Sandy Berna Baltimore County Savings Bank Most Consumers Reached Sandy Berna Baltimore County Savings Bank

2011 Maryland Banking School Graduates

T

he Maryland Banking School announced the latest graduates at the University of Maryland University College on August 5. A three-year program, the Maryland Banking School offers a comprehensive curriculum that addresses the current issues and challenges as well as providing a foundation in all areas of the banking industry.

Bill Grant, chairman of the ABA’s America’s Community Bankers Council, and chairman and CEO of First United Bank & Trust, offered the commencement address.

In his speech, Bill recalled themes from the classic American movie, It’s a Wonderful Life, and explained how the movie serves as a reminder for all of us today. He shared with the graduates and guests that, as bankers, service to our communities is a vital part of our mission, that the only constant in our environment is change, that everything begins and ends with character and commitment and that we can and do make a difference.

Academic Awards Lilian T. Moffat Award Sandy Berna Baltimore County Savings Bank Board of Trustees Award Dawn N. Lewis First United Bank & Trust

*Sandy Berna Baltimore County Savings Bank Timothy S. Boston The Bank of Delmarva *Joseph L. Clarke EagleBank Laura Cranston Harford Bank *Justin Cunnane Susquehanna Bank *Donald J. Hoyt Susquehanna Bank *Michelle Kelso Susquehanna Bank *Dawn N. Lewis First United Bank & Trust *Daryl Motley, CPA Community Bank of Tri-County *Dushanti Peiris Sandy Spring Bank *Paul Price The Federal Reserve Bank of Richmond Gregory S. Proctor, III Old Line Bank *Rocco Ricci Howard Bank *Keith R. Sanders First United Bank & Trust *Matthew Turner The Federal Reserve Bank of Richmond * Denotes MBS honors students

6 | The Maryland Banker

Message from the President KATHLEEN M. MURPHY | PRESIDENT & CEO

MARYLAND BANKERS ASSOCIATION

Strengthening Relationships

F

or our industry, one of the most important votes that took place in Congress recently was in the United States Senate on the provision to stop and study the effect of the DoddFrank Act interchange provision which, for the first time, required the Federal Reserve to set the pricing in a business to business contract.

While the provision received a majority vote in the Senate, it ultimately failed, as it was unable to reach the critical 60th vote in support. We were pleased that Sen. Barbara Mikulski reversed her position on the Dodd-Frank amendment and supported the stop and study provision. She spoke at length with former chairman and current board member of The Columbia Bank, John Bond, as she was deliberating about the issue. She knows and trusts John, and knows she will get a straight answer from him. That trust and that relationship developed over many years, during meetings, conversations and community meetings where the banker was not asking for something. It was over those years that John Bond was able to convey the role of his bank in serving Maryland consumers and businesses.

Bill Grant, chairman and CEO of First United Bank and Trust, engaged in frequent and sometimes daily communication with Sen. Ben Cardin and his staff about the interchange provision.

The MBA and many members across the state also voiced concerns about the impact that the interchange provision would have on their ability to serve their clients, particularly those in need of basic banking services. While Cardin did not vote in unison with Mikulski, and

Effective advocacy includes a strong political action committee, and ours is Maryland BankPAC, which is affiliated with ABA BankPac. Participating in the 2011 check presentation to ABA BankPAC are (from left to right) Jeff Plagge, chairman, ABA BankPAC and chairman, president and CEO, Midwest Heritage Bank, FSB, Clive, IA; Bill Grant, chairman and CEO, First United Bank and Trust, Oakland; Kathleen Murphy, Jim Cornelsen, president and CEO, Old Line Bank, Bowie; Steve Wilson, ABA chairman and chairman, president and CEO, Lebanon Citizens National Bank, Lebanon, OH; Bill Couper, president of the Mid-Atlantic Region, Bank of America, Washington, D.C.

ultimately rejected the stop and study provision, he called Bill Grant personally the day after the vote to thank him for his communication with his office and asked him to stay in touch with him in the future.

Over the last two years, the MBA has been engaged with members of our Congressional delegation in unique ways that provide banking resources and expertise in the areas that matter most to the member of Congress. We have worked with Rep. Elijah Cummings on a firstof-its-kind program, a Borrowing Guide for Faith-Based Institutions. This led to a successful pilot program this summer, “Building Bridges: Understanding Faith-Based Financing,” which drew 130 faith-based leaders and bank relationship managers. Cummings cares deeply about all of his constituents, and has a passion for the faith-based community, particularly finding ways to bridge the challenges churches are facing in the new lending

environment. Without tremendous involvement from several MBA members, this creative new program would not have become a reality.

Likewise, Rep. John Sarbanes has been focused on small business financing since he took office four years ago. We have had several meetings with Sarbanes and worked with him to bring MBA members to “speed dating” lending forums in Anne Arundel and Howard counties to match businesses with loan needs to banks that are lending.

Relationship-building with policymakers takes time and energy, just as building a relationship with a friend takes time. Shared experiences, over time, build that trust and bond.

■

What’s On Your Mind?

It is my honor to serve this great industry. Please contact me at any time to discuss industry issues of importance to you at kmurphy@mdbankers.com or 443-837-1601.

Fourth Quarter 2011 | 7

Message from the Commissioner MARK KAUFMAN | MARYLAND COMMISSIONER OF FINANCIAL REGULATION

Community Banking and a Path Forward

T

here is little doubt that the financial crisis and its aftermath have been difficult for the community banking industry. Compliance and enforcement burdens have increased across the board, and community bankers rightfully point to the sheer volume of legal and regulatory changes with concern and frustration. A crisis that exposed terrifying systemic risks has given way to a financial system dominated by fewer and larger institutions. The consolidation that has characterized the banking industry in recent decades seems poised to grind onward.

This trend is not a healthy one.

Community banks throughout Maryland and the U.S. play a key role in local economies. They deliver credit, particularly small business credit, to our communities while providing diversity that stabilizes the broader system.

Ensuring the viability of the community bank model is a critical focus of the state banking commissioners who supervise the majority of these institutions. We are working to avoid a “one-size-fitsall” approach that suffocates smaller institutions with unnecessary or inflexible operating requirements and constraints.

In fairness, federal policymakers have taken a measure of notice and implemented some steps to respond.

Increased capital requirements for the largest institutions and exemptions from major elements of the Dodd-Frank Act,

8 | The Maryland Banker

from CFPB examination to the Durbin amendment, for banks under $10 billion reflect a clear sense that all institutions are not equal. The effectiveness of these provisions remains to be seen, but the legislative predicate for a tiered approach to regulation has been established.

Likewise, the Federal Reserve has created a special subcommittee that includes former Maryland Commissioner Sarah Bloom Raskin to evaluate the impact of regulatory policies on small banks.

There’s no denying that regulatory changes are costly and difficult for community banks. But, as former banker and current Federal Reserve Governor Elizabeth Duke noted at the MBA’s First Friday Economic Outlook Forum in January 2011, “community bankers are creative, committed, stubborn, and resilient.” I have confidence that, given time, our community banks can and will adapt. I see it every day.

In the long run, however, maintaining a vibrant community banking system also requires a strategic review that looks at the ability of strong and successful institutions to grow. Well managed community banks must have access to growth opportunities and the capital to meet them. They must have a viable chance to participate in consolidation opportunities that are likely to take emerge. If those seeking to grow cannot move forward, the sector will fall further behind.

Access to capital is important to organic growth and even more critical for a potential acquisition. Grant Thornton recently completed a national survey of executives at banks of all sizes. The survey asked management, “How do you intend to grow in the future?” Roughly one third of small banks pointed to mergers, the second most prevalent response behind organic growth. Capital access is a core component to such a strategy.

Unfortunately, current restrictions discourage institutional capital sources from taking a stake greater than 24.9 percent in any institution regardless of size. Over that level, the investor risks being deemed a “source of strength” and having an entire institutional fund exposed to potential losses. Recognizing the need to prevent abuse, the impact on smaller institutions is severe as the math unavoidably results in a deal size that is often too small to attract investor interest. Raising the 24.9 percent limit for banks under $1 to $2 billion would acknowledge the unique difficulty that size creates when applied to such a percentage without creating broader risks to the system.

Lacking access to institutional capital, smaller institutions must raise capital from many smaller investors or find a merger partner willing to move forward on a stock-for-stock basis. The latter “merger of equal” transactions are notoriously difficult to execute with

social issues compounding financial ones.

In either case, the community bank is likely to trip the “500 investor exemption” beyond which it must provide extensive and costly financial disclosure under our federal securities laws. Given that detailed call reports are already publicly available on a more timely basis, raising the 500 investor threshold for small banks seems like another reasonable step to remove an impediment with little associated risk.

In the years to come, some community banks are going to be sold and, absent a re-acceleration of de-novo chartering, the industry is going to continue to consolidate. Some of the activity will be precipitated by costly regulation, and we should work to reduce those burdens where possible. In many other cases, however, the activity will be driven by issues ranging from market or portfolio conditions to management and shareholder dynamics. Regardless, we need to ensure that successful community banks can participate in the process actively or the community banking system will erode. The 24.9 percent threshold and the 500 investor limitation are two examples, and a more detailed review is warranted. It’s not enough for successful community banks to survive, they need to have a path forward.

■

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Fourth Quarter 2011 | 9

Economic Update ANIRBAN BASU, MA, MPP, JD

| CHAIRMAN & CEO, SAGE POLICY GROUP CHIEF ECONOMIC ADVISOR, MARYLAND BANKERS ASSOCIATION

American Dream Has Shifted, at Least for Now

T

he initial use of the phrase “the American Dream” appears to be in James Truslow Adam’s The Epic of America, published in 1931. At first, the notion was much broader than individual aspirations and existed in the context of a nation that stretched from the City on a Hill to Gold Mountain (see www.pbs.org/moyers/journal/ americandream). Over time, the concept was increasingly embraced by individuals, taking on a distinctly materialistic interpretation. At the heart of this notion of individual fulfillment of the American Dream has been the notion of homeownership.

Not coincidentally, federal policymakers have been busily supporting homeownership since at least the 1930s through entities like Fannie Mae and Freddie Mac. The Federal Housing Administration was also created in the 1930s with the objectives of improving housing standards and insuring mortgages on single-family and multifamily homes.

The once widely-held perception that home prices move in only one direction was both caused by and resulted in an ever-expanding appetite for homeownership. As home prices increased, more Americans recognized homeownership as a predictable path to prosperity. By late 2004, homeownership in America reached its all-time peak of 69.2 percent. Among married couples with children, the homeownership rate stood at 84 percent, and would continue 10 | The Maryland Banker

U.S. Homeownership Rate, 35 and younger, 2005-Q1 2011

Source: U.S. Census Bureau

to rise for much of the next two years.

This was the result of a slew of factors all pushing in the same direction. The aspirations of households conspired with financial innovation and federal support for broadening access to credit to produce an untenable boom in housing.

Since the peak, homeownership has slipped by nearly 3 percentage points.

Still, at its current level of 66.4 percent, homeownership remains well above its historic range of the 1960s-1990s. A recent study conducted on behalf of the Mortgage Bankers Association predicts that homeownership rates will decline another 1 to 2 percentage points over time and other research indicates that price stability is not that far away.

But perhaps predictions like these will prove excessively optimistic. For instance, after the Great Depression, the Dow required 35 years to return to pre-crash levels. Japan’s Nikkei trades at less than a third of where it peaked 22 years ago.

While the most recent U.S. economic

downturn was not nearly as severe as the one that took place during the Great Depression, housing prices declined 31 percent during that period and have fallen 33 percent more recently. In other words, even if the broader economy did not experience a depression, the housing market did.

The awful performance of the housing market over the past five years appears to have permanently or semipermanently altered America’s attitude to homeownership. According to a Harris Interactive poll, roughly 70 percent of Americans aspire to own a home, down 7 percent from levels a year ago. An Allstate Heartland Monitor Poll released in March revealed that young adults appear uncertain about buying a home, with 49 percent saying it is a sound investment and an equal percentage saying it’s just too risky.

With many older households choosing to remain in place in part to avoid selling their existing homes at

a loss, the housing market’s recovery continues to depend disproportionately upon younger, first-time buyers. But the combination of soft job growth, welcoming parents and apartment landlords and a spreading sense that renting is better than owning suggests that genuine recovery may be years away.

For bankers, this translates into diminished transactional volume. Renters simply do not finish basements or add pools and decks. Even refinancing mortgages has become more problematic given diminished equity. Three of 10 homes now sell at a loss. According to Pimco, American homeowners have equity equal to 38 percent of their homes’ value, down a third since 2005 and half the corresponding level of 1950.

More uncertainty lies ahead, both for reasons of finance and public policy.

Bond markets have had to wrestle with a sea of challenges lately, including the federal government’s ongoing inability to smoothly and predictably manage its affairs. Additionally, mortgage reform continues to march ahead, with Washington seeking to play a smaller role in the mortgage market. Presently, more than 90 percent of loans flow through Freddie and Fannie, translating into roughly $1.5 trillion worth of mortgage debt. Efforts to reduce participation by Freddie and Fannie are likely to be jarring to the mortgage market, though new avenues of growth for banks will undoubtedly be created in the process.

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Fourth Quarter 2011 | 11

SUCCESSFULLY NAVIGATING MURKY WATERS FOR DISTRESSED LOANS

BEST PRACTICES FOR LENDERS

BY SUSAN J. KLEIN

S

ince the start of the economic crisis, credit markets have tightened, companies have struggled to survive, loan defaults have risen exponentially and lenders have been faced with decisions on whether to attempt a workout of a loan relationship or to begin exercising rights immediately, being always cognizant that a bankruptcy may be looming. This article examines strategies lenders should employ to successfully navigate these murky waters for commercial loans secured by personal property collateral.

Strength of Collateral A lender’s strategy will often be dictated by the type and value of a lender’s collateral. Early in the process, the secured lender should review the security documents to confirm the existence, priority and perfection of the lender’s lien on collateral. The lender should also verify that the security agreement (and other documents) are properly executed by the debtor and that there are no blanks or missing exhibits. When evaluating the collateral, lenders should obtain UCC reports, title searches, and judgment and lien reports.

The lender should verify that the financing statement is filed in the correct place. For most personal property collateral, the filing must occur in the state of organization or incorporation of the debtor. Financing statements expire after five years unless a continuation statement is filed within six months prior to the expiration date of the original financing statement or a previously continued financing statement. The lender should verify that the financing statement contains the correct name of the debtor. The financing statement should have the official name listed on the organizational documents filed with the state. Trade names are unacceptable.

Confirm that the collateral is adequately described. The security agreement may not list the collateral as “all assets,” but “all assets” is a permissible description for the financing statement if the debtor is providing a blanket lien on assets. For the description of inventory or equipment, it is important to remember that the collateral must be described based on how it is used by the debtor. For example, if the debtor is the seller of heavy equipment, the equipment it holds for sale should be described as “inventory,” not “equipment.” continued on page 14

Fourth Quarter 2011 | 13

Best Practices for Lenders continued from page 13

If the collateral is inventory or equipment, the lender needs to ascertain whether the lender’s file sufficiently identifies the collateral. State law may provide a judicial remedy (for example, a replevin action in Maryland) to obtain possession of the lender’s tangible collateral in the event the debtor refuses to deliver possession of the collateral. However, this type of remedy may be unavailable if the lender is unable to provide an adequate description of the property (e.g. type, model and quantity of the collateral inventory or equipment) and the value of the property.

Current accounts receivable and accounts payable agings should be obtained from the borrower. They should be reviewed for trends, concentrations with a particular customers, ineligible receivables and compliance with borrowing base requirements.

As a general rule, once a lender identifies any deficiency with its collateral it should attempt to remedy the deficiency. However, the lender should be cognizant that delays in granting a security interest or perfection of a security may result in the lien being avoided as a preference if the transfer occurred within ninety days of a bankruptcy filing. In the unfortunate situation where a bankruptcy court determines a lender is an insider of the debtor, the look back period for preferences is one year.

If the lender can work with the borrower, entering into a forbearance agreement provides the lender with time to cure the deficiencies and may be preferable to litigation, which is more likely to result in a bankruptcy during the preference period.

The same issues arise in taking additional collateral or junior liens on property as a part of a forbearance arrangement. If properly structured, the forbearance period should extend beyond the preference period. Sophisticated obligors may request an agreement tolling the preference period if they realize deficiencies exist in the security documents.

Review the Loan Document Beyond the security documents, the lender will want to examine other documents such as guarantees and obtain updated financial statements from all obligors. The current financial statements of all obligors may highlight additional collateral that can be obtained to secure the indebtedness. Even if the lender is unable to obtain additional collateral in a workout, learning the identity, location and other pertinent information regarding tangible assets owned by the obligors may prove useful in executing on a judgment. For example, if the debtor owns stock, the method of executing on the stock differs depending on whether the stock is certificated or uncertificated. Therefore, it is important to know whether the stock is certificated or uncertificated, the location of the stock if it is certificated, and the chief executive office of the issuer if it is uncertificated so that the writ of attachment can be properly served.

Current financial statements should be compared with prior financial statements to determine whether any assets have disappeared. If the obligors are unable to provide a satisfactory explanation, this may impact the lender’s approach to the borrower and other obligors.

14 | The Maryland Banker

The lender will need to review guarantees to determine whether they are unlimited, and, if they are not, what recourse the lender has against the guarantors. Now is also the time to ascertain whether there are additional guarantors that can add value to the relationship.

Know Your Borrower and Guarantor Identify the causes of the borrower’s financial problems.

Ascertain what external factors may have played a part in the deterioration of the loan. Central to any strategy will be an evaluation of the management of the borrower. Is the current management competent? Can the current management be trusted and have they been forthright? Evaluate the current operations of the borrower and whether the borrower is viable. Critical to a successful workout is competent management, a viable product and financial resources.

Meet on site with the borrower. Meet with the borrower at the place of business to determine the condition of the business operations and the collateral. Plant visits and monthly reporting provide an opportunity to determine whether the borrower is engaged in deceptive or fraudulent practices. Conduct or hire a consultant to perform field audits of the inventory and equipment conducted. Equipment and inventory should be appraised at “market,” “in place,” “orderly liquidation” and at “fire sale” values.

Adjustments should be made for obsolete or ineligible items of inventory. Meet with key members of the internal accounting team and external accountants for the borrower.

Obtain short term and long term budgets from the borrower. As part of any forbearance arrangement, the borrower should be put on a budget and provide monthly reporting as to compliance with the budget. The borrower should provide on a monthly basis: 1. profit and loss statements; 2. accounts receivable reports, accounts receivable agings, accounts payable reports and accounts payable agings; and 3. budget variance reports.

Review the Administration of the Loan The lender should review the lender’s internal communications regarding the loan and communications with the borrower and any other obligors to gain both the history of the loan and the relationship of the parties. The lender should identify any communications that could be detrimental to the lender in litigation with the obligors. Remember, internal emails can be subpoenaed by the borrower. The file should be reviewed for side letters and consents that deviate from the loan documents.

If there is a course of dealings waiving defaults or foregoing the enforcement of covenants in the loan documents, the lender may need to give the borrower reasonable notice before enforcing these provisions of the loan documents. This supports the notion that the earlier the lender can identify the problems, the more likely the lender will be able to fix them before finding itself in litigation with the obligors.

Communications should be centralized so that borrower cannot do an “end run” around the asset manager or special assets department entrusted with preparing and executing a plan. For consistency, all negotiations should be handled by the same one

When a loan or a lending relationship becomes troubled, early intervention is the key to a successful strategy. or two representatives of the lender. The lender should avoid assurances that a work-out is possible. Conversely, the lender should avoid the appearance of a “knee jerk” reaction by declining even reasonable requests of the borrower. Ideally, early in the process the obligors will retain counsel so that the lender’s counsel can deal directly with the obligors’ counsel.

Forbearance Agreements If a consensual workout may be feasible, the lender should consider entering into a pre-negotiation agreement. The purpose of the pre-negotiation agreement is to clarify that unless final documents are executed, no oral agreements are enforceable, discussions are strictly settlement communications and are not discoverable, and the lender is not foregoing other options.

Although Md. Code Ann., Cts. & Jud. Proc. §§ 5-408, et seq. provide that as to financial institutions1 oral modifications of commercial credit agreements or oral promises to forbear from collecting such a debt or exercising remedies are unenforceable, it is still a good practice to enter into a pre-negotiation agreement so that the expectations of the parties are clear during negotiation of a forbearance agreement.

Certain key terms of any forbearance agreement are: • Acknowledgement by the obligors of the outstanding debt (principal, interest, late fees, etc.) and that there is no defenses, counter-claims or right of recoupment.

• A reservation of rights by the lender against all obligors in the event of a default or the expiration of the forbearance period.

• Consent to the provisions of the agreement and ratification of the loan documents by all obligors.

• A broad release, which should include a voluntary relinquishment and waiver of all claims, counterclaims or the like, whether known or unknown, against the lender, its employees, officers, directors, affiliates, parent company and counsel.

• Waiver of a jury trial (this provision should be in bold print, conspicuous and near the signature lines).

• Confession of judgment as a remedy.

The forbearance agreement should not contain a provision prohibiting the filing of a bankruptcy because this type of provision is void as against public policy. Similarly, the agreement should not contain a waiver of the automatic stay of 11 U.S.C. § 362 with respect to any collateral as those type of clauses have been held to be unenforceable. Given the importance of the automatic stay in bankruptcy, some courts have refused to enforce provisions in forbearance agreements consenting to stay relief as a matter of public policy. Although bankruptcy courts uniformly agree that these provisions are not self-executing or

per se enforceable, the trend among courts is in favor of granting relief from the bankruptcy stay when a debtor has agreed to consent to relief from the stay, or agrees not to raise defenses to a lift stay motion if certain factors weigh in favor of the creditor.

In Maryland, the factors reviewed by the bankruptcy court in determining whether to enforce the waiver are: • Sophistication of the party making the waiver.

• Proximity in time to the bankruptcy.

• The consideration by the lender, including whether there were substantial concessions by the lender and whether the lender assumed risk.

• Feasibility of the debtor’s plan.

• Whether other parties with legitimate interests in the bankruptcy affected (e.g. large unsecured class, subordinated leases, employees).

At a minimum, if a forbearance agreement contains a provision consenting to the lifting of the stay or an agreement not to raise defenses to a lift stay motion, in certain jurisdictions including Maryland, this may be considered as a factor in deciding if cause exists to lift the automatic stay.

Final Analysis When a loan or a lending relationship becomes troubled, early intervention is the key to a successful strategy. Ascertaining the competence of the borrower’s management and the viability of the borrower are necessary to formulate a plan. Because the lender will have the greatest leverage if it is well collateralized, an analysis of the type and value of the collateral must be performed early in the process. During this process any collateral deficiencies should be identified and remedied, if possible. If additional collateral or guarantors can be provided to strengthen the lending relationship, or if loan document deficiencies can be cured, these factors may weigh in favor of attempting to achieve a forbearance arrangement with the obligors, rather than immediately enforcing the lender’s default remedies. If a forbearance arrangement is feasible, the agreement should contain certain essential terms (identified in previous section) to help protect the lender in the event of a default or bankruptcy. A consistent plan and a well informed lender has the greatest ability to minimize loss when a good loan goes bad.

■ 1

Both “financial institution” and “credit agreement” are defined in Md. Code Ann., Cts. & Jud. Proc. § 5-408.

Susan J. Klein is a member of the bankruptcy and reorganization practice group at Gordon Feinblatt Rothman Hoffberger & Hollander LLC. She can be reached at 410576-4137 or sklein@gfrlaw.com.

Fourth Quarter 2011 | 15

News &

Notes

Members in the Community

The Columbia Bank employees volunteer at the Maryland Food Bank to help sort food.

With donations of food and supplies to the Maryland Food Bank being at an all-time low, The Columbia Bank helped raise awareness and increase contributions to help feed hungry individuals and families in their community. From May 25 through June 17, The Columbia Bank donated $1 to the Maryland Food Bank for every new Facebook “Like” or Twitter Follower they received. The Columbia Bank presented a $500 check to the Maryland Food Bank from their “Feed the Food Bank” social media campaign and after the check presentation, employees of the bank collectively gave 30 volunteer hours to the Maryland Food Bank helping to sort 19,695 pounds of food. Some of the food that was sorted was donated by The Columbia Bank’s headquarters in Columbia that collected and donated 1,937 pounds of food, which will provide 2,518 meals to hungry families across Maryland.

Mike Galeone, executive vice president of community banking at The Columbia Bank, was recently recognized

by Leadership Howard County Mike Galeone for his outstanding leadership efforts in the community. Galeone was presented with the Distinguished Alumni Award at the Annual Awards Dinner and Graduation celebration in June. Leadership Howard County also welcomed their newest class of Premier and Essentials graduates.

Among the graduates were The Columbia Bank employees Stanley Wladkowski, premiere graduate, vice president and branch manager of the Long Gate Office, and Joseph Zajdel, essentials graduate, vice president commercial banking.

16 | The Maryland Banker

Three employees of The Columbia Bank have been honored by the Cystic Fibrosis Foundation as one of Howard County’s Finest. Joseph Zajdel, vice president Joseph Zajdel of commercial banking; Lisa Swan, branch manager of the Oakland Mills Office; and Ryan Haussmann, customer service representative of the Ellicott City Office.

Lisa Swan Howard County’s 39 Under 39 Finest Event to benefit the Cystic Fibrosis Foundation, honors Howard County’s most outstanding young professionals for their success in business, leadership in the community, and their fundraising commitment to the Cystic Fibrosis Foundation.

Leadership Anne Arundel held their graduation event at the Maryland Hall for the Creative Arts in Annapolis. Among the graduates was Steve Wientge, assistant vice president and branch manager of The Columbia Bank’s Bowie Office. Wientge successfully completed Steve Wientge the nine-month Flagship Series program. The 2011 class focused on building community knowledge, developing leadership skills, and gaining a philosophical understanding of community trusteeship. As a part of the program they met and discussed critical regional issues with leaders in the public, private, and non-profit sectors to identify areas of community need and methods required to serve as community leaders.

Dave Wheeler, senior vice president of The Columbia Bank and Vicki Callahan, director of Opportunity Builders Inc. and president of MACS.

Dave Wheeler, senior vice president of The Columbia Bank, was recognized at the Maryland Association of Community Services (MACS) Annual Meeting and Volunteer Awards Program, winning The Arc of the Central Chesapeake Region’s Volunteer of the Year Award. MACS, is a private nonprofit organization dedicated to strengthening agencies to support people with developmental disabilities and their families.

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Kulley Bancroft, Sandy Spring Bank’s vice president of public and community relations, is a 2011 recipient of the Annapolis and Anne Arundel County Kulley Bancroft YWCA’s TWIN Award.

The Tribute to Women and Industry Award (TWIN) honors women who are making substantial contributions to their respective organization or company in a managerial role, and is a highly respected distinction in the community.

A recent article was also published in The Capital in July about Bancroft, titled “Bank Exec Devours Books; Polished off 426 in Year.” Amazingly, Bancroft plows through books at a pace of 300 pages a day. Her record is 426 books in a year. She says: “Reading is a way to reconnect, re-center myself. Books are an adventure to me. I can’t imagine life without reading.”

Zurich was voted “Best In Class” by risk managers from a choice of more than 50 providers as the number 1 favorite of insurance buyers in the annual “Risk Manager Choice Awards” in the “best overall” insurance companies category. continued on page 18

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Share your bank’s achievement.

Send your news and photos to Cindy Gentilcore at cgentilcore@mdbankers.com.

roBert l. MorriSon, Jr. MAnAging DiRecToR bMoRRiSon@SRAbAnk.coM 240-674-3866

Fourth Quarter 2011 | 17

News &

Notes

continued from previous page

The Bank of Glen Burnie Raises Money for the SPCA of Anne Arundel County Mike Livingston, president and CEO of The Bank of Glen Burnie, presents one of their donation checks of $2,500 to the SPCA of Anne Arundel County. The SPCA provides shelter, food, and medical care to homeless animals as they wait for loving homes. Livingston, a passionate animal lover, created a program in which $10 for every new account opened at the bank was donated to the SPCA. In addition, The Bank of Glen Burnie also participated in the SPCA’s “Walk for the Animals” on May 1 and raised $2,500 at the event.

Mike Livingston, president and CEO, The Bank of Glen Burnie, SPCA’s Mindy Nelson, and one of the available companion dogs, Solace.

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18 | The Maryland Banker

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Mark Lindig

Richard M. Riley

Michael S. McHale

Debbie H. Gosselin

Jeff W. Ostenso

Gary Shaivitz

Jennifer Joseph

Members on the Move Mark Lindig has been appointed CEO to lead Accume Partners in its next stage of evolution and growth. Mark has served as a regional managing director for Accume since August 2010.

Richard M. Riley joined BankAnnapolis as a mortgage loan officer, working out of the Bestgate branch. A University of Maryland graduate, Riley comes to BankAnnapolis from Washington Savings Bank, where he was a senior loan officer.

Prior to that, he held the same position at Severn Savings Bank for nearly 18 years. BankAnnapolis named three new members to its board of directors: Hospice of the Chesapeake President and CEO Michael S. McHale, Watermark Cruises President Debbie H. Gosselin, and CPS/Gumpert CEO Jeff W. Ostenso.

Gary Shaivitz joined Maryland Financial Bank (MFB) as senior vice president, responsible for overseeing operations for MFB and for MFB Advisory Services, LLC. He has had previous senior level assignments with HarVest Bank of Maryland, Allfirst Bank, Bank of America, Furash & Company, Baltimore Bancorp, and Equitable Bancorporation.

Jennifer Joseph has been named PNC Bank’s new market executive on the Eastern Shore of Maryland and Virginia, and Sussex County, Delaware. Joseph previously held a series of business banking and retail management positions of increasing responsibility, including her most recent position as business banking sales manager for the Eastern Shore. She has held various leadership positions in PNC’s Central Pennsylvania market, including branch manager, sector manager and business banking sales manager. continued on page 20

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Fourth Quarter 2011 | 19

News &

Notes

continued from previous page

Maryland Bank Services, Inc.

Welcome New Members Offering

business solutions, services and products Maryland Bank Services Preferred Provider

for MBA member banks.

Equias Alliance, LLC, a trusted partner to America’s banking institutions, is comprised of several of the most experienced former  independent consultants and  top technical resources of Clark Consulting. Their strategies and  practices enable clients to meet key financial goals, manage  benefit liabilities, enhance shareholder value, and attract and retain their best people.

They bring banks a comprehensive 

understanding of industry trends, given the changing landscape of compensation, benefits and investments. They provide expertise to banks with design and implementation of bankowned life  insurance (BOLI) portfolio strategies, BOLI program reviews, design of non-qualified benefit plans, and  administration of BOLI and non-qualified benefit plans using their experienced technical resources and superior technology.  For more information on Equias Alliance, contact  David Shoemaker at dshoemaker@equiasalliance.com or 901-754-4924. 

Investment Services ATM Sales & Services Loan Loss Prevention BOLI & Compensation Plans On Hold Services Business Continuity Overdraft Protection Services Checks & Marketing Solutions Printing, Supplies & CRA Solutions Promotional Items  Document Destruction  Retirement Services  Energy Consulting Maryland Bank Services, Inc. Offering  Telecom & Utility Auditing Financial Literacy BUSINESS SOLUTIONS, PRODUCTS  Title Services  Flood Certifications SERVICES AND  Voice & Data Connectivity Identity Theft Solutions for MBAmember banks.  Insurance • ATM Sales & Services • BOLI & Compensation Plans • Business Continuity • Checks & Marketing Solutions • CRA Solutions • Document Destruction • Energy Consulting

• Financial Literacy • Flood Certifications • Identity Theft Solutions • Insurance • Investment Services • Loan Loss Prevention • On Hold Services

• Overdraft Protection Services • Printing, Supplies & Promotional Items • Retirement Services • Telecom & Utility Auditing • Title Services • Voice & Data Connectivity

For more information on Maryland Bank Services For more information on Maryland Bank Services Preferred Providers, Preferred Providers, call Joanna Weinreich at 443-837-1608. call Joanna Weinreich at 443-837-1608.

20 | The Maryland Banker

Associate Members BuckleySandler, LLP is a leading law firm serving the financial services industry with deep experience counseling banks, mortgage lenders and servicers, credit card companies, insurance companies, and other financial services companies. With over 120 lawyers in Washington, DC, Los Angeles and New York, BuckleySandler provides best-in-class legal counsel to meet the challenges of its financial services industry across the full-range of government enforcement actions, complex and class action litigation and transactional, regulatory and public policy issues. For more information on BuckleySandler, contact David Baris at dbaris@ buckleysandler.com or 202-349-8004.

BVFR Associates, LLC is an investment banking/financial solutions firm that is committed to providing the highest level of financial intermediary services to small and middle market companies. BVFR has specialized in structuring commercial loans and in preparing applications for the USDA Rural Development Business and Industry (B&I) Loan Guarantee Program. For more information on BVFR Associates, contact Henry Garner at hgarner@bvfr. com or 410-234-3650).

John Hancock Retirement Plan Services provides annuities, life insurance, long-term care, mutual fund and retirement plan products. For more information on John Hancock Retirement Plan Services, contact Dennis Beaudet at dennis_beaudet@jhancock.com or 302-437-5594, or Chip Saltz at csaltz@ jhancock.com or 617-663-7960.

United Computer Sales & Service, Inc. is an IT, security and compliance services provider engineered to mitigate security and compliance risk, reduce IT expenditures, and improve operating efficiencies to community financial institutions. For more information on United Computer, contact Sebastian Fazzino at sfazzino@ucss.com or 704-582-2976. â–

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Fourth First Quarter 2011 | 21

SPECIAL EVENTS

Mar yland Bankers Association Professional Development Calendar

2011

October 17

General Accounting (AIB)

Law & Banking: Applications (AIB)

October 6

BankNext

Supervisor Certificate (AIB)

December 15

CFO & Financial Management Forum

October 24

Principles of Banking (AIB)

November 7

Economics for Bankers (AIB)

Principles of Banking (AIB)

November 14

General Accounting (AIB)

Money and Banking (AIB)

2012 January 7

June 3-6

First Friday Economic Outlook Forum MBA Annual Convention

SEMINARS, WEBINARS,

SCHOOLS, AND ONLINE TRAINING

December 5

Law & Banking: Principles (AIB)

Principles of Banking (AIB)

Economics for Bankers (AIB)

December 12

General Accounting (AIB)

Principles of Banking (AIB)

Compliance ABA National Compliance School

IRA Personnel October 5

Basic IRAs (GSB)

October 26

Compliance with Federal Lending Regulations (Professional Bank Services)

October 12

IRA Reporting (GSB)

October 27

Mastering HMDA (Professional Bank Services)

October 11

Mergers and Acquisitions in the Current Environment (GSB)

Strategic Planning for a New Environment (GSB)

October 12

Risk Management for Community Banks (GSB)

October 13

MBA/Smith School Directors Program #1 – Credit Risk Management

October 26

Update on Regulatory Enforcement Actions (GSB)

December 8

MBA/Smith School Directors Program #2 – Enterprise Risk Management

Finance October 9-14

GSB Financial Managers School

October 13 & 20 Optimizing Pricing

Decisions in ALCO (GSB) November 14

Managing Interest Rate Risk (AIB)

December 7

Practical Approach to Anticipating and Managing Interest Rate Risk (GSB)

General Banking October 11

Principles of Banking (AIB)

Law & Banking: Principles (AIB)

22 | The Maryland Banker

Analyzing Financial Statements (AIB)

November 22

Global Cash Flow (3-Part Series) (GSB)

Monitoring and Updating Real Estate Values: Using Real Estate Cash Flow and Other Resources Beyond the Initial Underwriting (3-Part Series) (GSB)

A Practical Guide to Consumer Lending (3-Part Series) (GSB)

December 5

Consumer Lending (AIB)

Analyzing Financial Statements (AIB)

Marketing

October 15-21

Executive Management & Directors

November 7

October 19 & 26 IRA Frontline Fundamentals (GSB)

October 18

Money-Saving, Money-Making Marketing Ideas (GSB)

November 2-3

Creating Compelling Advertising for Community Banks (GSB)

November 9

IRA Beneficiary Distributions (GSB)

November 7

Marketing Financial Services (AIB)

November 30

Understanding and Processing Transfers and Rollovers (GSB)

November 10

The Next Generation of Customers (GSB)

December 7

IRA Required Minimum Distributions (GSB)

December 14

IRA Contributions (GSB)

November 17

Ways to Market Your Bank Online – Surf, Search and Social Strategies for Success (GSB)

Sales & Service

Lending October 4 & 6

Current Trends in Agricultural Lending (GSB)

October 11

Introduction to Agricultural Lending (AIB)

Analyzing Financial Statements (AIB)

October 19

Financial Statement Analysis (GSB)

October 24

Consumer Lending (AIB)

October 25

Commercial Real Estate Appraisals: Reviewing and Interpreting (4-Part Series) (GSB)

Commercial Real Estate Cash Flow: Analyzing Income- Producing or Rental Real Estate (4-Part Series) (GSB)

Keys to Understanding Personal Cash Flow from Tax Returns (3- Part Series) (GSB)

October 31

Introduction to Mortgage Lending (AIB)

October 12

Developing a Referral Program That Works (GSB)

Recipe for an Effective Sales Environment (GSB)

November 2-3

Eight Habits of Effective Branch Managers (GSB)

Security & Technology October 5

Developing a Risk Mitigation Strategy – Where Do I Spend My Next Security Dollar? (GSB)

October 16-21

GSB Bank Technology Management School

October 19

IT Audit for Community Banks (GSB)

Trust October 3

Introduction to Trust

Products and Services (AIB)

October 23-28

ABA National and Graduate Trust Schools

December 5

Basic Administrative Duties of a Trustee (AIB)

For detailed and updated information on all professional development programs, visit the Calendar section of the MBA’s website at

www.mdbankers.com.

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