Small Calif. banks seize chance to sell bad assets.

California community banks, which were battered by the state's protracted recession, are taking advantage of market conditions to jettison bad assets.

Soem are even using the community bank equivalent of bulk sales - deals that would have been impossible just a year ago.

The banks say they have been helped by reduced selling by the Resolution Trust Corp. At the same time, a group of distressed-asset investors is targeting California.

Whole Developments Auctioned

"People are clamoring for nonperforming assets, particularly in California," said Steve Didion, a bank analyst at Hoefer & Arnett in San Francisco. In Southern California, Guardian Bank is arranging a $50 million sale of nonperforming real estate loans, the bulk of its problem assets. San Jose-based Silicon Valley Bank has had significant success at whittling down its portfolio of foreclosed residential real estate through auctions of whole developments.

Meanwhile, confident of eventual recovery, Hawthorne Financial in Los Angeles is developing on its own several large residential projects that were taken back borrowers.

Signs of a Comeback

The spate of deals is one of the strongest signs yet that California's 416 community banks are making a comeback after suffering under the weight of severe real estate loan problems for the past several years. The banks were hit especially hard because, unlike their bigger brethren, they generally lack geographic diversification.

The group's nonperforming assets, which peaked in 1992 at 6.4% of loans and repossessed real estate, eased to 6% by the end of last year. Now, the banks are moving to improve that ratio more rapidly.

Los Angeles-based Guardian Bank, with $512 million in assets, decided on the bulk-sale strategy after the first quarter, when the carrying costs of foreclosed real estate and high reserves began eating away at the $20 million in capital the bank raised in January, said Kenton Johnson, senior vice president.

The bank plans to auction $50 million of nonperforming loans and real estate - almost its entire nonperforming portfolio - this summer.

"We've got to get back to profitability," Mr. Johnson said. "Getting rid of a large portion of our nonperformers will reduce our expenses and get rid of a drag on our earnings. The management of the bank wants to turn its attention to other strategic initiatives, something they can't do while we have so many problem assets."

After the sale, scheduled for the third quarter, Guardian's portfolio of nonperforming assets will consist of about $8 million of loans with high long-term recoverability.

Mr. Johnson said the real estate market stabilized in the later part of 1993, making the sale possible.

"When we started evaluating this option, our research indicated we could get 63% to 64% of customer falue [or 64 cents on the dollar]," he said. "As we get further on with the due diligence, we feel more confident that valuation will hold."

"What I don't like to see is people bleeding," Mr. Didion said. "It's a shame to bleed when you can just lop off the problem - like a tumor."

Mr. Didion said the large California banks, most notably Bank of America, were also to purge billions of dollars in bad assets through bulk sales in the late 1980s and in 1990. The community banks were not only behind the curve in recognizing their real estate problems, but also suffered from the fact that their smaller portfolios precluded bulk sales because the hit to book value was just too big.

Mr. Didion said prices are firming up in Southern California and are even rising in parts of Northern California. He said that just three years ago the prevailing rate for troubled-asset portfolios was between 35 cents and 40 cents on the dollar. Now he hears prices like 75 cents on the dollar.

Bids Being Sought

John Busch, executive vice president and chief credit officer for Silicon Valley Bank, with $990 million in assets, said the banks is putting bad assets up for bid, too.

"We don't fool around," he said.

In early 1993, Silicon Valley's nonperformers hit a peak of $67.4 million, made up of everything from unfinished residential development to shopping centers. Mr. Busch, who previously helped First National Bank of San Diego out from under a crushing load of bad real estate loans, said the bank evaluates the disposition strategy of each property separately.

To date, the most successful disposition for Silicon Valley has been a series of four auctions of residential developments in California that have significantly reduced nonperforming assets. Nonperformers are down 26.4% in the past year to $49.6 million.

Mr. Busch said he would rather sell a property sooner than later.

"The recovery is more certain," he said. But, he added, the eventual recovery from a bad credit is increasing as the RTC, which competed with banks and thrifts for buyers, winds down its operations.

However, some institutions are bucking the trend and holding on to their bad assets. Hawthorne Financial, an $880 million-asset thrift holding company in west Los Angeles, has most of its $168 million in nonperforming assets tied up in several large residential developments in Southern California that are far from completion.

In public disclosures, Hawthorne has said it plans to hold on to those properties, complete its development, and sell the finished lots to individual builders.

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