The fourth quarter is often a time when banks try to tidy up their balance sheets for the coming year. As they step up efforts to sell problem loans, this quarter could be the big flush.
In recent weeks several banking companies have announced that they have shed nonperforming assets or struck deals to do so. Loan-sale experts say interest in selling is picking up, with executives growing weary of playing defense and looking to start 2011 with a clean slate, or at least a cleaner one.
"I think there is a segment of the bank seller market that really has the desire to clean up their books for the end of the year and be able to move on next year," said Justin A. Barr, president of Loan Workout Advisers in Chicago.
Encore Bancshares Inc. in Houston, Whitney Holding Corp. in New Orleans and Flagstar Bancorp Inc. in Troy, Mich., are on course to sell more than of $679 million in toxic assets, most of which are nonperforming, this quarter. Last year's fourth quarter had similar activity as United Community Banks Inc. and First Busey Corp. sold large pools. This time around, a larger trend could take hold.
"I would like to believe that this could be the beginning of a more fluid market," said Mike Sheridan, the president of DebtMarket Inc., which runs an online marketplace for loans. "We hope that is the trend, but it is too early to make that assumption."
The most recent deals include Flagstar's plan to sell $474 million of nonperforming mortgages at 44 cents on the dollar, which would reduce its nonperforming assets by 41% from the Sept. 30 level.
Whitney said in October that it would sell $180 million of nonperformers, mostly in Florida, and it reclassified another $100 million for sale. Last week, the commercial real estate services company Jones Lang LaSalle said it was marketing a $160 million nonperforming loan on the Omni Center and Hilton Downtown in Miami for Capmark Financial Group's Capmark Bank.
John C. Hope 3rd, the chairman and chief executive of Whitney, said Thursday at a conference in New York held by Sandler O'Neill & Partners LP that its pending transaction could help the company move past its problems and return to profitability in 2011. Also, he said, Whitney's ability to strike a deal gave him confidence that it will be able to sell more assets. "The primary objective of the sale of problem loans is to accelerate both the disposition of our problem assets and [an] exit from the overall effects of the credit cycle in order to produce a faster recovery," he said.
For many banks one significant hurdle hampers nonperforming-asset sales. Since the market value is probably lower than the carrying value, sellers must have sufficient capital to absorb the hit.
Ken Segal, the director of asset finance services at Howe Barnes Hoefer & Arnett Inc., said some banking companies might contemplate concurrent deals to sell assets and raise capital. Flagstar did that, raising $400 million this month while explicitly telling potential investors it planned to use the proceeds to absorb the losses on sales of nonperformers.
Larger community banks can clean up their balance sheets quickly in that way because they have access to the market, Segal said. Smaller banks must be more selective about what they try to liquidate. "Some of those guys can purge and reload. But when you are a community bank, you often have to live with your mistakes," he said. "Community banks can't purge, they have to nip and tuck."
Beyond executive fatigue, more sales are likely because the bid-ask spread is slowly narrowing. Banking companies have endured another year of writedowns on nonperforming assets, which could mean that their carrying value is getting closer to the price they could fetch at market.
"There has been a tendency for banks not to sell loans because the writedowns have not caught up to where the pricing is on the assets," said Jon Winick, the president of Clark Street Capital in Chicago. "We are starting to see a convergence between sellers and buyers."
Buyers also are more motivated than a year earlier. Sheridan said numerous funds have sprouted up to buy such assets but have been unable to invest. This is similar to the private-equity groups that formed with the hope of buying failed banks but have now moved on to recapitalizations.
"The investors are realizing that they are going to have to budge to make deals work," Segal said.
One thing could hold back some banks from massive divestitures: a lack of solid lending opportunities to rebuild balance sheets. "With no loan demand, they are asking, 'What am I going to do to fill this?' " Sheridan said.