It took some time and perhaps some prayer, but CVB Financial finally got the go-ahead from regulators to sell a group of church loans that it picked up almost three years earlier as part of a failed bank acquisition.
CVB (CVBF) sold the 11 church loans during the second quarter, the $6.5 billion-asset company said Wednesday. The Ontario, Calif., company had held onto the loans since it bought San Joaquin Bank in Bakersfield in October 2009 from the Federal Deposit Insurance Corp.
As a result, the company also found a way to skillfully avoid what could have easily become a PR nightmare.
"We, for the past year, have been pressing hard on the FDIC to allow us to sell these loans as opposed to have to go foreclose on these loans," Chris Myers, CVB's president and chief executive, said during a quarterly conference call Thursday. "You may not get to the finish line when you're going into Louisiana to foreclose on some local church."
The sale is noteworthy because the loans were covered by a loss-share arrangement, which are designed to maximize the value of a loan by keeping it in the private sector. Banks must thoroughly document their efforts to work through issues with the loans. Against that requirement, selling covered assets is a tough pitch to regulators because sales are often regarded as taking the easy way out.
But such sales may soon be on the rise, according to some industry observers. Banks have five years to submit claims on commercial loans, and the earliest FDIC-assisted transactions will meet that deadline in November 2013.
"The further we get into the loss-share period, I do think we are going to see banks stepping up their efforts to resolve some of this stuff," says Aaron James Deer, an analyst at Sandler O'Neill. "They want to eliminate any question marks."
Sales are only one potential tool for winding down those loans. Banks are resolving other credits through refinancing. In some cases, borrowers have been able to work themselves out of default.
"Even though the economy is not great, things are getting better," Deer says. "The credit environment has improved."
CVB's former church loans had a gross balance of $17.6 million, but the company had the loans marked down to $3.7 million. It then sold them to an undisclosed buyer for $5.9 million, resulting in a $2 million gain. The FDIC gets $1.8 million of that gain based on its 80/20 loss-share agreement; CVB gets "a measly couple hundred grand," Myers said during the conference call.
"That's the negative side of these FDIC-assisted acquisitions … you're killing yourself to work these things out. And at the end of the day, there's just not that big of a differential between if we lose a little or gain a little," Myers said. The upside is that "we don't have to work those 11 loans and have a special asset person or persons dedicated to dealing with all those things."
Myers declined to comment further on Friday.
FDIC officials say the agency is not opposed to loan sales, though banks that are considering such sales need to submit a detailed account that describes why selling represents the best scenario for the loan and not just an easy solution.
"The purpose of loss share is to keep assets in the banking sector, which is more seamless for failed bank customers, and also enables the FDIC to realize the intrinsic value of the assets," said Pamela Farwig, a deputy director in the FDIC's division of resolutions and receiverships.
Banks can submit letters requesting the approval of sales of individual or a small number of loans anytime, and can explore bulk sales of covered loans either at four or four and half years with FDIC consent, depending on the agreement.
The FDIC says they receive five to ten letters for individual loan sales a month, but says the number of requests it receives should not go up if banks are following the requirements of the agreement.
"They should be working that portfolio from the beginning," Farwig said. "So we should not see an increase in the number of overall loan sales."