Loan sales helped a growing number of community banks push some of their problems out the door in the fourth quarter.
Analysts and executives said the opportunity — and willingness — to move nonperforming assets off their books is increasing. As a result, loan sales are likely to be a trend among community banks in 2010 as well.
Though the sales often are made at a steep discount, the method is a quick way to clean up asset quality. It also lets a company redeploy its efforts elsewhere.
"You can carry nonperforming loans, but the question is: How are you going to resolve them?" said Thomas O'Brien, the president and chief executive of State Bancorp Inc. in Jericho, N.Y. "We elected to get out and move on with business. We didn't feel that we were, as bankers, well-suited to act as developers or property men."
State Bancorp, with $1.6 billion of assets, sold $22 million of legacy nonperforming loans in the fourth quarter, reducing its nonperforming assets by 80% from the third quarter.
Others that struck such deals include First Busey Corp. in Champaign, Ill., which sold $73 million of nonperformers in the quarter. This cut its nonperforming asset total to $86.3 million, half what it was the previous quarter. United Community Banks Inc. in Blairsville, Ga., reported Friday that it sold $81 million in nonperforming loans and foreclosed properties, helping to trim nonperforming assets by 8% from the third quarter.
The list is likely to grow longer after successful efforts to raise capital late last year. With bigger cushions to absorb losses, healthier companies are now in a better position to entertain bargain pricing on assets. For example, First Busey raised $122 million in the fourth quarter.
"I see this as the next phase. Liquidating assets in order to start moving forward is going to be a big theme in 2010," Jason O'Donnell, a senior research analyst at Boenning & Scattergood Inc., said in an interview last week.
The ability to divest these assets, though, has a cost. First Busey's sale came at a 36% discount to the assets' market value.
And loan pricing is unlikely to improve any time soon, said Justin Barr, the managing principal of Loan Workout Advisers LLC in Chicago. Yet the reality of a deep discount is better than the uncertainty of further writedowns, he said.
"If you have the capital to trade out some of these loans, you should," Barr said. "Given the prolonged downturn in the economy and the difficulties we are expecting in commercial real estate, there is a real risk for further writedowns. Why not eliminate that uncertainty?"
Soft loan prices probably will keep down the number of banks divesting assets through sales, experts said. "The pricing is pretty punitive, and I think a lot of bankers are going to be reluctant to take such hits," said Daniel Arnold, an analyst at Sandler O'Neill & Partners LP. "It might be a fast way, but it is an expensive way."
Further, the sale of nonperforming assets does not guarantee improved credit quality. Several companies that reported loan sales in the fourth quarter still had upticks in nonperforming assets from the prior quarter.
And not every company can sell nonperforming assets. Patrick M. Fahey, the chairman and chief executive of Frontier Financial Corp. in Everett, Wash., said his company's capital is too low to consider selling a pool of such assets, which made up roughly one-quarter of total assets at Dec. 31. Still, he said, the $3.6 billion-asset company is selling loans where it can.
"Any time that we can get rid of a nonperforming asset by sale on a reasonable level, we are going to do it," he said.