These are the days Beal Financial Corp. was waiting for.
The Plano, Tex., wholesale banking company specializes in buying loans from other banks. But from February 2004 to August 2007, it made no purchases and originated just one loan.
Beal's portfolio ran off, leaving it swimming in capital. By mid-2007, the company's two banks combined had a total risk-based capital ratio of 88.05% — nearly nine times the cushion regulators expect healthy institutions to hold.
"We knew there was going to be an opportunity to buy," Jacob Cherner, Beal's top loan-servicing executive, said in an interview last week. "We just didn't know when."
Two years into the financial crisis, spreads have widened considerably, and Beal's buying is in overdrive. Its assets surged 135% from a year earlier, to $7.5 billion at June 30. And with many banks motivated to unload assets — to boost capital ratios or clean up their balance sheets — Cherner said he expects that torrid pace of growth to continue for the foreseeable future.
Meanwhile, Beal has set its sights on a new arena. The parent company, which is owned by the Texas billionaire Andrew Beal, has applied to charter a thrift. The proposed ProAlliance Bank would open with $15 million in fresh capital and focus on originating mortgages through Internet and phone channels.
"We feel like this is an underserved market," Cherner said. "With the loss of the securitization market and disruption on Wall Street, there is a large number of individuals who need home loans. We felt like now is the time to get into that, and we didn't want to disturb our existing banks with it."
Those existing units — Beal Bank Nevada in Las Vegas and Beal Bank in Plano — mostly buy residential and commercial loans. They buy both performing credits and nonperforming ones, the latter at significant discounts to face value. Beal holds loans until maturity and works out the bad ones.
The strategy is working well in the current economic climate, and it is one that others are trying to copy, said Curtis Carpenter, a managing director at Sheshunoff & Co. Investment Banking.
"They are out ahead of the others that are trying to replicate their model," he said. "There are so many banks that have assets they want to shed and they can't because there is no market for them. … Banks are desperate to sell loans, and that creates opportunities for companies like Beal.
"It's a very timely strategy, and I think they should do relatively well with that for the next couple of years, until we work through the cycle."
Cherner, the president of the servicing units at each of Beal's banks, said the strategy has worked for the last 20 years and that the dry spell beginning in 2004 was atypical.
"We do not require massive market disruptions in order to have a stable, growing platform," he said. "There is always an opportunity for a bankers' bank, or wholesale bank, to purchase loans from another bank that for whatever reason they want to sell down, either for geographic reasons or a downturn."
Despite the profit opportunities, John Matheny, the director of sales and marketing at the Austin consulting firm Brintech Inc., said he does not expect many banks to build teams of workout specialists.
"Most bankers wouldn't have the appetite to get into this business," he said. "A traditional banker isn't going to think positively about spending their whole day dealing with problem loans."
Carpenter agreed, saying the strategy requires plenty of capital and talent.
"You have to have a lot of capital, and you have to have the human resources and know-how to collect on those loans on a timely basis," he said. "In many cases, the courts are backed up, and foreclosing on a residential loan is 12 to 24 months. You have to have enough patience to work through problems and take that loan and resolve it."
In January Beal won a $90 million settlement from the Federal Deposit Insurance Corp. The regulator had seized Superior Bank in Hinsdale, Ill., in 2001 and sold some of its subprime loans to Beal, which later sued because the borrowers defaulted at an alarmingly high rate.
Cherner said the strategy of buying nonperformers on the cheap and resolving them is the reason Beal has a high ratio of nonperformers (18.1% of total loans at June 30) but super-low chargeoffs (0.13% in the second quarter). He declined to give pricing specifics on loans Beal has bought.
Among wholesale banks, focusing on nonperformers is unusual.
Steve Brown, the president and chief executive of the $660 million-asset Pacific Coast Bankers Bank in San Francisco, said it has never actively sought to buy nonperforming loans so it could work them out. He said he did not know of any bankers' bank that has.
"The primary reason we are not doing that is, our capital comes from community banks," he said. "When you are talking about buying at a deep, deep discount, and the customer is also a shareholder, then you have a conflict because the shareholder wants a good return and [the] customer doesn't want to sell at a deep discount."
Beal's model is showing good results.
The two bank subsidiaries, combined on an asset-weighted basis, generated a return on equity of 19% in the second quarter, compared to the average for banks nationwide of negative 0.19%.
As a wholesale bank with 16 offices around the country, Beal's overhead is low. The subsidiaries have an efficiency ratio of 26.99%, compared to the national average of 57.07%.
Several bank organizers have recently thrown in the towel on getting charters, saying new deposit insurance is difficult to obtain. The FDIC has said there is no moratorium, formal or informal, on new insurance.
Cherner said Beal is optimistic that its planned thrift will open by the first quarter, though the process is not moving as quickly as he had hoped.
Regulators "have given us a list for the areas of improvement on the charter and given us realistic expectations on time frames, but they haven't told us that it won't be possible," he said. "It's not the time frames we were hoping for."
