A lot of the banks actively unloading problem loans share a telling characteristic — ownership by big private equity groups or hedge funds.
Backing from deep-pocketed investors has helped Sun Bancorp Inc. in Vineland N.J., Sterling Financial Corp. of Spokane, Wash., United Community Banks Inc. of Blairsville, Ga., and other community banks speed up the costly process of eliminating loans to businesses and consumers that cannot repay them.
A recent Keefe, Bruyette & Woods Inc. report underscored how banks that count private financiers as major investors tend to be unusually aggressive with write-downs, chargeoffs and loan sales. Buyout firms or hedge funds own substantial stakes in a number of banks with low levels of new problem loans last quarter, the report said. (KBW's research team, which rates 188 banks, added chargeoffs in the quarter to net changes in nonaccruals and in restructured loans from a quarter earlier.)
Financiers tend to give banks with lots of bad property or consumer loans the wherewithal and incentives to clean up their balance sheets sooner rather than later. A bank can buy another bank or sell itself at a decent price only if it has relatively few problem loans. That generally means having 2.5% or less of all loans classified as delinquent.
Reducing problem loans can be expensive. It requires workout teams to collect repayments, write-downs of loans when it is clear a borrower will not return the full principal and sales of loans at less than their face value. A smaller balance sheet can also mean fewer profits and narrower margins. When a bank gets rid of loans — even troubled ones — it has fewer borrowers to collect fees and interest from.
Buyout firms and hedge funds have several characteristics that can make them an asset in these situations: they take a long view, and tend to be active investors, not passive like the retirement fund managers or insurance companies that historically dominated the industry's institutional investor class.
They can give a bank the money and other resources to absorb short-term losses. These investors are experts in number-crunching and deal-making and can help a bank pinpoint the value of its problem loans and sell them.
That extra support was evident in the second-quarter results of a handful of banks recapitalized by investment groups. After selling a 25% stake to the financier Wilbur Ross last year, Sun Bancorp has taken at least $80 million of losses on the sale of about $260 million in unwanted hotel, retail and other kinds of loans for less than their face value in December and May.
That was the price for sharply reducing problem loans, with loans whose repayment was in doubt falling by nearly one-third in the quarter while loans not accruing interest fell by a one-fourth. Its ratio of nonaccruing loans to total loans fell 250 basis points from the prior quarter to 5.5%.
Sun's nonperforming loan ratio remained higher than the aggregate 2.77% for banks in KBW's coverage, though it declined at a much sharper quarter-to-quarter rate than the 22-basis point decline for the overall industry.
Private equity-controlled Sterling and United Community have been making similar gains in recent quarters.
Sterling's resolution of problem loans has accelerated since it raised nearly $400 million last summer from Thomas H. Lee Partners LP and Warburg Pincus LLC, which each hold about 21% of the $9 billion-asset company. Its sales of foreclosed properties more than doubled year over year for the first six months of 2011, to 487 holdings worth $153 million. Nonperforming assets have fallen by about 50% during that time as well.
United Community's capital raising and asset dispositions are intertwined, too. It received $380 million from Corsair Capital LLC and other investors in March, saying at the time that the investment would help it unload more than $400 million of delinquent loans and seized property. The $7.4 billion-asset company's nonperforming assets declined about 14% in the most recent quarter, to about $119 million, mostly thanks to about $30 million in loan and property sales and another $19 million in chargeoffs.