Why so few banks are offloading problem loans
A small number of banks have sold distressed loans during the coronavirus pandemic, providing more evidence that bankers feel comfortable with the quality of their portfolios.
Hancock Whitney Holding in Gulfport, Mississippi, sold a large portfolio of energy loans last summer. Ameris Bancorp in Atlanta and Great Western Bancorp in Sioux Falls, SD, gave up several hotel loans, while OceanFirst Financial in Red Bank, NJ, and Chemung Financial in Elmira, NY, parted with commercial loans.
Few other announcements have come in, even after billions of dollars in loans emerged from deferrals made in the early days of the pandemic. That’s a much shorter list than many industry watchers expected last spring when coronavirus restrictions triggered a recession.
The bottom line: credit quality is maintained, reducing the urge to purge loan portfolios.
“We just don’t see a lot of pressure for loan sales because credit isn’t as bad as a lot of people thought seven or eight months ago,” said Damon DelMonte, analyst at Keefe, Bruyette & Woods. . “The little that we saw, there were specific strategic reasons. “
Great Western had disproportionate exposure to the hospitality industry, which was hit hard by travel restrictions imposed to slow the spread of the virus. A recovery in the hospitality industry depends on the successful deployment of virus vaccines, an ongoing but uneven process so far.
Against this backdrop, Great Western reduced its hotel portfolio – excluding casino properties – by 20% through multiple loan sales at a 12% discount from face value. About $ 209 million in hotel-backed loans were sold in the fourth quarter. Hotels accounted for about 9% of the company’s total loans as of December 31.
The company recorded write-offs, but sales also reduced distressed loans. Great Western’s allowance for loan losses decreased 30% in the fourth quarter from the prior quarter to $ 11.9 million.
“We focused on these [loans] that have either been criticized, classified or with declining trends, ”Stephen Yose, Great Western’s chief credit officer, said on the company’s recent earnings conference call at assets of $ 12.8 billion.
With the potential for successful vaccination programs and a rebound in travel, Yose said Great Western is not looking to sell more loans.
“I feel great about selling the loan and trying to reduce the risk on our hotel portfolio,” he said. “We’re really not looking at future portfolio sales. … This is not a strategy for the future.
The $ 20.4 billion Ameris asset made a similar move in the fourth quarter, sale of 25 hotel loans totaling $ 87.5 million at 82% of face value.
The bank recorded a related charge of $ 17.2 million, but noted that sales significantly reduced its hotel exposure.
OceanFirst sold $ 81 million in loans with a discount of almost 20%, which contributed to a large loss in the third quarter. The company with $ 11.4 billion in assets called the moves a strategic decision to speed up resolution of credit losses.
Sales were “aggressive” but “important” in moving OceanFirst away from pandemic-specific issues and paving the way for growth opportunities, including acquisitions in 2021, Chief Executive Officer Christopher Maher said in an interview.
“We expect people to look for strategic alternatives, probably in the first half of this year. We expect to do so as well, ”Maher said on his company’s fourth quarter earnings conference call. “If we can find something that adds value for our shareholders, there’s nothing stopping us from doing something immediately. “
Federal stimulus measures, regulatory leniency with postponements and a slow economic recovery at the end of last year have left few banks willing to accept haircuts to remove loans from their balance sheets, said Matthew Anderson, chief executive by Trepp.
Sell loans for at least 80% of face value, as OceanFirst and Great Western did, could be meaningful to other banks. The problem is, many potential buyers want discounts of 30% or more.
“There’s a pretty big gap between supply and demand right now, in most cases, so we’ll probably continue to see just a trickle of loan sales for now,” Anderson said.
Bankers are also struggling to make new loans, pushing them to keep the ones they already have, especially given the optimism that the economy could get back on track.
The wild card is the overall effectiveness of vaccines. A new wave of loan sales could occur if vaccinations fail to stem future outbreaks, industry watchers have said.
“All bets are off” in this scenario, Anderson said.