Banks’ troubles with troubled assets have eased, but the process of working through the hangover of the recent recession isn’t over.
“What’s happened industrywide is that the velocity of negativity has declined,” said Stephen Gordon, chief executive of Irvine-based Opus Bank. “Performance is improving.”
A bank typically assigns what it deems to be problem loans to a special-assets department charged with recovering as much of the assets as possible. Opus has a special-assets group comprised of 13 employees.
“We staffed it accordingly, based on our business model, which is to buy challenged institutions,” Gordon said. “They do everything from working the assets through, taking legal actions, selling off pools or individual assets, auctioning them and so on. It’s multi-spoked; it’s case by case.”
The workout group at Opus has been seeing a shift in the size of the assets that end up in its portfolios.
“We’re finding that they’re dealing more with business loans than with real estate loans these days,” Gordon said. “The more difficult, more troublesome assets—which would be land or development loans—have been worked through. The worst of the worst have been worked out. [The team] is still busy, as a small loan still needs people, time and effort. But they’re a little bit less complicated.”
Workout Indicator
The chunk of money set aside by banks in anticipation of future delinquencies or default—known as provisions for loan losses—is a good indicator of how much remains to be worked out, according to Paul O’Mara, senior vice president Wells Fargo Bank in Irvine and head of the San Francisco-based bank’s commercial banking unit.
Wells Fargo has cut its provisions greatly during the past few years after peaking in 2009 at $21.67 billion. That dropped to $15.75 billion in 2010, and was halved to $7.9 billion last year.
Pre-recession numbers were far smaller, with 2007 provisions totaling $4.94 billion.
“Today’s market, while not doing phenomenal, is doing substantially better than 2009 and 2010,” O’Mara said. “Competition is really heating up again. I think that in general, most of the banks are doing better and are all wearing their marketing hats, going out there fairly aggressively.”
The improving quality of loans overseen by Wells Fargo’s local workout group is evident in the level of interest in new job postings.
“When I post for a position, I’ve been seeing a lot of special-assets folks showing interest,” O’Mara said. “Over the last 12 months, there’s definitely been an outflow of people from our special-assets group into other areas of the bank. In an upward-sloping economy, fortunately, they’re not as busy. When things get a little tougher, you’ll see our special-assets group post to bring additional people as well. We always look inside for any position before we go outside.”
OC’s homegrown banks have seen similar trends with loan-loss provisions.
Pacific Mercantile Bank in Costa Mesa readied itself for potential credit problems in 2008 by increasing provisions to $21.7 million from $2 million the year prior, and upped provisions to $23.7 million in 2009. The bank has steadily brought the total down since then, with $1.5 million set aside during the first half of this year.
Pacific Mercantile had $708.4 million in gross loans as of June, equal to about 83% of its total deposits. That’s up from loan-to-deposit ratio of 76% at the end of last year.
The tough times of the recession created opportunities for those who seek riches in troubled niches—and provided banks with buyers as the market bottomed.
“A tremendous amount of private-equity money has come into the marketplace to acquire what were distressed assets,” Opus’ Gordon noted. “The momentum of those dollars has increased the valuation of these challenged assets throughout the industry. It’s created the ability to move these loans off the balance sheets.”
Credit Unions
Local credit unions also spent several years cleaning up troubled loans.
“Prior to 2008, we hadn’t taken any losses on mortgage loans,” said Jeff Harper, vice president of lending at Santa Ana-based Orange County’s Credit Union. “So when the economy started to deteriorate, one thing we had to do was learn how to collect and handle defaulted mortgages. Auto loan problems were pretty typical, but when it came to real estate-backed assets, those were something the credit union hadn’t been used to.”
The credit union formed a “loss-mitigation department” in the fourth quarter of 2008. That division saw requests for loan-modifications reach a peak in 2010, when it worked out $17.9 million worth of loans.
The amount wound down to $9.4 million in asset workouts in 2011. So far this year, it has dealt with $1.4 million in troubled loans.
“Our organization [has become more able] to focus its efforts on loan growth rather than mitigating losses,” Harper said. “We have been able to reassign loss mitigation staff to other areas of the credit union where we drive revenue and production.”
