Categories : Loan Loss

 

Can the Bank Sell some Impaired Loans?

One thing to watch for as Second Quarter Financial are about to be released is whether the bank has been able to sell its impaired loans.  As the economy improves, this option may be available to the bank.  Indeed, maybe it's been trying to do that for a while.

I have attended a few seminars in the past month, and one thing I learned was that hedge funds are now providing money to small banks by buying out their impaired loans.  This usually works well if the bank needs cash quickly.  What would happen is that the bank would sell the loan at some percentage of what is owed, and the hedge fund then tries to recover as much as possible from the borrower.  Conceptually, it's not much different from factoring receivables, except when the original owner of the receivables (this is an equivalent position to the bank) sell his receivable for cash, he has already applied the "factor" (ie discount rate) and should make a profit when they're sold.  In the bank's case, they didn't expect to have to sell the loans, so the bank will ahve to sell at a deep discount, probably deeper than the loan loss expense whick it already took.

Selling Impaired Loans- How does it Work?

Over the last four years, the bank has taken a bit more than $70M loan loss expense that has crippled its ability to do anything positive for shareholders, employes, or even potential borrowers.  Hypothetically, let's say that for that $70M expense, it still has $30M on its books as collateral, so the total value of those loans would be around $100M.  Let's say that a hedge fund offered the bank $25M to take all the loans and the collateral off the bank's books.  At the end of the day, the bank would take the $25M in cash, give the hedge fund rights to the loan and the collateral.  The bank (in this example) would also take another $5M in loan loss expense (or loss on sale, or some other debit).  The advantage to the bank is that it would now have $25M in cash for which could be well used in dozens of places. 

The bank's four new large East Coast Shareholders have access to the money or access to the people who have the money, so look for them to be in the middle of making this happen.

In the next set of financials, look for something like that to happen.  I've heard that things are thawing out a bit, so maybe the bank will be able to sell some impaired loans in the next few quarters.

 Posted on : July 12, 2011
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