Also This Week: Fitch Drops Central Pacific Bank to Junk Status; East West Bank Takes Over Chinese-Controlled United Commercial Bank; Life Needs To Get Better for Hanmi Bank; Sterling Bank Boosts Loan Loss Provisions, To Sell CRE Loans; Los Padres Sells KCMO Branches to Raise Capital, Right Market Value; and Appalachian Bancshares Hit with More Regulatory Actions
It's a tough time being a small business lender these days. This week, Advanta Corp. joined CIT Group Inc. as a filer for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Although Advanta Corp. has close to $100 million in cash and equivalents on hand, over time it said it would not be able to meet all of its existing obligations. The company is reviewing both existing and potential business opportunities in connection with the reorganization.
Its wholly owned subsidiary Advanta Bank Corp. in Draper, UT, is not included in the Chapter 11 filing. However, its capital is less than regulatory capital requirements and over time Advanta Bank Corp. may be turned over to an FDIC receivership, Advanta said in announcing the filing. The parent corporation consciously decided not to fund the capital deficiency after the FDIC rejected two previous capital plans.
Advanta Bank lost $315.2 million in the quarter ended Sept. 30.
"The economic debacle over the last two years devastated Advanta's small business customers and Advanta itself," said Dennis Alter, chairman and CEO of Advanta Corp., who is waiving his salary and any bonus during this process.
Advanta Bank has been one of the nation's largest issuers of credit cards for small business. It is currently collecting its $2.7 billion portfolio of managed receivables from 360,000 customers but the cards have not been open to new charges for several months.
Last week, CIT Group Inc. filed for Chapter 11 protection. The company struggled for months to avoid collapse and it filing now ranks as one of the largest bankruptcy cases in U.S. history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. The U.S. government will probably lose most of its $2.3 billion aid given to CIT last December through the Troubled Asset Relief Program. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. The company is looking to reduce its total debt by $10 billion while allowing the company to run its business.
According to management, the decision to proceed with the company's plan of reorganization will allow it to continue to provide funding to two sectors -- small business and middle market customers.
None of CIT's operating subsidiaries, including CIT Bank, a $9.9 billion Salt Lake City, UT-based state bank, were included in the filings. CIT Bank reported year-to-date profits of $8.7 million as of June 30.
Fitch Drops Central Pacific Bank to Junk Status
Fitch Ratings has downgraded the long-term issuer default rating (IDR) of Central Pacific Bank, the bank subsidiary Central Pacific Financial, to 'CCC' from 'B'. The downgrade ratings reflect the significant escalation of credit problems in both its California and Hawaii loan portfolios.
Fitch said it expected the bank to endure increased credit stress in its Hawaii portfolio, as well as in its still sizeable exposure to California commercial real estate. Credit deterioration, which is not expected to abate in the near-term, has generated sizeable losses and caused considerable erosion to the bank's capital position. Central Pacific Financial reported an adjusted net loss for the third quarter of 2009 of $71.7 million.
Fitch said it believes that the company will continue to generate material losses, which will continue to erode capital and reduce the benefit of any potential capital augmentation. Further, due to the heightened level of credit stress and the erosion of capital. Fitch said the bank is expected to consent to a formal enforcement action with the FDIC and its state regulator, with directives focused on capital, asset quality and liquidity.
Existing regulatory agreements call for Central Pacific Bank to maintain enhanced capital levels that exceed the minimum regulatory requirements to be considered 'well-capitalized', specifically maintaining a leverage ratio of 9%, which the bank is now in violation.
Central Pacific Financial continues to explore all public and private means to boost capital and comply with its enhanced capital requirements. Nonetheless, Fitch said it believes the prospects for raising sufficient equity from external sources to absorb expected losses and to meet enhanced regulatory capital requirements are limited. Should the company be unable to raise the necessary capital and losses continue to diminish the company's capital base, Fitch would likely take further negative rating actions.
Honolulu-based Central Pacific Bank with $5.5 billion in assets operates 39 branches through-out Hawaii.
"Our quarterly results continue to be adversely impacted by increased credit costs resulting from further deterioration in the Hawaii and California commercial real estate markets and the resultant decline in property values in those sectors," said Ronald K. Migita, chairman, president, and CEO of Central Pacific Financial. "We continue to expect these challenging economic conditions to persist over the coming quarters and to result in further credit deterioration. As we navigate through this difficult period, we intend to accelerate the reduction of our credit risk by pursuing loan sales, including potential bulk sales. At the same time, we are pursuing all measures to increase our capital levels, while maintaining strong liquidity."
Nonperforming assets as of Sept. 30, totaled $418.5 million, or 8.09%, of total assets, compared to $261.2 million, or 4.73%, of total assets at June 30. The sequential-quarter increase reflects further deterioration in the Hawaii and mainland commercial real estate portfolios, which included net additions of $53.8 million in mainland commercial mortgage loans, $38.9 million in Hawaii commercial construction loans, $38.8 million in Hawaii residential construction loans, and $33.8 million in mainland commercial construction loans.
The Hawaii construction and commercial real estate loan portfolio totaled $1.1 billion and Hawaii construction and commercial real estate loans held for sale totaled $14.5 million. The company's total exposure to this sector decreased by $43.2 million from June 30, 2009.
The mainland construction and commercial real estate loans totaled $865.8 million, mainland construction and commercial real estate loans held for sale totaled $6.9 million, and mainland construction and commercial real estate foreclosed properties totaled $20.5 million. The portfolio balance consisted of $594.6 million in California and $271.2 million in other Western states. The company's total exposure to this sector decreased by $77.8 million from June 30, 2009.
East West Bank Takes Over Chinese-Controlled United Commercial Bank
The California Department of Financial Institutions closed United Commercial Bank in San Francisco last week and appointed the Federal Deposit Insurance Corp. (FDIC) as receiver.
The FDIC entered into a purchase and assumption agreement with East West Bank of Pasadena, CA, to assume all of the deposits of United Commercial Bank and its 63 branches. This agreement included all U.S. branches of United Commercial Bank, the Hong Kong branch of United Commercial Bank, and the subsidiary of United Commercial Bank based in Shanghai, China, United Commercial Bank (UCB-China).
As of Oct. 23, United Commercial Bank had total assets of $11.2 billion and total deposits of approximately $7.5 billion. East West Bank paid the FDIC a premium of 1.1% for the right to assume all of the deposits. In addition to assuming all of the deposits of the failed bank, East West Bank agreed to purchase approximately $10.2 billion in assets of the failed bank. The FDIC and East West Bank entered into a loss-share transaction on approximately $7.7 billion of United Commercial Bank's assets. East West Bank will share in the losses on the asset pools covered under the loss- share agreement.
Bank Watch reported last month that UCBH Holdings Inc., the holding company of United Commercial Bank, entered into a cease and desist agreement with the FDIC and state regulators to enhance the soundness of the bank.
Separately, a subcommittee of UCBH's board completed an investigation regarding the recognition of impairment losses on its nonperforming loans and other real estate owned (OREO) assets. The subcommittee's report identified problems resulting both from weaknesses in the bank's internal controls and from deliberate and improper actions and omissions of certain unidentified bank officers. The report concluded that those problems were driven by an apparent desire to downplay deteriorating financial conditions by delaying or abating risk rating downgrades and minimizing the bank's overall loan loss allowance.
The report raised serious concerns regarding the actions of a number of current and former officers at various levels of the bank's management.
United Commercial Bank posted nonperforming assets as of June 30 of $840 million with another $37 million in real estate owned assets. Of the total amount of nonperforming assets, about 24% ($206 million) were related to commercial income producing properties. UCBH said it expects to sell approximately $101 million of nonperforming and other assets this quarter.
Life Needs To Get Better for Hanmi Bank
Hanmi Financial Corp., the holding company for Hanmi Bank whose slogan is 'Life Gets Better,' reported a net loss of $59.7 million for the third quarter ended Sept. 30.
Following the report, Hanmi and the bank entered into a written agreement with the Federal Reserve Bank of San Francisco and consented to the issuance of a final order by the California Department of Financial Institutions to address various matters including issues related to capital, liquidity and asset quality.
In addition, the order and the agreement place restrictions on the bank's lending to borrowers who have adversely classified loans with the bank and require the bank to charge off or collect certain problem loans.
Hanmi Bank in Los Angeles with about $3.86 billion in assets reported that its provision for credit losses in the third quarter increased by $25.6 million to $49.5 million compared to $23.9 million in the prior quarter. The increase was due mainly to the $16.4 million additional provision provided to impaired loans that are part of the banks ongoing efforts to address further deterioration in the commercial real estate market.
Non-performing loans at Sept. 30 were $174.4 million of which 10.4% were construction loans, 47.6% were C&I loans including owner/user business property loans, 30.3% were commercial real estate loans with very little of that related to multifamily, 9.5% were SBA loans, and 2.2% were consumer loans.
Sterling Bank Boosts Loan Loss Provisions, To Sell CRE Loans
Sterling Bancshares Inc. took an additional loan loss provision of $28.6 million for the third quarter of 2009 in order to sell certain nonperforming loans and further strengthen its allowance for loan losses. This additional provision resulted in a total provision for credit losses of $56.1 million and $76.6 million for the three and nine months ended Sept. 30.
The bank holding company for Sterling Bank in Houston, TX, has executed a definitive agreement to sell $19 million in net book value loans related to Semgroup (a previously disclosed nonperforming energy loan relationship) and executed a letter of intent to sell approximately $32 million in net book value commercial real estate loans out of its national SBA/commercial real estate portfolio. The loan sales are expected to close in the fourth quarter of 2009.
As of June 30, 2009, Sterling Bank's nonperforming assets and foreclosed assets were littered with commercial income producing properties. The bank was carry about $75 million in such assets -- and none of it tied to multifamily. Sterling Bank reported total assets of $4.9 billion.
Los Padres Sells KCMO Branches to Raise Capital, Right Market Value
Harrington West Financial Group Inc., the holding company for Los Padres Bank FSB and its division Harrington Bank, received a Nasdaq deficiency letter indicating that it was not in compliance with Nasdaq's listing rules.
The Solvang, CA-based bank holding company's market value had fallen to less than $5 million for 30 consecutive trading days. The company has 90 calendar days to correct the deficiency.
Harrington West Financial Group Inc. is a $1.1 billion diversified holding company for Los Padres Bank and operates 17 full service banking offices on the central coast of California, Scottsdale, AZ, and the Kansas City, MO, metro area. The company also owns Harrington Wealth Management Co., a trust and investment management company with $152.6 million in assets under management or custody.
Harrington West this week sold $91.8 million in loans, all $93.6 million of its deposits, $4.8 million retail repurchase agreements, and $5.5 million in premises and equipment associated with its Harrington Bank of Kansas division at net book value plus a premium of $4.1 million to Arvest Bank, an Arkansas-chartered commercial bank with offices in Arkansas, Oklahoma, Missouri and Kansas and over $10.5 billion of consolidated assets at September 30, 2009. The deal did not include the purchase of any Harrington Wealth Management assets managed in the Kansas City market. The divestiture increased Los Padres Bank’s capital ratios and will allow HWFG to focus strategically on its western markets
For the nine months ended Sept. 30, Harrington West incurred a net loss of $21.7 million compared to a $6.6 million loss in the same period a year ago. As of Sept. 30, Los Padres Bank listed non-performing loans of $39.1 million and REO of $18.7 million.
Appalachian Bancshares Hit with More Regulatory Actions
Appalachian Bancshares Inc., which last week voluntarily delisted from the from Nasdaq exchange after failing to comply with minimum market values, entered into a written agreement with Federal Reserve Bank of Atlanta and the banking Commissioner of the State of Georgia to maintain the financial soundness. The agreement calls for the holding company to retain capital, not issue dividends or debt, and come up with a capital raising plan within 60 days.
Appalachian Bancshares in Ellijay, GA, is the bank holding company for Appalachian Community Bank, Appalachian Community Bank FSB, and Appalachian Real Estate Holdings Inc. The bank holding company reported a net loss for the quarter ended June 30, of $30.9 million.
It has been operating under a cease and desist order the FDIC and the Georgia Department of Banking and Finance since April. Among other things, the order required it eliminate from its books by charge off or collection, all assets classified as "loss" and 50% of all assets classified as doubtful. As of August, the bank said it had eliminated about $13 million of such assets.
As of June 30, Appalachian Bancshares had $1.2 billion in assets, $21.2 million in commercial nonperforming loans on its books and held $6.7 million in foreclosed properties. Among its bank-owned assets is a closed Chevrolet car dealer lot at 2402 Hwy 76 in Chatsworth, GA, with an asking value of $3.2 million, and a 2,829-square-foot auto garage/lube center at 5 Whitlock Place SW in Marietta, GA, with an asking price of $579,000.
Download this story and all of the stories in the Watch List Newsletter here. The Adobe pdf version also includes all of this week’s leads of distressed properties and loans of concern, lease cancellations applied for in bankruptcy proceedings, all of the local and national facility closures & layoffs, and lists of loans approaching their maturity date. Plus the pdf version contains bonus news items not found in these columns or the CoStar Group web news pages.
Receive notice when a new Watch List Newsletter column is published by receiving The Watch List E-Mail Alert. It's the quickest way to link directly to the news and leads you want. Just e-mail me your name, title, company, company business, city, state, and e-mail address. You can reach me by clicking on the byline above or e-mailing me at Mark Heschmeyer