Academic journal article ABA Banking Journal

Liquidity for Your Bank Can Hinge on Liquidity for Out-of-Favor Loans

Academic journal article ABA Banking Journal

Liquidity for Your Bank Can Hinge on Liquidity for Out-of-Favor Loans

Article excerpt

SHOULD WE SELL OUR BANK? Should we acquire a bank across town? Given the renewed M&A activity in the banking industry, acquisitions have no doubt become a topic of discussion in your boardroom. Community banks have a host of reasons to consider mergers or acquisitions, from succession planning to ever-increasing pressures from regulatory compliance, but closing a deal is often about being in the right place at the right time. When that time comes, a healthy balance sheet is paramount to obtaining the highest multiple possible.

Dealing with Out-of-Favor Assets

Consider the following scenario. A community bank in the midst of negotiating its sale came to realize it had loans secured by hotels, multi-family and development projects on its balance sheet that the acquiring bank did not want. These were good customers, and the loans were possibly well secured in the long run. However, in a post-9/11 world, outcomes were uncertain.

In order to maximize the value of the portfolio--and, most importantly, close the deal--these loans needed to be moved off the balance sheet.

Whole-Loan Sales: An Efficient Option

Whole-loan sales are a cost-effective and efficient method to dispose of assets, from a single loan to an entire portfolio. When compared to other secondary market options, the relative simplicity can greatly reduce the amount of resources needed to determine asset value and execute a transaction. Transactions can be completed directly between buyer and seller without fees from accountants, rating agencies, underwriters, trustees or brokers.

That's one reason bank executives in the midst of planning for M&A activity have turned to whole-loan sales as a tool to manage the disposition of out-of-favor assets. These assets might be squeezing profit margins, problem credits that take up too much managerial time and focus, or loans that a potential acquirer might not value the same way you do. Active management of these loans today becomes a competitive strength for your future.

While specific types of assets that become out of favor change with market forces, periodic review and loan sales will ensure your balance sheet is ready and your negotiation position strong when your sale or merger becomes a reality. …

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