Who's that bank with the OREO properties?
Posted: March 26, 2010

After coming on board last fall, CEO Andy Davies, hired Dave Brown to devise a plan on how to handle the OREO properties that were piling up.

By Michael Schwartz
"Other real estate owned" is a loathed line on bank balance sheets that these days contain figures larger than many banks are accustomed to.

The housing bust and recession turned the spotlight on the term, more commonly known as OREO, an overly complicated name for properties the bank has reclaimed from borrowers, usually through foreclosure. While banks aren't in the business of holding, managing and trying to sell foreclosed houses, commercial real estate and vacant plots of land, increasing numbers of OREO properties and the pressure to unload them in a reasonable amount of time and at a reasonable price in one of the worst real estate climates in history, have spurred some banks to get creative. On the Bank of Hampton Roads home page earlier this month up popped a prominently placed graphic of a house made of dollars, signaling visitors to "find bank-owned properties here.” It’s a proactive and fairly unusual initiative, at least among local community banks, to deal with a growing problem that banks can't afford to ignore. It’s also a forthright effort by a bank whose holding company has been struggling with millions of dollars of OREO properties in multiple states ever since the bubble burst and the bank expanded its geographic footprint via acquisition.

These days, the more markets a bank is in, the more exposure it leaves itself open to. When Hampton Roads Bancshares acquired Eastern Shore-based Shore Financial Corp. and the rapidly expanding Gateway Financial Holdings, HRB found itself with troubled real estate borrowers as far away as Charlottesville, Raleigh, Wilmington and Myrtle Beach. According to financial reports filed with the Federal Deposit Insurance Corp., HRB subsidiaries Bank of Hampton Roads, which now includes Gateway assets, and Shore Bank held on their books a combined $8.6 million in OREO properties as of the end of 2009. Nearly $8 million of that total is held by Bank of Hampton Roads.

More troubled properties have since come down the pike. According to its new OREO Web site, the company has 51 such properties that it's trying to sell for a combined total of $17.52 million. To be sure, HRB is not alone. Of the 12 banks headquartered in Hampton Roads, seven had at least $2 million in bank-owned property on the books at the end of 2009. Local banks combined had about $42 million in OREO assets at year's end and the economy since then likely hasn't helped those numbers shrink.

HRB's new site is unique among its local peers because it lets the public know just how many of these properties are out there, giving a glimpse into what markets and what types of properties have been taking a beating.

By far the hardest-hit area for HRB has been Northeastern North Carolina. Nearly two dozen - about $6.1 million worth of - homes and lots are listed on the company's OREO site, most of which are on or near the Outer Banks. Vacation homes on the Outer Banks are hurting because the mortgage on a vacation home or the money vacationers might spend to rent there aren't affordable in tough times, said Paul Driscoll, HRB's associate general counsel. Backing up that figure is the $8.03 million in OREO assets on the year-end books of The Bank of Currituck, headquartered in Northeastern North Carolina. Gateway Bank's expansion into Raleigh and the Research Triangle area a few years back, before it was acquired by HRB, was touted as a bold move into a thriving market. Today the company is trying to sell nine reclaimed properties in that area for $2.07 million, half of which are empty lots in the same development where a Raleigh builder's business model revolved around closing 30 high-end homes a month. You can't stop that train on a dime," Driscoll said. It also has high-end new construction properties near Richmond, another area of conquest from Gateway's glory days. And it's hard not to notice the 13.55 acres in Myrtle Beach the company is trying to sell for $4.6 million.

Most bankers are clear - they aren't comfortable with holding all these foreclosed assets. They are not property managers and they don't want to be land developers. It doesn't do us any good to have real estate that is not for banking purposes sitting on our books," Driscoll said. The goal, of course, is to take that non-performing asset and turn it into cash, he said.

So last fall, after HRB's new CEO, Andy Davies, took the helm, the company began looking at the books and wondered, "What are we going to do with this river of properties that's coming in?" said Driscoll.

One reason Davies was hired was to help steer the holding company out of troubled waters. Davies admits he is no stranger to what he calls "special assets." He learned his lessons on how to deal with bank-owned properties two decades ago. During the savings and loan crisis, in the early 1990s, Davies was at the helm of another troubled bank, Virginia Beach Federal Financial Corp., which later became First Coastal Bancshares.

That's when he "learned how important it is to stay on top of special assets," Davies said, and "the value of having experienced people in special assets and OREO."

That's where Dave Brown comes in.

Brown, Gateway's former chief credit officer-turned troubled asset consultant, was brought in to HRB last summer to devise a plan on how best to handle the properties that were piling up. That included an OREO site on the bank's home page. The difference between the present crisis and the S&L crisis is the Internet. The Bank of Hampton Roads site is a component added to the more traditional methods of marketing these properties. Banks typically work with auction houses and real estate brokers for both residential and commercial properties.

Andy Perkins, chief credit officer at Old Point Financial Corp., parent of Old Point National Bank in Hampton, said his company works mostly with local real estate brokers to market its properties and will put out a request for bids from some out-of-town commercial real estate firms for higher-priced bank-owned commercial real estate. Old Point, according to FDIC reports, had $7.62 million in OREO assets as of the end of 2009.The tough part is pricing the properties so as not to lose too much on the sale compared to the original loan value. That's a difficult task considering the market may or may not have yet hit bottom. Banks also don't want to price a property too high so as not to get stuck with it for too long. There are regulatory provisions that govern how long a bank can hold a property and how the necessary fair value is determined. Regulators also like to see that banks are making an effort to dispose of properties.

"Every bank has to show we're doing something with it," Perkins said. The cost of holding the properties is also something banks must consider, said Bob Bloxom, HRB's chief credit officer. Upkeep on vacant residential properties doesn't cost the bank too much, mostly real estate taxes, he said.

"But a shopping center is completely different," he said.

There is a bright spot in sifting through the properties on HRB's OREO site, which can be found at

Its bank-owned listings include only a handful of properties priced at a combined $757,000 from Hampton Roads, excluding the $6.1 million in properties it has for sale in Northeastern North Carolina and the $264,000 in OREO properties for sale on the Eastern Shore.