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Opus Bank's credit problems spill over into another quarter

Opus Bank recorded another consecutive quarter of credit losses, a setback for a management team attempting to right-size the bank and control its credit troubles.

The Irvine, Calif.-based bank announced a net loss of $19 million, or a loss of 55 cents per share, during the fourth quarter of 2016. The loss for the quarter was driven by a loan loss provision that totaled $69.5 million, which included $27.2 million in response to loan-risk rating migration, a $22.1 million increase in specific reserves on impaired loans and $19.2 million of net charge-offs for impaired loans.

Newly hired Senior Chief Credit Officer Brian Fitzmaurice spoke at length during the call, detailing the internal review he led that contributed to a series of credit downgrades and related provisions. The review impacted both new and previously identified problem loans in the commercial business units dealing with technology, healthcare and corporate finance.

He said many of these loans were "enterprise value loans" and had been underwritten based on projected cash flow or the enterprise value of the underlying business. The purpose of many of these loans was to provide financing to purchase a business or asset, fund a dividend or provide working capital for technology companies that had not yet achieved a consistent positive operating cash flow, or to refinance a loan that was used for those purposes. Fitzmaurice said every enterprise value loan was included in the fourth-quarter review, and the bank has suspended new originations of these loans for the foreseeable future. It had $915 million in enterprise value loans at the end of the year, excluding institutional syndicated loans.

In addition to de-emphasizing technology banking, the bank is moving away from healthcare practice lending; Chairman, President & CEO Stephen Gordon said the bank will not be funding loans in this area for the foreseeable future. The healthcare practice portfolio was reduced by $20 million to $68 million through loan payoffs or sales.

The bank also continued making changes to its approvals and controls process, including lowering its in-house maximum hold limits and approval authority level. It also curbed loan originations in the commercial and specialty banking divisions during the quarter as it reassesses the portfolio and its overall commercial lending strategy.

Opus also announced it raised $50 million from a $53 million private placement of its common stock with institutional accredited investors, at a price of $18.50 a share. Executives said they entered into the agreements over the weekend and that there were no conditions on the raise that mandated a change in the board.

The investment community was caught off-guard by a second quarter of unexpected credit losses. Hovde analyst Brian Zabora downgraded the bank on the loss, given the amount of future uncertainty around the commercial portfolio, according to comments made in a Jan. 30 report. Piper Jaffray analyst Matthew Clark wrote that he was most surprised by the extent of credit issues in the portfolio that were "not flagged" by management during the third quarter.

"While we can appreciate a kitchen-sink quarter after hiring two senior credit officers to put their respective marks on the portfolio, we are surprised [Opus] would be willing to issue common at $18.50, unless the company was forced to raise equity," he wrote in a Jan. 30 report. "The hope would be that the new credit staff took an overly conservative view of the portfolios and has completely ring-fenced the potential problems."