Friday, April 30, 2010

7 bank failures take bite out of FDIC deposit fund

April 30, 2010

By John Letzing, MarketWatch

SAN FRANCISCO (MarketWatch) -- A trio of bank failures in Puerto Rico and four more closures in Michigan, Washington and Missouri took a nearly $7.4 billion bite out of the federal deposit-insurance fund on Friday, while raising the number of U.S. bank failures this year to 64.


The Federal Deposit Insurance Corp. said Puerto Rico's Westernbank, Eurobank and R-G Premier Bank of Puerto Rico were all closed, with a combined $14.84 billion in deposits.

Their closure will cost the deposit-insurance fund roughly $5.28 billion, the regulator said.

The closure of Everett, Wash.-based Frontier Bank, which $3.13 billion in deposits, will cost the insurance fund $1.37 billion, the FDIC estimated.

According to a report in The Wall Street Journal, the FDIC hasn't grappled with such a significant problem in a single banking market since the savings and loan crisis of the 1990s.

Later in the day, the FDIC announced the closure of CF Bancorp. in Port Huron, Mich. The Michigan bank had $1.43 billion in deposits as of Dec. 31.

Two Missouri institutions, Creve Coeur-based Champion Bank and Butler-based BC National Banks, also were closed.

Champion Bank had $153.8 million in deposits as of Dec. 31, while BC National Banks had $54.9 million in deposits, according to the FDIC.

Square Mile Wins Stake in FDIC Hotel Loans

Commercial Mortgage ALERT

4.30.10

Square Mile Capital has won the bidding for a 40% stake in a $420 million portfolio of hotel mortgages from the FDIC. The New York fund manager agreed to pay about 75 cents on the dollar, or $125 million, according to people familiar with the offering. The transaction values the portfolio at about $315 million. The FDIC, which is retaining a 60% interest in the assets, will supply debt financing for half of Square Mile’s purchase, reducing the firm’s cash outlay to about $63 million.

Other bidders included Colony Capital of Los Angeles, Starwood Capital of New York and Thayer Lodging of Annapolis, Md. Deutsche Bank is the FDIC’s advisor. The FDIC inherited the loans from the $4.1 billion-asset Silverton Bank, an Atlanta institution that failed last May. A little more than 80% of the portfolio’s balance is performing.

The FDIC divided the portfolio into two pools: one with whole loans, the other with participation interests. Investors could bid on either pool or the entire slightly from the $420 million that was first marketed in mid- January, but an exact final tally was unavailable. Bidders also had an option on whether to include a senior loan on the 237-room W Atlanta-Downtown Hotel & Residences. That property was singled out because it was embroiled in a dispute with mezzanine lender Capri Capital of Chicago. Capri recently agreed to convert its $43.5 million debt position into an equity stake in the property.

The whole-loan pool contained 22 mortgages. The collateral is in 11 states, with concentrations in New York (22% of the balance), Texas (17%), Georgia (16%) and Arizona (15%). None of the properties remains under construction. Some 85% of the pool balance is performing.

The second pool consisted of participation interests in 41 loans. Some 81% of the pool, by balance, is performing. The underlying hotels are in 19 states, with large concentrations in Georgia, Texas, Florida and Pennsylvania. Six properties are still under construction. The FDIC has been selling equity stakes in commercial and residential mortgage portfolios since the real estate market peaked. In 12 sales from May 2008 through the current deal, the government stake has been in the range of 20- 40%. Winning bidders then work out the mortgages and split the proceeds with the FDIC. The stakes have sold for a range of 9-75 cents on the dollar.

Square Mile is expected to make the acquisition via its third investment fund, Square Mile Partners 3. The $806 million vehicle, which began investing in performing and distressed debt last year, had committed some $200 million of its equity as of March.

Square Mile was launched in 2006 by Jeffrey Citrin, who cofounded Blackacre Capital’s real estate group. He heads the company with Craig Solomon, a former partner of New York law firm Solomon & Weinberg.

Failed Banks Had $566.9Bln of Assets, FDIC Has $33Bln Left

MONDAY, 26 APRIL 2010

Orest Mandzy

Commercial Real Estate Direct Staff Report

The FDIC, which since the beginning of 2008 has taken over 205 failed banks with $566.9 billion of total assets, has only about $37 billion of those assets left to sell.

And roughly $4.2 billion of those assets are in the process of being brought to market through the agency's structured sales, where it partners with investors on large acquisitions and provides them with financing. Factor those out and the FDIC is left with about $33 billion of assets left to sell.

Interestingly, that's roughly the same volume of assets the agency had left to sell six months ago, after it had taken over 118 failed banks with $476.4 billion of assets. That indicates that its sales efforts are accelerating. And the expectation is that they'll continue to accelerate, especially because so many other institutions have issues. Indeed, 702 banks with $402.8 billion of assets were formally tagged as "problem" institutions by the FDIC at the end of last year. Those are the highest levels since 1993 and are up from 552 banks with $345.9 billion at the end of the third quarter.

And, according to Trepp, a common thread among problem banks is their relative exposure to commercial real estate.

The agency is expected to continue relying on its structured offerings to dispose of the lion's share of assets it takes over because of their relative efficiency. It's able to sell $1 billion or more of assets in one fell swoop, while retaining a stake, which could allow it to benefit if asset values climb. It has also offered financing and has been able to sell that into the market.

In addition, the agency will continue to sell assets individually through its whole-loan, or cash sales, which are handled by five advisers. It had until early this year sold commercial real estate assets on a whole-loan basis, but has since then shifted its focus to sell such assets solely through its structured packages.

And while the agency has yet to securitize assets taken from failed banks, that's expected to change. Sheila Bair, FDIC chairman, said earlier this year that "securitization will play an increasing role" in the agency's efforts to rid itself of assets from failed banks.

The reason the agency has relatively little left to sell is that buyers of deposits of failed banks have generally acquired most of their assets, largely because of the backstop against losses that the agency provides.

Until recently, the FDIC would insure up to 80 percent of any losses from failed-bank assets subject to the loss-sharing agreements. In some cases, its insurance would climb to 95 percent. But lately, it has sought to reduce the scope of its backstop. And because market conditions have improved, evidently it's been able to do just that.

When TD Bank agreed to acquire three failed banks, American First Bank of Clermont, Fla., First Federal Bank of North Florida, Palatka, Fla., and Riverside National Bank of Florida of Fort Pierce, Fla., it agreed to assume $2.2 billion of the institutions' assets. And the FDIC agreed to cover only 50 percent of the possible losses from those assets.

The $566.9 billion of assets held by banks that failed since the beginning of 2008 compares with $519 billion of assets held by the 1,043 savings and loans that failed during the S&L crisis of the early 1990s. While that volume is not adjusted for inflation, it puts the current banking issue in context. It also shows just how large some failed banks have been.

Indeed, this time around, a $307 billion-asset institution - Washington Mutual Bank - failed. No similar-sized institution failed during the last crisis. Another seven institutions had more than $10 billion of assets each.

If you exclude WaMu, the 205 banks that have failed had an average of $1.3 billion of assets. But the top 25, exclusive of WaMu, had an average of $7.5 billion of assets.

Thursday, April 29, 2010

Gerald J. Ford's Preemptive Move: Pacific Capital's 'Pre-Failure' Recapitalization

Bank Billionaire Gerald Ford Targets Pacific Capital

April 29, 2010, 2:31 PM EDT

By Nikolaj Gammeltoft, Bloomberg


April 29 (Bloomberg) -- Gerald J. Ford, who became a billionaire by purchasing distressed lenders during the savings and loan crisis, will inject $500 million into Pacific Capital Bancorp as the California company struggles to survive.

Ford’s affiliates will pay 20 cents each for shares of Pacific Capital, whose stock closed at $4.11 yesterday in Nasdaq Stock Market trading and plunged as much as 57 percent today. Ford gets a 91 percent stake and the U.S. bailout fund must agree to take a paper loss, according to a statement. The offer was “the best alternative available to us to assure the company’s future,” Chairman Edward Birch said in the statement.

“Going from $4 to 20 cents a share is a big indication that there’s hole in the balance sheet,” said Lawrence Kaplan, an attorney at Paul Hastings Janofsky & Walker LLP in Washington and a former attorney at the Office of Thrift Supervision. “Whatever bank management can do, the best situation is to avoid a failure.”

The sale gives Ford, 65, a chance to increase the fortune amassed during the 1980s and 1990s by acquiring distressed banks and turning them around. The Texas billionaire led investors who transformed Golden State Bancorp Inc. into the second-largest U.S. savings and loan, which he sold to Citigroup Inc. in 2002 for $5.3 billion.

Much of his wealth was tied to California, where Golden State was based, and Ford said in the statement he’s pleased to be investing in a bank “with such deep roots in attractive markets” in that state. Ford will join Pacific Capital’s board with Carl B. Webb, the former president of Golden State.

Stock Falls

Pacific Capital fell $1.92 to $2.19 at 12:48 p.m. New York time and sold for as little as $1.75. The shares topped $39 in July 2005. Trading of bearish put options surged to a record last week before the announcement.

Pacific Capital turned to Ford after the Santa Barbara- based bank hired investment bankers last year to explore “strategic alternatives.” The company, with $5.42 billion of deposits at 50 branches, said in March its survival was in doubt and that shareholders might be wiped out.

The company hasn’t posted a profit since the first three months of 2008, and today reported a $79.9 million first-quarter loss, or $1.71 a share, tied to residential and commercial real estate and construction loans. Regulators have told First Pacific to develop a strategic plan that includes strengthening its earnings, capital and management.

Cutting a Deal

Recapitalizing a bank may be preferable to new investors because they avoid competitive bidding against other potential buyers, said Thomas Vartanian, a partner at Fried, Frank, Harris, Shriver & Jacobsen LLP in Washington.

“If you find an institution you think is a jewel and all it needs is some new capital, then you can cut your deal with the management and shareholders and you got it,” Vartanian said. “There are a lot of these transactions out there percolating and to see some of them getting done is a very positive step in terms of recapitalizing banks throughout the country.”

Terms call for Ford Financial Fund LP to buy 225 million shares at 20 cents each, and pay $1,000 each for 455,000 preferred shares that can convert to common. The U.S. Treasury Department would also have to agree to take a loss by swapping a stake valued at $180.6 million held by the Troubled Asset Relief Program for common shares at 20 cents each.

TARP Swap

The Treasury would be left with a 7 percent stake and common shareholders with 2 percent. The shareholders get a chance to buy more shares at 20 cents in a rights offering.

Earlier this week, Sterling Financial Corp., the Spokane, Washington-based lender that posted more than $1 billion of losses in two years, said that private-equity firm Thomas H. Lee Partners LP agreed to inject $134.7 million. Lee also demanded that the Treasury swap its TARP stake.

Ford also demanded that investors in trust preferred securities and subordinated debt instruments swap some of their holdings for as little as 20 cents on the dollar.
Andrew Williams, a spokesman for the Treasury, declined to comment. Ford and Deborah L. Whiteley, spokeswoman for Pacific Capital, didn’t respond to calls and messages.
Ford, who isn’t related to the former U.S. president or founders of the U.S. auto-making empire, entered the banking business in 1975. He made his name in the last banking shakeout during the 1980s when he and billionaire Ronald Perelman acquired five debt-ridden thrifts, creating First Gibraltar Bank, and sold the franchise in 1992. With part of the proceeds, they purchased San Francisco-based First Nationwide Bank from Ford Motor Co. in 1994.

Golden State

Ford and Perelman transformed First Nationwide from a money-losing lender plagued by bad real estate loans into a profitable statewide thrift. They merged it with Golden State Bancorp in 1998, keeping the Golden State name to form the second-biggest U.S. savings and loan.

Citigroup bought Golden State in 2002 for $5.3 billion, giving Ford more than 20 million Citigroup shares, which soared past $1 billion in value while climbing 38 percent the next year. Ford was spared much of Citigroup’s wreckage because of a plan to divest his stake if the shares fell below a certain price. Ford has said he was mostly out at $45 a share; Citigroup now sells at about $4.55.

Pacific Capital was the third-biggest provider of tax- refund loans until December. That’s when the Office of the Comptroller of the Currency told the lender that its subsidiary, Santa Barbara Bank & Trust, wouldn’t receive regulatory approval to originate so-called refund anticipation loans, or RALs, in 2010. The company sold the tax business less than a month later.

Tax-refund loans are used to attract clients who need cash immediately by offering short-term loans based on the expected amount of their tax refunds. Consumer groups fault RALs for putting people deeper in debt, with interest rates on some of the loans that exceed 100 percent.

--With assistance from Peter Eichenbaum and Jeff Kearns in New York and Ari Levy in San Francisco. Editors: Rick Green, William Ahearn

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Alec McCabe at amccabe@bloomberg.net

Wednesday, April 28, 2010

Growth Fueled More by Business Than Consumers

GE Sees Growth Fueled More by Business Than Consumers

April 28, 2010, 2:47 PM EDT

Bloomberg

By Rachel Layne

April 28 (Bloomberg) -- General Electric Co. Chief Executive Officer Jeffrey Immelt said the U.S. economic recovery will be driven by more business investment than consumers as companies spend cash from flush balance sheets.

“The businesses are definitely getting better,” Immelt told reporters before the company’s annual shareholder meeting in Houston. “Consumers are going to be more conservative around debt levels. So to a certain extent the U.S. economy is going to have to be driven by business investment.”

Immelt has worked to stem loan losses and boost reserves at the Fairfield, Connecticut-based company’s finance unit while pouring resources into a more focused lineup of industrial businesses. Growth will be driven by emerging markets and recovery in developed economies, and the GE Capital finance unit is stabilizing, he said today.

“The clouds are breaking and the forecast ahead of us is promising” Immelt told shareholders.

GE, the world’s biggest maker of jet engines, power-plant turbines and medical-imaging equipment, repeated today that earnings may improve enough later in the year that the company can raise its dividend in 2011. In the first quarter of 2009, GE cut its dividend for the first time since the Great Depression to preserve cash and shore up the finance division.

The company sees growth coming from emerging markets such as China, where it garnered $6 billion in sales last year, including about 40 percent from goods exported from the U.S. Immelt said he plans to hire more workers in the U.S. this year.

Available Cash

GE Capital’s performance should “snap back” starting in the current quarter and continue to improve in the rest of the year, Immelt reiterated. GE previously projected the unit’s earnings would be little changed from last year.

The commercial real estate unit, a major concern for investors, is stabilizing, GE Capital CEO Michael Neal said in an interview before the meeting.

“We’re in 35 countries. I would say it varies by ZIP code. The thing that has been our biggest concern has been the United States, Japan second,” Neal said. “But I think everything today is better and is in a bottoming pattern. ”

Executives repeated projections that GE will have $25 billion in cash available to invest at the end of this year.

GE is one of the world’s most widely held stocks with about 10.7 billion shares outstanding. With 76 percent of the 8.1 billion eligible ballots voting, all six shareholder-sponsored proposals failed.

House Prices, Though Higher Than Last Year, Are Weakening Again

April 27, 2010

By DAVID STREITFELD, New York Times

Housing prices recorded their first annual increase in more than three years in February, but there was little cause for celebration as the monthly number again showed a decline.

The Standard & Poor’s Case-Shiller Home Price Index, a widely watched indicator, was up 0.6 percent in February from February 2009, data released Tuesday show. The last time the index showed an annual increase was in December 2006, just as prices were beginning their long slide.

The current trend is once again down, however, with last year’s strong summer and fall yielding to a weak winter.

Prices dropped 0.9 percent in February from the previous month. It was the fifth consecutive monthly decline and the largest since last March when measured in numbers not adjusted for seasonal variations.

S.& P. announced last week that the unadjusted numbers were a more reliable indicator than its seasonally adjusted numbers, a break with the company’s past preference for treating both data sets equally. In recent months, the two indexes have diverged, with the adjusted numbers showing the market was modestly improving and the unadjusted numbers showing it was modestly declining.

In explaining its new preference for the unadjusted numbers, the Case-Shiller Home Price Index Committee said that the housing market crash had generated “unusual movements that are easily mistaken for shifts in the normal seasonal patterns.” These movements, which include an abundance of foreclosures, have resulted in “misleading results,” the committee said.

Karl E. Case, a member of the committee and the co-developer of the index, said, “The thing that spooked us is that the seasonal component got bigger. We found ourselves with this number we didn’t quite understand.”

The best way to measure the strength of housing, the committee now says, is on an annual basis.

By that measure, housing was barely holding its own in the year ending in February. Eleven of the 20 cities declined during the period. Las Vegas performed the worst, dropping 14.6 percent, followed by Tampa, Seattle and Detroit. The best performer was San Francisco, up 11.9 percent, followed by San Diego and Los Angeles. New York City was down 4.1 percent for the year.

The health of the housing market is difficult to determine. The government has poured more than a trillion dollars of stimulus into real estate, but that support is now beginning to taper off. A tax credit for buyers expires this week. That stimulated sales in March and this month, and probably helped prices as well. But it is likely to weaken the market this summer.

If the credit had any effect on prices this winter, it was minimal. Nineteen of the 20 cities in the index, excepting only San Diego, fell in February from January on an unadjusted basis.

Other housing indexes mirror the weak Case-Shiller numbers.

The government’s housing price index, released last week, fell 0.2 percent in February on an adjusted basis to a new low for this cycle.

Compiled by the Federal Housing Finance Agency, the index uses data from mortgages that have been sold to or guaranteed by the government-controlled mortgage holding companies, Fannie Mae and Freddie Mac. It tends to be less volatile than other indexes.

Another index, compiled by First American CoreLogic, dropped 2 percent in February from January. That drop followed a 1.6 percent decline from December to January.

The First American index is not seasonally adjusted, which probably means that the traditionally weak winter market may be pushing the numbers down.

First American projected this week that house prices would decline 3 to 4 percent over the next year, assuming there is not yet another round of stimulus.

“The administration has made a policy of putting a floor under home prices, and they succeeded,” a First American analyst, Sam Khater, said. Over the next year, he said, “the floor will be removed and home prices will decline to a more organic level that is not artificially supported.”

Tuesday, April 27, 2010

CMBS Monthly Delinquency Report 4-23-10

Realpoint LLC

April 2010

Monthly Delinquency Report 4-23-10

CMBS Outstanding Balance:

The total unpaid balance for CMBS pools reviewed by Realpoint for the March 2010 remittance was $798.22 billion, up slightly from $797.06 billion in February 2010. The resultant delinquency ratio for March 2010 of 6.4% (up from the 6% reported one month prior) is nearly four times the 1.66% reported one-year prior in March 2009 and over 22 times the Realpoint recorded low point of 0.283% from June 2007. The increase in both delinquent unpaid balance and percentage reflects a steady increase from historic lows in mid-2007.

Trend:

In March 2010, the delinquent unpaid balance for CMBS increased by another $3.23 billion, up to $51.05 billion from $47.82 billion a month prior. This included an increase in four of the five delinquency categories. Overall, the delinquent unpaid balance is up almost 268% from one-year ago (when only $13.89 billion of delinquent unpaid balance was reported for March 2009), and is now over 23 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 27th straight month – up by $2.57 billion (7%) from the previous month and $30.31 billion (352%) in the past year (up from only $8.6 billion in February 2009).

Forecast:

Therefore, with the combined potential for large-loan delinquency in the coming months and the recently experienced average growth month-over-month, Realpoint now projects the delinquent unpaid CMBS balance to continue along its current trend and grow to between $60 and $70 billion by mid 2010. Based upon an updated trend analysis, we now project the delinquency percentage to grow to between 8% and 9% through mid 2010, potentially approaching and surpassing 11% to 12% under more heavily stressed scenarios through the year-end 2010).

CRE Indicators: Fitch Sees Cumulative CMBS Defaults Hitting 11% This Year

Apr 21, 2010 - CRE News

The cumulative default rate for CMBS conduit loans is projected by Fitch Ratings to climb to 11% by the end of the year from 6.59% at the end of last year.

Through the end of last year, $35.5B of loans in Fitch's universe of $539B of fixed-rate CMBS loans had defaulted. Last year alone, $17.7B of loans were added to the rolls of defaulted mortgages, with $6B of that being added in the fourth quarter.

In contrast, $17.7B of loans had defaulted between the market's inception in the early 1990s through 2008.

Fitch said that it expected another 4.4% of the universe it tracks to default by the end of this year, bringing cumulative defaults up to its projected 11% level.

That's because it expects loans, particularly large ones, to continue defaulting at a rapid pace.

The last time the cumulative default rate was anywhere near its current level was in 2004, when it was 4.14%. The rate after that fell sharply as a result of the massive volume of fresh, performing loans that were added to the CMBS universe.

The cumulative default rate counts delinquent loans that remain in CMBS pools and those that have been resolved and provides a complete picture of overall delinquency trends. Fitch counts as delinquent any loan that is more than 60-days late. However, it excludes loans that defaulted solely because they were not refinanced by their maturity dates and continue to make their debt-service payments.

The cumulative default rate is not to be confused with the delinquency rate, which is often updated monthly or quarterly and provides a snapshot of the volume of loans that are late at any given moment in time. Fitch determined that 7.14% of the volume of CMBS loans that it tracks were more than 60-days late at the end of last month.

Fitch's findings in its latest default study throw a wrench into a number of well-established historic trends. For instance, in the past, the default rate for commercial mortgages would gradually climb annually and spike in the eighth year. It then would begin its gradual decline to near zero in year 13.

That's no longer the case. The sharp increase in defaults is now taking place much sooner and lasts much longer, largely because of the aggressive underwriting that was in vogue between 2005 and 2007.

Indeed, Fitch found that CMBS loans originated in 2006, which are now roughly four years old, had a 6.72% cumulative default rate. Those originated in 2007 have a 5.32% rate and account for 35.6% of all defaults. Fitch projects that loans originated in 2007 will have a 10-year cumulative default rate of 27%.

In addition, whereas large loans had historically performed better than their smaller-balance brethren because they were generally less leveraged and backed by stable, high-quality trophy properties, they are now a liability with large default probabilities.

In 2008, for instance, five loans with balances of more than $50M each defaulted, including only one office loan with a balance of $25M or more. Last year, 56 $50M-plus loans went bad, including 33 $25M-plus office loans. The increase in large-balance defaults is also due to aggressive underwriting and the prevalence of pro-forma loans that relied on projected, as opposed to actual property cash flows.

After five years in which multifamily loans led all property types with most new defaults, retail loans led the pack last year, accounting for 32.3% of all defaults. But apartment loans continue to lead the retail sector in terms of cumulative defaults with a 9.15% rate, compared with a 6% rate for retail loans.

Hotel loans, meanwhile, have the highest cumulative default rate, at 13.9%.

Monday, April 26, 2010

FDIC Nears Launch of $2B of Structured Offerings

Apr 20, 2010 - CRE News

The FDIC is close to formally launching its next two structured offerings, involving a total of $2.2B of commercial real estate and development loans.

The agency, like in its 12 previous structured sales, will sell only an interest, of 20% to 50%, in each of the portfolios. It could also provide financing.

The agency's sales adviser, Barclays Capital, earlier this week started distributing preliminary offering information on the two portfolios, one of which will contain 1,739 commercial real estate loans with a balance of $2B, while the other will have 236 commercial property acquisition, development and construction loans with a balance of $225M.

Just over half of the larger portfolio, by balance, is performing, while the remainder is at least 30-days delinquent. Nearly one-third has matured, but about one-quarter of the portfolio still has another five years left to maturity. The portfolio's weighted average coupon is 7.54%.

Meanwhile, a total of 74.2% of the smaller portfolio is more than 30-days late, with two-thirds having defaulted at maturity.

The loans in both portfolios are backed largely by properties in Nevada, Colorado, California and Arizona. They were held by institutions such as Community Bank of Nevada, New Frontier Bank of Greeley, Colo., and First Bank of Beverly Hills, Calif.

The expectation is that Barclays will accept offers for stakes in the two portfolios in early June, with a targeted closing date of June 25.

Separately, the agency through adviser Deutsche Bank last month took offers for a $420.1M portfolio of hotel construction loans. The buzz is that investor interest in the two pools, which have a total of 63 loans on properties in New York, Georgia, Texas and Florida, was heated and bids were substantially higher than the 31% purchase price the agency's 12 previous structured offerings have commanded.

The FDIC so far has sold loans with a combined balance of $15.3B through its structured offerings. It has sold interests with a book value of $3.9B for a total of $1.2B, or nearly 31% of par. It has also provided a total of $3.1B of financing.

But it has sold $2B of the financing it provided, specifically the $1.4B of debt it lent to a Starwood Capital Group venture that bought a stake in a $4.5B portfolio of assets from the failed Corus Bank. And it sold the $653M it provided to Residential Credit Solutions for its purchase of a stake in a $1.3B portfolio of residential assets from the failed Franklin Bank of Houston.

Sunday, April 25, 2010

Interview of Independent Community Bankers of America President/CEO

cnbc.com

A look ahead of the Senate's vote on financial reform, with Camden Fine, Independent Community Bankers of America President/CEO.













FDIC shuts down 7 banks in Illinois

By STEVENSON JACOBS (AP) –

NEW YORK — Regulators on Friday shut down seven banks in Illinois, putting the number of U.S. bank failures this year at 57.

The Federal Deposit Insurance Corp. took over four banks in Chicago: New Century Bank, with $485.6 million in assets; Citizens Bank&Trust Company, with $77.3 million in assets; Broadway Bank, with $1.2 billion in assets; and Lincoln Park Savings Bank, with $199.9 million in assets.

The FDIC also took over Amcore Bank of Rockford, which had $3.8 billion in assets; Peotone Bank and Trust Company in Peotone, with $130.2 million in assets; and Wheatland Bank of Naperville, with $437.2 million in assets.

MB Financial Bank agreed to acquire the deposits of both Broadway Bank and New Century Bank. Republic Bank of Chicago agreed to assume Citizens' deposits, while Chicago-based Harris National Association agreed to acquire Amcore Bank's deposits.
Northbrook Bank and Trust Company of NorthBrook agreed to acquire the deposits of Lincoln Park Savings Bank. First Midwest Bank of Itasca agreed to assume Peotone Bank and Trust's deposits. Wheaton Bank & Trust will acquire the deposits of Wheatland Bank.

The failure of Broadway Bank is expected to cost the FDIC's deposit insurance fund $394.3 million. For the other banks, the estimated costs are: Amcore Bank, $220.3 million; New Century Bank, $125.3 million; Citizens Bank&Trust Company, $20.9 million; Lincoln Park Savings Bank, $48.4 million; Peotone Bank and Trust Company, $31.7 million; and Wheatland Bank, $133 million.

Broadway Bank was owned by the family of Illinois Treasurer Alexi Giannoulias, a Democrat who is running for President Barack Obama's old Senate seat. The bank was heavy into real estate loans and lost $75 million last year.

There were 140 bank failures in the U.S. last year, the highest annual tally since 1992 at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008 and only three succumbed in 2007.
The number of bank failures likely will peak this year and will be slightly higher than in 2009, FDIC Chairman Sheila Bair said recently.

As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31.

The number of banks on the FDIC's confidential "problem" list jumped to 702 in the fourth quarter from 552 three months earlier, even as the industry squeezed out a small profit. Still, nearly one in every three banks reported a net loss for the latest quarter.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government. Apart from the fund, the FDIC has about $66 billion in cash and securities available in reserve to cover losses at failed banks.


The Associated Press

Friday, April 23, 2010

Seven U.S. banks closed, bringing '10 tally to 57

John Letzing, MarketWatch

SAN FRANCISCO (MarketWatch) -- Seven U.S. banks were closed by regulators Friday, bringing the total number of bank failures for the year to 57. The seven banks are all based in Illinois, and include Wheatland Bank, Peotone Bank and Trust Company, Lincoln Park Savings Bank, New Century Bank, Citizens Bank & Trust Company of Chicago, Amcore Bank and Broadway Bank. Broadway Bank is run by the family of U.S. Senate candidate Alexi Giannoulias. The seven bank failures combined will cost the federal deposit insurance fund $973.9 million, according to the Federal Deposit Insurance Corp.

Thursday, April 22, 2010

The FDIC's Recalibrated “Loss Calculator”

In the past week we have seen more and more optimistic reports about the direction of the US economy. Some, once spurned, CRE asset classes may be finding a “price floor” (there were anecdotes about sales of Miami Condos and the rising prices of Finished Lots in the Western US).

As bank failures make up a very large portion of the commercial and residential asset transfers occurring today, another possible economic inflection point worth watching may be the FDIC’s “DIF Cost Ratio”.

DIF stands for the Deposit Insurance Fund, and the “DIF Cost” is an estimate by the FDIC, at the time of the failure, of what a bank failure may cost the deposit insurance fund (funded from insurance premiums paid in by FDIC member banks). The DIF Cost is the first “mark down” of these assets by the FDIC (nearly $30 billion of failed bank assets in 2010 so far) as they are moved into the private sector via whole bank sales or taken into FDIC’s inventory to be sold individually or bundled up and sold or securitized at a later date.

The DIF Cost Ratio, when viewed as a function of the total assets of failed banks, measures the level or rate of the initial asset “ mark down”. Last week alone there were 8 failed US banks and the DIF Cost to Total Failed Assets Ratio dropped dramatically. In the first quarter of 2010 the DIF Cost Ratio had been running approximately 30%, meaning that the FDIC estimated that the losses of asset value and the cost to the fund was 30% of total failed bank assets in a total of 41 bank failures. In the month of April 2010, on a smaller sample of only 9 failures, the ratio had dropped to 16% of assets and in one instance this month the DIF Cost was just 2% of the asset total.

Multiple factors may be at work here. This month, the strategic desirability of three Florida institutions may have resulted in heated competition for these three failed banks that might provide a unique opportunity for rapid regional expansion into the desirable Florida market. In general, "whole bank" bidding has heated up for this once-in-a-generation chance to expand deposits and branches quickly. And, as a result, the FDIC now has the opportunity to write new loss share agreements more in the FDIC’s favor: in one case last week lowering the FDIC's coverage of future shared losses to 50% from the 80% coverage seen in most previous loss sharing agreements.

The FDIC may be recalibrating its “loss calculator” to reflect the perception of improving economic conditions. We will continue to watch activity to determine if this is indeed a turning point. Such a change will alter the failed bank bidding environment as well as expectations of future FDIC losses, a huge potential impact on the US banking system.

Don’t get us wrong. In the coming year there will continue to be failed orphan banks in regions or economies holding toxic assets that no institution will be willing to buy, at any subsidy level.

If, however, rosier economic forecasts prove to be correct and lasting, the FDIC is smart to capitalize on this trend sooner rather than later.

Wednesday, April 21, 2010

Big and local banks diverge on reform

Big banks are fighting like mad against financial reform, but many of the little ones think change is actually a good idea. Alisa Roth reports.

marketplace.publicradio.org

TEXT OF STORY

KAI RYSSDAL: Here's an entirely apropos question for you, given the news of the day. What is a bank? I'm not talking about the difference between an investment bank and a commercial bank here. I'm talking about the difference between, I don't know, say, First Regional Bank of Boise, Idaho, and Bank of America.

They look reasonably similar on the outside. They've both got brick and mortar branches; they make loans to small businesses; they offer checking accounts. But in all the back and forth over the new financial regulations, we are seeing a real difference between them. The big banks are fighting like mad against reform. But a lot of the little guys think change is actually a good idea.

Marketplace's Alisa Roth reports.

ALISA ROTH: Big banks have been making lots of money lately by doing things community banks don't do.

Karen Thomas works for the Independent Community Bankers of America, a trade association. She says local and regional banks are interested in Main Street.

KAREN THOMAS: They're not focused on exotic derivative products and, you know, credit default swaps, and they're not internationally active.

Those profitable activities are being threatened by reforms, which is why the big Wall Street banks are fighting the proposed legislation.

MATT MCCORMICK: Really what it comes down to is that the bigger guys are pushing away, are trying to stop some areas of reform occurring that are extremely lucrative for them.

Matt McCormick is a banking analyst at Bahl and Gaynor.

MCCORMICK: And any more regulations, bureaucracy, or change in those plans could potentially be harmful to future earnings and profitability and ultimately their share price.

Community banks make their money elsewhere -- with deposits and small loans.

Karen Thomas, from the Community Bankers Association, says unlike the big guys, her constituents are fighting for reform.

THOMAS: We'd like to see an end to too big to fail. We would like to see a pre-funded systemic risk fund that can be used to dissolve and liquidate a failing large institution instead of having the taxpayers bail the institution out.

Analysts say major reforms would make it easier for small banks to compete, which would be good for the economy as a whole. There'd be more lending at a local level, and the risk would be more spread out.

In New York, I'm Alisa Roth for Marketplace.

Tuesday, April 20, 2010

May 2009 BankUnited Bid Reveals Complexity of FDIC Decision Process

BY EDUARDO GALLARDO, GIBSON, DUNN & CRUTCHER LLP,

Wednesday, July 08, 2009 at 10:07 AM EDT

This post is by my colleagues Kimble Cannon, Dhiya El-Saden and Chris Bellini.

The post discusses the recently disclosed bids in the Federal Deposit Insurance Corporation’s May 2009 auction of BankUnited Financial Corp. The bids show that the “highest” bidder did not necessarily win the auction, and that the FDIC’s decision making process is less formulaic than might be expected.

Auction Bids Publicly Disclosed Following Embargo

On June 25, 2009 the FDIC publicly released for the first time the formerly sealed bid forms submitted on May 19, 2009 by all three bidders in the auction for BankUnited Financial Corp. The FDIC made these bid forms available through its Freedom of Information Act Service Center. The documents provide insight into the FDIC’s auction process, and in particular confirm that, at least in this case, submitting the arguably “highest” economic bid did not guarantee success before the FDIC.

The FDIC announced the closure, receivership and sale of BankUnited on May 21, 2009. The successful acquisition group included a management team led by John Kanas, former chairman of North Fork Bancorp, and an ownership group comprised of WL Ross & Co., Carlyle Investment Management, Blackstone Capital Partners V, Centerbridge Capital Partners, LeFrak Organization, Inc., The Wellcome Trust, Greenaap Investments, and the East Rock Endowment Fund. However, the FDIC-run auction also attracted bids from two other groups. These two unsuccessful bidding groups were led by J.C. Flowers & Co. and Toronto Dominion Bank, respectively.

Rejection of “Higher” Bid Reveals FDIC Concerns

The FDIC’s rejection of the Toronto Dominion bid is not surprising as TD applied a much larger discount to the value of the failed bank’s assets than did the bids from J.C. Flowers and John Kanas, bidding as JAK Holdings, LLC. However, the FDIC’s rejection of the J.C. Flowers offer is interesting because that bid applied a smaller asset value discount and a larger deposit premium than did the successful JAK Holdings bid. A review of the bid forms and comments from parties familiar with the FDIC process suggests that the J.C. Flowers bid was rejected because regulators were concerned about how to evaluate future losses under the loss-share agreement to be entered into between the FDIC and the successful bidding group. A notation on J.C. Flowers’ bid form placed by the FDIC staff suggests that J.C. Flowers sought the ability to transfer - without FDIC approval - BankUnited assets subject to an ongoing FDIC loss-share obligation.[1] The FDIC may be concerned about allowing future transfers of assets accompanied by the FDIC’s loss-sharing obligation to unknown parties because its estimated recovery value for the assets, one of the risks to the future health of the Deposit Insurance Fund and therefore an important factor in the statutory “least cost to the FDIC” test, is likely tied to the knowledge and experience of the party that controls and manages those assets.


Summary of the Newly Released Bid Forms

J.C. Flowers & Co. made a single bid for all of the deposits of the failed bank. The terms of this bid can be summarized as follows:

• Contingent upon modifying provisions of the Loss Sharing Agreement to allow certain transfers of loss-sharing assets
• Asset discount bid of $2,795,000,000
• Deposit premium bid of 1%
• Resulting entity a thrift

The J.C. Flowers bid form can be found here.

JAK Holdings LLC made two bids for all of the deposits of the failed bank. Multiple bids are “encouraged” by the FDIC with the understanding that the FDIC will select the bid that is “most cost effective” for the FDIC. The JAK bid forms show the following:

First JAK Bid:

• No modification of Loss Sharing Agreement
• Asset discount bid of $3,150,000,000
• Deposit premium bid of 0%
• Resulting entity a thrift

Second JAK Bid:

• No modification of Loss Sharing Agreement
• Asset discount bid of $3,000,000,000
• Deposit premium bid of 0%
• Resulting entity a thrift

The JAK Holdings LLC bid forms can be found here.

Toronto Dominion Bank, N.A. also made two bids for all of the deposits of the failed bank as follows:

First Toronto Dominion Bank Bid:

• Contingent upon FDIC accepting the terms of a Purchase and Assumption Agreement that had been marked up by the bidder
• Asset discount bid of $4,130,900,000
• Deposit premium bid of 0%
• Resulting entity a bank

Second Toronto Dominion Bank Bid:

• Contingent upon FDIC accepting the terms of a Purchase and Assumption Agreement that had been marked up by the bidder
• Asset discount bid of $4,358,700,000
• Deposit premium bid of 0%
• Resulting entity a bank

The TD Bank bid forms can be found here.

Significant FDIC Risk in Loss Sharing Agreements

The short term economic difference between the J.C. Flowers bid and the best of the two JAK Holdings bids is readily capable of estimation. JAK Holdings offered $205 million less for the bank’s assets. In addition, JAK Holdings offered no deposit premium to J.C. Flower’s 1% premium. Assuming deposits remained constant from the $8.6 billion in deposits reported by BankUnited as of May 2, 2009 through closing, the J.C. Flowers deposit premium was worth another $86 million. While almost certainly retail deposits would have deteriorated in the interim, the sum of these numbers suggests a delta of as much as $291 million. Opposing this is the additional risk to the FDIC’s Deposit Insurance Fund under the J.C. Flowers proposal to allow transfer of assets covered by the loss sharing agreement. The magnitude of this risk is illustrated by the loss sharing arrangement reached between the FDIC and the successful JAK Holdings consortium. The parties to that agreement agreed to share losses on $10.7 billion in assets.

While the FDIC is tasked with selecting the “best” offer for failed banks, and regularly certifies that the bid it selects offers the “least costly” resolution, the BankUnited bidding records illustrate that the actual process is less transparent and more complex than simply comparing asset discount rates and deposit premiums. In fact, the FDIC is clearly considering the level of risk it is taking on under the terms of the loss-sharing agreements it enters, which may require the FDIC to make future payments. Managing these future payments is particularly important in light of the fact that, according to Bloomberg L.P., the FDIC’s industry-funded DIF has dropped 64% to $13 billion from its peak at the start of last year’s second quarter.

FDIC Guidelines Expected

The FDIC is expected to issue guidance for private equity participation in purchasing failed institutions in the coming weeks.

Footnotes:

[1] A notation made by the FDIC staff on the J.C. Flowers bid form states “This bid was contingent upon modifying paragraphs 6.2 of the Loss Sharing Agreements to allow certain transfers of loss-share assets.” While this notation is ambiguous as to whether J.C. Flowers sought the right, without FDIC consent, to transfer the assets subject to loss sharing or rather to assign the loss-sharing obligation of the FDIC to a third party acquiror of those assets, we have concluded (assuming the reference to paragraph 6.2 is correct) that J.C. Flowers most likely sought the ability to assign, without FDIC consent, the FDIC’s obligations under the loss sharing agreement. Paragraph 6.2 of the standard form Shared-Loss Agreement provides, among other things, that the purchaser may not assign its rights under the loss sharing agreement to a third party without FDIC consent. One media source reported that J.C. Flowers wanted the ability to transfer ownership of BankUnited assets that would be covered by loss-share agreements without the FDIC’s approval and that the FDIC had concerns on that point because the FDIC assesses loss-share risk based on who controls the covered assets.


THIS ARTICLE ORIGINALLY APPEARED ON THE HARVARD LAW SCHOOL FORUM ON CORPORATE GOVERNANCE AND FINANCIAL REGULATION.

Monday, April 19, 2010

Canada Firm Acquires Three Failed U.S. Banks; Others Shut

APRIL 16, 2010

By ROBIN SIDEL, Wall Street Journal

Canada's TD Bank Financial Group, accelerating its march on the U.S. banking industry, gobbled up the operations of three failed institutions in Florida.

Regulators seized a total of eight banks, marking 50 so far this year that have failed. In addition to the three in Florida, they shuttered two in Michigan and Massachusetts that represented the first failures of the year in those states, two in California, and one in Washington.

Two of the deals call for the Federal Deposit Insurance Corp. to profit if the stock price of the acquiring bank rises over a certain period of time. The FDIC previously has profited from such "value appreciation" instruments and has expressed an intention to do more of them under the right circumstances

In Florida, TD acquired the banking operations of AmericanFirst Bank in Clermont, First Federal Bank of North Florida in Palatka, and Riverside National Bank of Florida in Fort Pierce. The three failed institutions weren't affiliated with one another.

The deals come two years after TD significantly bolstered its U.S. presence by acquiring Commerce Bancorp Inc., of Cherry Hill, N.J., which also had a large presence in Florida.

The acquisitions "add quality stores to our existing retail network in target markets, allow us to accelerate our organic growth in Florida by five years, and come with limited downside credit risk," said Ed Clark, chief executive and president of TD.

The largest of the TD deals was for Riverside National, which has 58 branches in Florida, and had assets of $3.42 billion and deposits of $2.76 billion at the end of 2009. AmericanFirst Bank, with three branches, had $90.5 million in assets and total deposits of $81.9 million at the end of 2009. First Federal, with eight branches, had assets of $393.3 million and total deposits of $324.2 million.

TD is assuming all of the deposits from the three Florida banks and will purchase virtually all of their assets. The Canadian bank also entered a loss-sharing agreement on $2.20 billion of the failed institutions' assets with the FDIC.

The Massachusetts Division of Banks closed Butler Bank, a four-branch institution in Lowell, Mass. People's United Bank of Bridgeport, Conn. agreed to assume Butler's $233.2 million of deposits and essentially all of its $268 million in assets. People's also entered into a loss-sharing agreement with the FDIC on $206.1 million of Butler's assets.

In California, Center Bank of Los Angeles assumed the deposits of Innovative Bank, a four-branch bank in Oakland with $268.9 million in assets. The FDIC and Center Bank entered into a loss-share transaction on $178.1 million of Innovative's assets. In addition, terms of the deal include a "value appreciation instrument" which provides additional money to the FDIC if Center Bank's stock price rises over a certain amount of time.

Also in California, San Francisco-based Union Bank assumed the deposits of Tamalpais Bank in San Rafael, which had seven branches and $628.9 million in assets. Union Bank paid the FDIC a premium of two percent to assume Tamalpais' $487.6 million in deposits and agreed to buy essentially all of the failed bank's assets. The FDIC and Union Bank, N.A. entered into a loss-share transaction on $522.3 million of Tamalpais' assets.

Separately, Whidbey Island Bank, based in Coupeville, Wash., assumed the deposits of City Bank of Lynnwood, which was closed by the Washington Department of Financial Institutions. The failed eight-branch bank had roughly $1.13 billion in assets and $1.02 billion in deposits. Whidbey Island Bank paid the FDIC a premium of one percent to assume the deposits and agreed to buy $704.1 million of the failed bank's assets. The FDIC and Whidbey Island Bank entered into a loss-share transaction on $455.6 million of City Bank's assets.

Elsewhere, the Michigan Office of Financial and Insurance Regulation closed the one-branch Lakeside Community Bank, of Sterling Heights, Mich. A unit of Michigan Community Bancorp, Lakeside had $53 million in assets and $52.3 million in deposits at the end of 2009.

The FDIC entered into an agreement with First Michigan Bank, of Troy Mich., to accept Lakeside's direct deposits from the federal government, such as Social Security and Veterans' payments. The FDIC was unable to find another financial institution to take over Lakeside's banking operations.

The FDIC estimated that the total cost of the eight bank failures to its deposit insurance fund would be $984.7 million.

Saturday, April 17, 2010

Winkler Blogging at 30,000 Feet-- "Bank Failure Friday: 8 More Banks Close"

Rolfe Winkler

seekingalpha.com


Reporting from somewhere over Louisiana (Delta in-flight WiFi = very cool). Big bank failure news so far tonight is a coordinated closure of three banks that involves three different regulators and a 50%/50% loss share agreement with FDIC and the acquiring bank. Typical loss-shares had been 95/5 and the news was they were going to 80/20. Here the FDIC has apparently secured a deal to share losses equally.

#43

—Failed bank: Lakeside Community Bank, Sterling Heights MI
—Regulator: Michigan Office of Financial and Insurance Regulation
—Acquiring bank: None
—Transaction: payout transaction
—Vitals: assets of $53 million, deposits of $52.3 million
—Estimated DIF damage: $11.3 million

#44

—Failed bank: AmericanFirst Bank, Clermont FL
—Regulator: Florida Office of Financial Regulation
—Acquiring bank: TD Bank, National Association, Wilmington DE
—Transaction: 50/50 loss share on total of $2.2 billion of assets among three institutions
—Vitals: assets of $90.5 million, deposits of $81.9 million
—Estimated DIF damage: $10.5 million

#45

—Failed bank: First Federal Bank of North Florida
—Regulator: OTS
—Acquiring bank: TD Bank NA
—Transaction: 50/50 loss share on total of $2.2 billion of assets among three institutions
—Vitals: assets of $393.3 million, deposits of $324.2 million
—Estimated DIF damage: $6.0 million (one of the smallest loss rates as % of assets since WaMu cost the DIF $0)

#46

—Failed bank: Riverside National Bank of Florida
—Regulator: OCC
—Acquiring bank: TD Bank NA
—Transaction: 50/50 loss share on total of $2.2 billion of assets among three institutions
—Vitals: assets of $3.42 billion, deposits of $2.76 billion
—Estimated DIF damage: $491.8 million

#47

—Failed bank: Butler Bank, Lowell MA
—Regulator: Massachusetts Division of Banks
—Acquiring bank: People’s United Bank, Bridgeport CT
—Transaction: loss share of $206 million of assets
—Vitals: assets of $268 million, deposits of $233.2 million
—Estimated DIF damage: $22.9 million

#48

—Failed bank: Innovative Bank, Oakland CA
—Regulator: California Department of Financial Institutions
—Acquiring bank: Center Bank, Los Angeles CA
—Transaction: loss share on $178.1 million
—Vitals: assets of $268.9 million, deposits of $225.2 million
—Estimated DIF damage: $37.8 million

#49

—Failed bank: Tamalpais Bank, San Rafael CA
—Regulator: California Department of Financial Institutions
—Acquiring bank: Union Bank, NA, San Francisco CA
—Transaction: loss share on $522.3 million of assets
—Vitals: assets of $628.9 million, deposits of $487.6 million
—Estimated DIF damage: $81.1 million

#50

—Failed bank: City Bank, Lynnwood WA
—Regulator: Washington Department of Financial Institutions
—Acquiring bank: Whidbey Island Bank, Coupeville WA
—Transaction: loss share on $455.6 million of assets
—Vitals: assets of $1.13 billion, deposits of $1.02 billion
—Estimated DIF damage: $323.4 million

About Rolfe Winkler

Rolfe Winkler is a columnist and blogger for Reuters. His website is http://blogs.reuters.com/rolfe-winkler. Prior to Reuters he blogged for the Implode-o-Meter at OptionARMageddon.com and his content was syndicated on RGE Monitor and Naked Capitalism.

Thursday, April 15, 2010

The Key to the Brave New World of FDIC-Assisted Banking: “It’s the Accounting....”

In the Brave New World of Banking, particularly for institutions navigating the pothole filled landscape of FDIC-assisted transactions, accounting is the first big task to tackle, post acquisition. In plain words, the goal is to gain control of legacy accounting systems (of the acquired institutions) that, in turn, can generate robust and reliable data and reports necessary for the demanding FDIC reporting environment. Accounting systems must be properly initialized and also sufficiently automated to quickly reflect post-closing data corrections. Above all systems must be nimble. Manual processing is neither recommended nor sufficient to handle in the complex, multi-dimensional, high velocity and fluid world of FDIC-assisted transactions.

Are Toxic Assets Out of The Banking System?

Posted By: Barbara Stcherbatcheff | Writer, CNBC

CNBC.com

| 15 Apr 2010 | 04:21 AM ET

Investors haven’t heard the last of toxic assets by a long shot.

Despite surging stock markets and record quarterly earnings for Wall Street’s top banks an alarming amount of hard-to-value financial instruments still remain in the banking system.

“I think banks are less than 50 percent of the way through recognizing all the loan losses that they need to recognize,” Tanya Azarchs, banking credit ratings analyst at Standard & Poor’s, said. “Under accrual accounting, loan losses will take a while to develop. Until the borrowers actually do default, you can’t write it off.”

The label “toxic,” tossed around like a Frisbee over the past couple of years, has been loosely applied to assets that are highly risky, difficult to value, and nearly impossible to sell.

In a nutshell, a toxic asset is a product that makes buyers cringe. In 2007 to 2009, that was most of the collateralized debt obligations, credit default swaps, or mortgage-backed securities that the banks were desperately trying to shed.

Exact figures on how much of those assets remain on banks’ balance are hard to come by, but John Lonski, chief economist for Moody’s Investor Services, estimates that banks (including investment banks) are currently holding about $1.2 trillion, insurance companies are holding $250 billion, and US government sponsored enterprises have $240 billion.

Other estimates are lower.

Jim Eckenrode, banking and payments research executive at Tower Group, estimates that as of Dec 31, 2009 (the last date for which Federal Depositary Insurance Corporation numbers are available), total loans that are “nonperforming” across all US banks come in at about $530 billion, up from $396.5 billion in the year-ago period.

But in an indication that banks are still wary about the size of nonperforming assets, total loan loss provisions (the amount that banks reserve against future loan losses, based on their analysis of their loan portfolios), is $61.1billion, down only slightly from $71.1billion a year ago.

And while Fed holdings of agency MBS are generally non-toxic, a paper published by the New York Fed entitled “Large Scale Asset Purchases by the Federal Reserve: Did They Work?” asserted that $1.3 trillion in agency debt and MBS still remained on the Federal Reserve’s balance sheet as of February 2010.

“Many people assume that these assets will improve in the 5 to 10 year horizon – an assumption that could prove incorrect,” Bob McDowell, director of European banking at Tower Group, said. “There are assets that will come into deeper scrutiny in the next few years.”

Finding Gold in Toxic Assets

Despite the amount of such assets on balance sheets, toxic assets don’t appear to be clogging the banking system. And that’s good news for the many investors that have dived into financials, pushing exchange traded funds like the Dow Financial Sector Index Fund up 10 percent since the start of the year.

The Fed was quick to take the most toxic of these assets off the balance sheets of the banks that were too big to fail, engaging in large-scale asset purchases, bailouts and liquidity injections.

“Banks are trying to lend,” Azarchs said. “Corporations are flush with cash. They’re not hiring people or taking loans. Banks are willing to extend credit, but they can’t force companies. As the saying goes: you can take a horse to water …”

And some are even looking at these toxic assets as new investment opportunities.

“At one point during the crisis, high yield bonds were also thought to be toxic… but they have performed very well over the past year, generating returns of 50% or more. Toxic assets could follow suit,” Lonski said.

Anything Still Lurking off the Balance Sheet?

A more critical question may be not whether banks are holding toxic assets, but whether they are hiding them. Recent evidence suggests that Repo 105-type book-cooking and balance sheet manipulation has been a prevalent phenomenon among a lot of Wall Street banks.

But Lonski remained skeptical.

“In this type of environment, where regulators and investors are increasingly sensitive to risk appetite, it’s less likely that banks would want to be seen as understating risk,” he said

And while more unsellable instruments could prove another burden for the recovering banking system, it is possible that the current crop of toxic assets has hit the bottom.

“It depends,” said Azarchs. “Are we through the housing decline or not? If there’s a wave of foreclosures, there could be downward pressure on prices. But the Case-Shiller index is already down 30%. That’s significant. How much lower can it really go?”

“I don’t think the major financial institutions are inclined to gamble (more),” Lonski said. “They’ve been burned once before. These investments are, with a bit of luck, thoroughly researched.”

Wednesday, April 14, 2010

CRE Financial Advisors' Focus

CRE Financial Advisors' focus is on the large and extended ‘after-market’ that the FDIC Loss Sharing transactions will create over the next 5 to 10 years (see: "Loss Sharing History" ). "Loss Sharing" (totaling nearly $140 billion in assets transferred in the latest cycle) is a public/private partnership between the FDIC and a healthy bank where the FDIC covers an amount of the losses incurred by a bank acquiring failed bank assets in exchange for possible upside to be shared with the FDIC that might result from the acquiring bank's expert asset management and improved economic conditions.

CREFA provides services to financial institutions in support of their FDIC Loss Sharing activities in the following important areas:

-Asset Acquisition and Due Diligence
-Asset Accounting and Valuation Services
-Asset Management
-FDIC Submissions, Processing, Auditing and Compliance
-Loan Servicing, Data and Document Management Systems

We have strategic partnerships with servicing, accounting, valuation and compliance firms to provide a "suite of integrated solutions" for the needs of FDIC-assisted financial institutions.

Our expertise (in residential and commercial underwriting) is the skill set that informs our institutional advisory work and leads the way to successful institutional participation in the large volume of FDIC related asset resolution activity to follow in the coming years.

FDIC Steps Up Busted-Bank Loan Sales on Terms Buyers ‘Love’

Bloomberg News

April 14 (Bloomberg) -- Starwood Capital Group LLC, Colony Capital LLC and TPG, whose leaders profited from the 1990s savings and loan crisis, are among firms buying assets from the Federal Deposit Insurance Corp. for as little as 22 cents cash on the dollar, according to data compiled by Bloomberg.

The sales, some including no-interest financing from the agency, are part of an FDIC effort to clean out $40 billion of loans that regulators seized from failed banks. Starwood Chief Executive Officer Barry Sternlicht told potential investors in February it’s “very hard to lose money” on the deals.

The government, which was faulted two decades ago for letting bank assets go at fire-sale prices, is planning to profit along with investors. Instead of selling the loans outright, the FDIC kept stakes of 50 percent or more in at least five loan portfolios sold since September. It’s also demanding as much as 70 percent of any gains.

“They are doing a much better job this time around,” said John Bovenzi, the FDIC’s chief operating officer until last year, who also helped unwind the S&L crisis. “They have learned a lot, and they aren’t making the same mistakes.”

Loan sales planned or completed so far this year total more than $8 billion by book value, compared with $10 billion in all of 2009. The FDIC arranged at least $860 million in interest- free financing this year to support deals, according to statements from the buyers.

Failed Banks

The sales involve packages of loans acquired by the FDIC from 182 banks that failed since the start of 2009. The loans typically are tied to commercial real estate and residential development, and can include debt on which borrowers stopped making payments or property seized by the bank.

Terms entitle taxpayers to a share of any money that private investors squeeze from delinquent borrowers or any profit earned reselling the assets. The FDIC-backed debt has to be repaid before the private-equity firms can take any cash generated by the loans.

Financing doesn’t go directly to investors. Instead, the FDIC is creating limited liability companies that hold the loans being sold and receive the financing.

“It’s very hard to lose money on a transaction like that,” Sternlicht said on a Feb. 11 conference call with potential investors, according to a copy obtained by Bloomberg News. “That’s the kind of asymmetric risk profile you love in a deal.”

‘So Distressed’

Financing is made on a deal-by-deal basis and won’t necessarily continue, said agency spokesman Andrew Gray.

“The financing helps pricing,” FDIC Chairman Sheila Bair said in a March 19 interview. The packages include hundreds of loans where borrowers aren’t making payments. Some “may be so distressed that a healthy bank just does not want to deal with them,” Bair said.

Linus Wilson, a finance professor at the University of Louisiana at Lafayette who has written more than a dozen papers on government bailout programs, said the FDIC’s zero-percent financing artificially inflates prices by as much as 20 percent and leaves the agency’s insurance fund vulnerable to losses.

The regulator may have to write down the value of its holdings if private-equity managers can’t recover as much from the loans as they expect, Wilson said. The agency could also lose money if its partners don’t make enough to repay the FDIC’s financing, he said.

“A better structure would not subsidize high levels of leverage, and it would eliminate the government’s stake entirely,” he said.

That would also allow the agency to collect cash more quickly while reducing risk, according to Wilson.

Resolution Trust

Things have changed since Sternlicht, 49, oversaw a fund that bought assets from the Resolution Trust Corp., the government agency that sold loans and property of failed lenders in the 1990s. The RTC disposed of $394 billion of assets from 747 banks between 1989 and 1995, according to an FDIC review published in 2000. Back then, a fund Sternlicht managed earned about a 94 percent return on purchases including those from the RTC, he said in the February call.

This time when Starwood and its partners won a stake in a company holding $4.5 billion of unpaid loans, the FDIC added an “equity kicker.” It increases the agency’s stake to 70 percent from 60 percent once the Starwood-led group makes back twice its initial investment and earns a 25 percent internal rate of return, according to the regulator.

The loans Starwood will help oversee were once held by the failed Chicago lender Corus Bankshares Inc.

‘Real Partnership’

“Structured loan sales benefit both investors and the U.S. taxpayer,” Sternlicht said in a telephone interview. “There is real partnership between the FDIC and investors in these deals, so you better be good at managing the assets.”

Homebuilder Lennar Corp. also bought into two limited liability companies holding loans seized from failed banks. The Miami-based builder paid $243 million for a 40 percent stake in two LLCs with $3.05 billion of unpaid loans, according to data compiled by Bloomberg.

Lennar’s cash contribution comes to about 19 cents per dollar of book value for its interest in one of the limited liability companies and about 23 cents for the other. In a February regulatory filing, Lennar valued the deals at about 40 cents on the dollar after taking into account $627 million in interest-free financing that went to the holding companies and the equity stake the FDIC is keeping.

Book value refers to the unpaid balance of the loans.

Lennar spokesman Marshall Ames declined to comment for this story.

The Starwood-led group including TPG and developer Richard LeFrak bought a 40 percent stake in the company holding Corus’s portfolio for 31 cents cash on the dollar as measured against its share of the book value of the assets. The FDIC covered half of the deal’s $2.77 billion purchase price with an interest-free loan.

Flats at Loft 5

Prospects for properties backing the FDIC assets are mixed, according to LeFrak, who visited a Corus property called the Flats at Loft 5 while in Las Vegas for his son’s wedding in October. About half of its 272 units are for rent, according to the leasing office. That’s because the condos didn’t sell, said LeFrak, whose holdings include 15,000 New York City apartments.

“It was kind of like in the middle of nowhere, and the design was kind of unusual and you went: ‘Why would anyone do this?’” he asked.

By contrast, LeFrak halted what he called “dirt cheap” sales at the Carlos Ott-designed Artech condominiums in Aventura, Florida, so that his group could raise prices. The Artech’s floor-to-ceiling windows overlook the Intracoastal Waterway, and buyers have access to boat slips, a beach club and a chartered yacht, according to marketing materials.

The FDIC pledged up to $1 billion in working capital and to complete construction on unfinished developments, Starwood said in an October statement.

‘Enormous’ Risk

“These are complex portfolios that face construction, litigation and performance issues,” said Colony Capital CEO Thomas Barrack, whose Santa Monica-based firm offered about 20 percent less than Starwood in the Corus bidding, people familiar with the sale said at the time. “They come with an enormous amount of risk, and bidders are betting to a degree on when the market corrects itself.”

Colony returned to the FDIC auctions in January and won, paying 22 cents cash on the dollar for a 40 percent stake in a company holding $1.02 billion in unpaid commercial real estate loans. The FDIC retained a 60 percent interest and provided zero-coupon notes to finance the deal, Colony Financial Inc. said in a regulatory filing.

Colony valued the purchase at 44 percent of the unpaid balance of the loans.

Barrack, Bonderman

Colony’s Barrack, Starwood’s Sternlicht and Fort Worth, Texas-based TPG co-founders David Bonderman and James Coulter all have experience buying bank assets dating back to the savings and loan crisis.

Barrack, Bonderman and Coulter worked for Texas billionaire Robert Bass before starting their own private-equity firms. Bass oversaw the purchase of American Savings & Loan in a government- assisted rescue in 1988, at the time one of the biggest S&L failures.

Representatives of Colony, TPG and Starwood Capital declined to comment about whether they are participating in pending auctions by the FDIC.

FDIC sales scheduled this month included a $610.5 million package of real estate debts assembled from 19 seized lenders, including IndyMac Bank, Silverton Bank and New Frontier Bank. Regulators are also preparing to sell $3 billion of loans from AmTrust Bank, the Cleveland-based lender seized in December.

Reluctant Banks

Private buyers are taking a bigger role in FDIC disposals because banks are glutted with commercial property and reluctant to buy more, said Chip MacDonald, a partner with Jones Day in Atlanta who specializes in deals among banks.

U.S. banks had $119 billion of non-performing commercial real estate loans on their books as of the fourth quarter, according to Foresight Analytics, a bank and property research firm in Oakland, California. Defaults are expected to pile up through 2011, and lenders have written off only 30 percent of the bad commercial mortgages they’ll ultimately face, according to a March report from Moody’s Investors Service.

“They just don’t need more exposure to real estate,” MacDonald said.

To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net Phil Mattingly in Washington atpmattingly@bloomberg.net .

Tuesday, April 13, 2010

Investment group bucks trend, invests in small banks

Atlanta Business Chronicle - by J. Scott Trubey Staff Writer

Friday, April 9, 2010

Betting on the banking sector’s recovery, a Buckhead-based fund has seen big returns on small investments in community banks.

Sagus Partners LLC, an investment group led by former Burke Capital Group investment banker David Brown, and partners including State Bank & Trust Co. Chairman and CEO Joe Evans, has deployed $23 million in its main fund over the past two years in strategic investments in Southeastern banks.

The group has had remarkable success so far, posting a 26.3 percent net return in its Sagus Financial Fund L.P. since January 2008, compared with the S&P 500 bank index’s net loss of 45.9 percent during that same period.

“This cycle, like the last cycle of the 1980s and 1990s, is going to transform the industry, eliminate some parties and make others stronger,” said Brown, a 15-year veteran investment banker who specialized in small bank mergers and acquisitions.
The window of opportunity, Sagus principals say, is generational. The firm has been buying stock in select smaller lenders with $500 million to $5 billion in assets that are trading at an extreme discount.

The bets are made that these institutions will survive the current cycle of failure to be later bought for a premium as bigger rivals seek greater market share or be consolidators themselves even after the failed bank sweepstakes comes to a close.
“Separate and apart from organic performance, we believe there’s another round of consolidation that will resume as the industry recovers, and banks in that size range are the beneficiaries of the consolidation process,” Evans said.

He should know. Evans led the July 2009 acquisition of tiny Pinehurst, Ga.-based State Bank, which became a platform to buy the six bank subsidiaries of the failed Security Bank Corp., and later metro Atlanta lenders The Buckhead Community Bank and First Security National Bank.

That bank will likely be looked at as a potential consolidator in the traditional sense, and other banks appear to be posturing to make buys even after the wave of Federal Deposit Insurance Corp.-assisted sales ends.

Evans has made a career of growing banks and selling them at a premium, from his days at Century South Banks Inc. and Flag Financial Corp.

Sagus also operates a distinct fund for regulatory purposes, called SBT Investment, that invested $8.5 million in the formation of State Bank last July. That investment, less than 4 percent of the bank’s privately held stock, is now valued at $14 per share, up 40 percent in less than a year.

The Sagus team includes several of Evans’ lieutenants with State Bank as well as J. Thomas Wiley Jr., the head of Bankers’ Capital Group LLC, a private equity group and major State Bank investor.

All are experienced bank operators with deep connections in the industry. They know the players and they know the makeup of the right banks in which to invest, Brown said.

The team has avoided community banks in the hardest-hit markets, or that were overly gung-ho on residential development loans. The team also scoped out banks with solid branch networks and stable core customers in growth markets that weren’t likely to be forced to raise capital at gunpoint, diluting investors.

Sagus invests mostly in illiquid stocks — though it has placed money in some publicly traded banks. The plan is for longer-term holds, waiting for the cycle of natural merger and acquisition activity to begin after the failed bank bonanza has run its course.

Investments in smaller lenders, many of them not publicly traded, is where real money can be made, industry observers say. Adam Aspes, institutional equity trader for Sterne, Agee & Leach Inc. in Atlanta, said Sagus has a deep team and breadth of knowledge of the region’s smaller banks.

“There’s no doubt that there’s a huge opportunity to recapitalize small banks and [Sagus] is in the middle of it all,” Aspes said. “They’ve got all the relationships and know who to support and who not to.”

Smaller lenders are still trading at distressed prices, and FDIC-assisted transactions for smaller banks can prove to be “transformative,” Aspes said. The group invests typically up to 5 percent of a bank’s stock, and would prefer to remain under 10 percent in ownership to avoid onerous regulatory requirements.
The only Atlanta bank in which Sagus owns stock is Buckhead’s Fidelity Southern Corp. (Nasdaq: LION), parent of Fidelity Bank andLionMark Insurance Co.

The banking company posted net income of $1.9 million and earnings of 11 cents a share in the fourth quarter, and said at the time that signs of improvement were appearing in its conservative balance sheet. Only a third of Georgia’s 300 banks posted net gains in the fourth quarter.

Fidelity’s stock bottomed out at $1.09 in March 2009, but has since rebounded to $7 at the April 6 close.

Sagus invested its first dollars in early spring 2008 and had invested 50 percent of its capital by the end of that year. Most of its capital is currently deployed, though liquidity remains for other investment opportunities.

“We felt that strategy was conservatively aggressive,” Brown said. “We were buying when no one else was.”

Sagus had an 18-month deployment schedule, and has managed to invest its capital at or near the bottom of the market, missing much of the “carnage” on the way down, Brown said.

“We didn’t have to have it exactly right, but we needed to be close,” he said. After being down for 2008 on average, the fund has seen a strong rally in community banks during the last three quarters of 2009, and particularly the first quarter of 2010. Investors are mostly high-net-worth individuals, families and endowments based in Georgia.

“We have a lot of our own money in this fund and most of our investors are friends, family and close associates,” Evans said. “We strongly believe in the Will Rogers saying that the return of your money is more important than a return on your money.”

FDIC extends key deposit program

By David Ellis, staff writer

April 13, 2010: 11:46 AM ET

CNNMoney.com


NEW YORK (CNNMoney.com) -- Federal banking regulators voted Tuesday to extend a program that offers U.S. businesses unlimited insurance coverage on their bank accounts.

The FDIC's Transaction Account Guarantee program, which was launched in October 2008 to prevent firms from pulling their money out of small banks, was originally set to expire on June 30.

Board members of the Federal Deposit Insurance Corporation unanimously agreed Tuesday to extend the TAG program for an additional six months, with the option of expanding it until the end of 2011.Under the program, the FDIC guaranteed funds in noninterest-bearing transaction accounts beyond their traditional $250,000 limit.

James Chessen, chief economist of the American Bankers Association, praised the FDIC's decision. He said that the FDIC program has "provided stability and confidence for many bank depositors" and added that "it is as important as ever to assure depositors that their money is safe."

Approximately 6,400 lenders, or roughly 80% of all federally-insured banks participate in the program, according to sources. Many of those banks are local and community lenders, a group that is still grappling with commercial real estate loan losses and other problems.

Some experts were concerned that an end to the FDIC program would lead to more failures of smaller banks and additional hits to the FDIC's deposit insurance fund.

This fund, which covers customer deposits when a bank fails, slipped into the red last fall for the first time since 1991. The fund's deficit continued to balloon during the final three months of the year to nearly $21 billion - its largest deficit on record.

The FDIC also proposed a new system Tuesday for how it determines payments large banks must make in order to support the deposit insurance fund.

FDIC Chairman Sheila Bair said the new system, which would only include the 100 or so institutions that have $10 billion or more in assets, is expected to do a more effective job in gauging banks' risky behavior, particularly during periods of economic calm.

About 52% of the biggest financial institutions would end up paying less than what they do today, according to sources.

Sunday, April 11, 2010

#42: After a two week break, a relatively quiet FDIC 'Bank Failure Friday' (only one bank down). Is pressure building or subsiding?

FDIC April 9, 2010 Press Release:

-Bank of North Carolina, Thomasville, North Carolina, Assumes All of the Deposits of Beach First National Bank, Myrtle Beach, South Carolina.

-As of December 31, 2009, Beach First National Bank had approximately $585.1 million in total assets and $516.0 million in total deposits.

-The FDIC and Bank of North Carolina entered into a loss-share transaction on $497.9 million of Beach First National Bank's assets. Bank of North Carolina will share in the losses on the asset pools covered under the loss-share agreement.

-The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $130.3 million. Bank of North Carolina's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to all alternatives.

Thursday, April 8, 2010

Private Equity Money Seeing Opportunities in CRE Again

While Major Action May Not Occur til 2011, Some Anxious To Get in Now

By Mark Heschmeyer, costar.com

April 7, 2010


Fund managers and others involved in the real estate private equity sector expect further deterioration in commercial real estate this year as unemployment leads to lower commercial occupancies and declining rents. And that could be a good thing.

With the sector still in recession, many fund managers are preparing for the beginning of a "generational buying opportunity" that could manifest as early as the first quarter of 2011, according to a survey by Ernst & Young's Real Estate Fund Services.

The survey, Market Outlook: Trends in the real estate private equity industry 2010, reveals that most market participants polled expect a gradual opening of debt and equity markets to occur by the end of this year as investors shift their strategy away from preservation of capital and begin to search for higher returns on investment.

But while many have noted the investment opportunity expected as a result of the deep recession, few seem to agree when investors should expect to see those opportunities.

For example, in its 2010 Private Equity Outlook, asset management firm Neuberger Berman said it expects a "a potentially large and sustained period of opportunity," and noted that that distressed real estate is "in" as an investment.

"Lower valuations in the U.S. commercial real estate sector are likely to continue to make debt refinancing more difficult and the distressed investing opportunity for that asset class more robust. The maturity schedule of commercial mortgages may exacerbate this stress, precipitating a need for more equity to be provided to leveraged real estate and, as a result, the potential for change in control. Given the size of the U.S. commercial mortgage market, these circumstances provide a potentially large and sustained period of opportunity," Neuberger Berman reported.

In Ernst & Young's survey, almost nine out 10 U.S. respondents (87%) also said they believe that the availability of debt and equity capital will increase by the end of 2010. However, few respondents see the U.S. real estate leveling out before then. Most expect 2011 to be the year in which investment opportunities start to appear in some abundance.

"Significant amounts of opportunistic capital have been accumulated to invest in distressed real estate, but simply stated, there is not enough distress to go around," said Gary Koster, Ernst & Young's global leader of Real Estate Fund Services. "Real estate lenders are not forcing the issue with respect to maturing debt which is under-collateralized. If the banks won't take action and instead choose to just extend loan maturities, there is little incentive for real estate owners to trade at current valuations. Given the impact that alternatives - such as foreclosure - will have on bank earnings and capital, it's not difficult to see why lenders' 'extend and pretend' strategy is still being widely deployed for maturing loans."

A majority of respondents to the survey clearly said they believe the commercial real estate crisis among U.S. banks is still only in the "middle innings" - 70% expect that banks will feel increasing pressure to trade troubled loans at reduced valuations or move to foreclose on problem assets by the end of this year.

"The consensus, at least in the US, seems to be that 2011 will be the year in which transaction velocity in the real estate private equity market returns in earnest," Koster said. "However, before fund sponsors can take advantage of the returning market opportunity, they must address any existing problems in their legacy investment portfolios and generally set their houses in order."

The report also points to a central dichotomy in the mindset of U.S. real estate private equity managers.

"The banking community's strategy of deferring the impact of distress is a double-edged sword for the real estate fund sector," Koster said. "The lending community's reliance is a lifeline for investors short on capital and holding problem assets, but it's a challenge for investors long on capital yet to be invested and anxious to put that capital to work at current valuations. Whatever the eventual outcome, one side of the market will ultimately be disappointed."

At least one investment manager Mark Taborsky, executive vice president and product manager at Pimco, said in a March Viewpoint that the reluctance to jump in now also presents its own opportunities.

"We also may see many kinds of opportunities in natural resources, real estate (mindful of the refinancing that will take place on a large scale in the coming years) and in other spaces. But each situation will be different, and most such opportunities are likely to have longer-term horizons," Taborsky said. "After the crisis, there isn’t as much willingness for investors to embrace illiquidity. So while liquid markets have rallied a lot, illiquid assets will lag as their liquidity premium gets re-rated. It’s going to take time for capital to return to less liquid and longer duration strategies. This itself is an opportunity - the fewer the bidders there are for long-term cash flows, the higher the expected return an investor may be able to command."

It appears Taborsky is not be alone in that thinking. According to an analysis of first quarter investment activity by CoStar Group, private equity funds have returned to commercial real estate office market as buyers. Private equity investors were net sellers last year reducing their holdings by a net of about $100 million. This year, though private equity investors have upped their holdings by a net gain of about $300 million.

Small Banks Quickly Shed Commercial Real Estate Risk

Apr 7, 2010 2:27 PM, By Sibley Fleming, NREI managing editor, nreionline.com

Under pressure from federal regulators and weighed down by an unhealthy exposure to commercial real estate, small banks — or those in the $1 billion to $100 billion asset range — are making haste to clean up their balance sheets, according to Oakland, Calif.-based Foresight Analytics, a unit of Trepp LLC.

In the fourth quarter alone, the nation’s small banks cut the total outstanding balance of commercial real estate construction and land loans by about 13%, while large banks with assets of $100 billion or more only trimmed back by about 4%, says Matt Anderson, managing director for Foresight.

The contrast in the outstanding balance of construction and land loans is even greater when comparing the fourth quarter of 2008 to the fourth quarter of 2009. Small banks held $121.7 billion and $83.4 billion respectively, a 31.5% decline over one year.

“Given that there’s not much in the way of other financing out there right now, to the extent that they’re shedding exposure, it’s more through selling off the loans to someone else or potentially through foreclosures,” says Anderson. The buyers of this debt have generally been private equity players that want to expand into commercial real estate, particularly if there’s a discount involved.

However, Anderson points out that many small banks claim the haircuts on the sales haven’t been as severe as they had originally anticipated.

“Given that the volume of non-performing loans has continued to grow, I’m guessing the ones that are selling are the ones where the bank isn’t having to take as big of a loss,” he says. “They’re choosing which ones to sell and they’re picking the ones that can get somewhat better pricing.”

The loans selected for disposition, in fact, may even be performing loans or “less bad” non-performing loans. For example, the discount on a loan for a piece of land far from an urban center and the discount on a loan for a project already under way in an urban setting is vastly different.

Bad rep

Over the past year, small banks have gained the reputation for not only being over-weighted in construction loans and mortgages but for holding loans of a lower quality than their larger bank brethren.

In February, the Congressional Oversight Panel, established by Congress in 2008 to oversee expenditures of the $700 billion Troubled Asset Relief Program, said that of the approximately 8,100 banks in the U.S., 2,988 are small banks that are dangerously exposed to commercial real estate.

In addition to the lack of diversification, these community and mid-sized banks also hold high concentrations of the riskiest and least sought-after loans, including transition properties and construction loans in secondary or tertiary markets, according to the panel.

The one plus, many small banks contend, is that on the mortgage side of the business they have a significant exposure to owner-occupied properties, which have performed better than income-producing properties. “It’s better but not problem free,” says Anderson.

Owner-occupied properties made up 43% of total loans outstanding for small banks at the end of the fourth quarter, and had a delinquency rate of 4.8%. That compares with 57% of loans backing income-producing properties, which had a delinquency rate of 6% over the same period.

No going back

Despite paring back their commercial real estate exposure, small banks are unlikely to be making room on their balance sheets for new commercial real estate loans. “[They are] cleaning up the risk and not planning on coming back anytime soon,” says Anderson.

With $1.4 trillion in commercial real estate debt maturing over the next five years and no obvious source of funding to soak it up, Anderson does not foresee any major improvement for commercial real estate lending in the near term, even if commercial mortgage-backed securities issuance continues to recover at a healthy pace. “Even if it doesn’t end incredibly badly for everyone, at best [the commercial real estate industry] is essentially treading water.”

Wednesday, April 7, 2010

The FDIC Loss Sharing Experience from the Last Big Crash to the Present Crisis (Part II):

What conclusions can we draw about the first quarter of 2010?

The loss sharing mechanism has dampened the potential for rampant private sector speculation that priced and cleared assets on a massive scale in the previous crash via RTC and FDIC asset sales. FDIC loss sharing intentionally encourages a slower, more methodical and patient approach to the resolution of individual assets, an investment regime private equity is not as accustomed to. In the case of most of the 2009 activity there has been little or no individual asset price discovery. We do know that in 2009 $2.5 billion of outright FDIC loan sales yielded 43.2% of book value overall, ranging from 26.4% of book paid for non-performing loans to 57.3% paid on performing loans. With such limited 'outright' asset sales, asset pricing is not particularly indicative given that loss sharing transaction volume is approaching a whopping $140 billion cumulatively.

The data points or the “moving parts” of the loss sharing agreements available for our view in FDIC-assisted whole bank sales are: total bank assets, loss sharing assets, DIF cost, asset and deposit bid premiums or discounts and stated thresholds contained in the agreements. In the first quarter of 2010 alone 41 banks failed with a total of $22.8 Billion in combined assets. The FDIC entered into loss-share transactions in 35 cases covering a total of $15.4 Billion of failed bank assets or nearly 70% of failed asset total. The total First Quarter cost to the Deposit Insurance Fund ("DIF") was $6.725 Billion. One very, very rough metric indicated by the FDIC data in the first quarter of 2010 might be, as measured by DIF cost to failed bank asset ratio, that the FDIC assets being transferred to the new banks are worth roughly 30% less than book. It could be more or could be less in the end. Each whole bank sales structure is unique. The ultimate economic outcome won’t be known for 3-10 years because of the way loss sharing agreements are structured to slowly and methodically resolve the individual problem assets.

If we boil it down, loss sharing is a variation of the ‘good bank/bad bank’ structure, the transferred ‘bad bank’ assets are now nested within healthier FDIC -assisted banks for the near to long term while asset prices firm and hopefully rise before they are ultimately resolved. In the first quarter of 2010 the markets have settled down. Economic recovery is widely believed to have begun. The hysteria of 2008 has subsided for now, allowing for an orderly transfer of bad bank assets to the private sector. The FDIC has complete confidence in the success of the approach, so much so that there is talk that they may be modifying the terms of the deals in the agency's favor by eliminating the provision where the FDIC would cover 95% of losses after the threshold loss amounts are reached.