Thursday, September 30, 2010

What FDIC Loss Sharing Compliance on Commercial Assets Looks Like

Compliance contracts have been awarded to FDIC Loss Share Agreement Contractors

“The scope of work under Loss Share Agreement (LSA) contracts, which have been awarded to the Contractors… encompasses oversight, surveillance and compliance monitoring of Loss Share Agreements (LSA) for Single Family (SF) and Non-Single Family (Non-SF) loss share loans, including whole loans and securities backed by SF and Non-SF loans. Under these contracts, certain assets of a failed bank(s) are identified as Loss Share Assets and passed to an acquiring bank(s) (Acquirer) under Purchase and Assumption Agreements (P&A) subject to Loss Share coverage.”

Compliance Contractors will conduct on-site reviews. Consistency of Credit Administration is Key

“During the pre-examination planning phase of on-site reviews, examiners will obtain a copy of any loss-sharing agreement and closely review the terms. The examination asset review will include a sample of commercial assets covered by LSAs, the volume of which will provide the examiner-in-charge with sufficient information to assess whether the acquiring institution applies its loan administration processes, credit risk management policies (including its loan review and credit grading policies), and loss recognition and charge-off standards to covered commercial assets in a manner consistent with its treatment of commercial assets not covered by LSAs. For covered single-family residential mortgages, the scope of asset reviews will be similar to a regular examination of such assets. The LSA and the covered assets are not being examined per se. LSAs are a risk mitigant and will be considered when assigning classifications and determining examination conclusions. However, if nonconformance with the terms of an LSA is apparent during an examination, examiners should contact the appropriate regional office which will advise the FDIC’s Division of Resolutions and Receiverships of identified issues.”

Wednesday, September 29, 2010

More Developments

FDIC's Bair: 2% Insurance Reserve Ratio Best For Potential Crisis

WASHINGTON -(Dow Jones)- Federal Deposit Insurance Corp. Chairman Sheila Bair Wednesday said the agency's Deposit Insurance Fund should have a minimum reserve ratio of 2% ahead of a possible banking crisis, significantly above the 1.35% minimum specified in the Dodd-Frank Act approved by Congress this summer.

The minimum designated reserve ratio was 1.15% prior to Dodd-Frank.

But an FDIC analysis indicated that the fund's minimum reserve ratio--which measures the fund's balance against estimated insured deposits--"should be about 2% in advance of a banking crisis in order to avoid high deposit insurance assessment rates when insured depository institutions are strained by a crisis and least able to pay," Bair said in remarks prepared for a Senate committee hearing scheduled for Thursday.

The FDIC assesses member banks a fee to back the deposit insurance fund, which in turn guarantees the safety of depositor funds.

-By Jeffrey Sparshott, Dow Jones Newswires; 202-862-9291; jeffrey.sparshott@ dowjones.com

FDIC Chairman: Framework In Place With Dodd-Frank Act To Resolve Any Failing Financial Entity

RTTNews.com

9/28/2010 5:12 AM ET

Sheila Bair, Chairman of the Federal Deposit Insurance Corp. (FDIC), Monday said that a framework is in place with the Dodd-Frank Act to resolve any failing financial institution that poses a significant risk to the financial stability of the U.S.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Barack Obama on July 21, is designed to end "too big to fail." Under the Act, the FDIC has broad authority to operate or liquidate a failing financial company, sell assets, and resolve the liabilities of the company immediately after the FDIC's appointment as receiver or when conditions become appropriate.

If selling the assets of the company to another entity is not possible, the FDIC can create a bridge financial company to maintain the failed entity's critical functions. The orderly liquidation process established under Title II of the Dodd-Frank Act imposes the losses on shareholders and creditors, while protecting the economy and taxpayer interests. Similarly, the FDIC will be able to act quickly in resolving non-bank financial companies under the Dodd-Frank Act, Bair said.

Bair also stated that the FDIC, which insures deposits at the nation's 7,830 banks and savings associations, on August 10th has created the new Office of Complex Financial Institutions, and the Notice of Proposed Rulemaking (NPR) is one step forward in the process. The FDIC is also consulting with the Financial Stability Oversight Council (FSOC) members in accordance with the Dodd-Frank Act, and plans to ask for a notational vote next week after the first meeting of FSOC.

In a separate announcement, the FDIC said that its Board of Directors approved a final rule to extend through December 31 the Safe Harbor Protection for Treatment by the FDIC as conservator or receiver of financial assets transferred by an insured depository institution in connection with a securitization or participation.

According to the FDIC, the Board had extended the protections twice previously. The last extension is set to expire on September 30. The safe harbor regulation fully conforms to the provisions of the Dodd-Frank Act.

THE FDIC also announced that the Board has approved the issuance of a proposed rule to provide depositors at all FDIC-insured institutions with unlimited deposit insurance coverage on noninterest-bearing transaction accounts beginning December 31 through December 31, 2012. The proposed rule is intended to implement the provisions of the Dodd-Frank Act.

Under the proposal, the FDIC will create a new, temporary deposit insurance category for noninterest-bearing transaction accounts, which are mainly checking accounts used by businesses for payrolls, accounts payable and other purposes. The FDIC said it will accept comments on the proposed rule through October 15.

FDIC Set To Approve Securitization Rule

SEPTEMBER 27, 2010, 11:30 A.M. ET

By VICTORIA MCGRANE, Wall Street Journal

WASHINGTON—U.S. banking regulators on Monday continued to press forward with new rules governing asset-backed securities, seeking to make banks more accountable given the role securitization has played in a number of bank failures.

The Federal Deposit Insurance Corp. will consider and vote on a final proposal that would require sellers of securitized assets to retain 5% of the risk, as well as set new standards for certain types of assets. The new standards would apply to transactions that occur after Dec. 31 of this year.

The FDIC's board will also get a briefing from staff on certain narrow aspects of the new power given to the agency to wind down systemically important financial firms teetering on the verge of failure.

Staff said they held off offering a formal draft proposal in order to have more time to consult with other key regulators. The board is expected to vote on a proposal dealing with several narrow aspects of the resolution authority soon, an FDIC official said.

At issue is how the FDIC treats securitized assets when a bank fails. The agency had traditionally provided a safe harbor from such assets, preventing the government from going after the assets backing the securities in the event of a failure.

Recent accounting-rule changes, as well as the role securitization has played in the growing number of bank failures, have forced regulators to reconsider the issue.

Write to Victoria McGrane at Victoria.McGrane@dowjones.com

Tuesday, September 28, 2010

New FDIC rule makes banks share some risk

Associated Press
Tuesday, September 28, 2010

Banks will have to share in the risk when they sell investments of the kind that rocked the financial system in 2008 under new rules adopted Monday by the Federal Deposit Insurance Corp.

The FDIC is requiring that banks hold at least 5 percent of the securities on their books, as part of rules required under the new financial overhaul law. Banks would be required to purchase their share of the securities beginning Jan. 1.

The idea is that banks with such exposure to risk would be more careful about properly screening borrowers. Experts say that banks' lack of investment in the risky securities contributed to the financial meltdown.

Financial industry executives have opposed the requirements, arguing that banks don't have enough room on their balance sheets to retain 5 percent of all the loans they make.

At a meeting, the FDIC board also voted to extend through Dec. 31 a guarantee against seizure of the securities in a bank failure if the requirements aren't met. It was set to expire Thursday.

Monday, September 27, 2010

Latest Big Banking Bust: US Bails Out 'Wholesale' Credit Unions

http://marketplace.publicradio.org



People in a credit union offfice.
Kai Ryssdal talks to the New York Times' Eric Dash about how the federal government is stepping into help wholesale credit unions, which support hundreds of credit unions around the country.
People in a credit union offfice. (Bensacco)

Links

TEXT OF INTERVIEW

KAI RYSSDAL: If you wanted to pick a part of the banking industry that you'd bet your bottom dollar would be safe and prudent and not likely to do something silly with your money, a lot of people would probably say credit unions.
And they'd be wrong.
Last week federal regulators took over three institutions that're what's called wholesale credit unions. They're basically credit unions for your local credit union. And they were shut down because they had plowed a bunch of money into bad investments. Can you say subprime mortgages?
Eric Dash reports on banking for the New York Times. Welcome to the program.
ERIC DASH:It's great to be here.
RYSSDAL: So I think, and I think most people, think of credit unions as being this sort of college town or trade group or whatever sort of local small banking institution. But there is this whole other layer, right, wholesale credit unions?
DASH: Right. Well credit unions have always held themselves out as the safest havens of the banking industry. They were the places that didn't make subprime loans; they shied away from commercial real estate. They were where you just sort of went and parked your cash. And as it turns out, that's true. And 99 percent of credit unions are just fine. But unfortunately, there was this extra layer there that serviced these credit unions. They provided things like payment processing and investment services to the retail credit unions, which are places that you and I would go. And when the retail credit unions left their money at these wholesale credit unions, they re-invested it. Some of the things that they re-invested turned out to be complex mortgages and subprime bonds. And when the market collapsed, so did those investments.
RYSSDAL: Is there taxpayer exposure on these things?
DASH: Taxpayers aren't expected to lose a penny on these things. The industry is going to pick up the costs. Just sort of the way that FDIC insurance works: When a bank fails, it's the banking industry that pays for the costs of resolving that bank. And when a credit union fails, through a similar mechanism, the credit union industry will pay. It's probably going to cost the credit union industry anywhere between $7 and $9 billion, which is a lot of money.
RYSSDAL: Yeah, but if you're a credit union customer, you can safely expect to see $7 to $9 billion worth of fees tacked on, right? Because they're not going to take that out of their own pockets.
DASH: The industry is going to get hit with an assessment fee, and that may wind up getting passed on to consumers. But it's also a competitive industry, and also rates are very low right now. So it's hard to sort of predict where it's going to show up in the consumer experience.
RYSSDAL: The thing that raised our eyebrows when we heard about this and read about this story was the fact that mortgage-backed securities, these toxic assets, are still out there and they are still working their way through the financial system. We're not done yet.
DASH: Right. No, we're not. We're probably -- if you talk to the experts -- about halfway through the bad assets...
RYSSDAL: Wait. Say that again. Halfway through two years on?
DASH: Two years on. There were probably, at the height of the crisis, something like $1.5 trillion worth of residential real estate and $500 billion of commercial real estate. We're a lot further along on the residential side of things, but there's still a lot of commercial real estate; it's the shoe that hasn't yet dropped.
RYSSDAL: If we're halfway through, though, is the worst of it over? Now that we know what's out there?
DASH: The way I look at it, this was sort of one of the last remaining hurdles for regulators. We had the big resolutions of companies like IndyMac and Washington Mutual, then we had a wave of regional banks that were in trouble. We sort of took care of those, then we've had about 279 or so smaller banks that needed to get resolved. I think that you're starting to see signs that the worst of the problem loans are starting to stabilize.
RYSSDAL: Eric Dash is a banking reporter for the New York Times. Eric, thanks a bunch.
DASH: Thank you.

Saturday, September 25, 2010

2010 Bank Failure Total Reaches 127

TheStreet.com

Financial Services

Two U.S. Banks Fail, 2010 Total Now 127

Philip van Doorn

09/25/10 - 10:49 AM EDT
WASHINGTON (TheStreet) -- State regulators closed two banks Friday, bringing the total number of U.S. bank failures for 2010 to 127.

Both failed banks were previously included in TheStreet's Bank Watch List of undercapitalized institutions, based on second-quarter regulatory data provided by SNL Financial.

Haven Trust Bank of Florida

State regulators shuttered Haven Trust Bank of Florida and appointed the Federal Deposit Insurance Corporationreceiver. The FDIC arranged for First Southern Bank of Ponte Vedra Beach, Fla. to assume the failed institution's total assets of roughly $149 million, along with all of its deposits. Under a loss-sharing agreement, the FDIC agreed to cover 80% of Southern Bank's losses on $127.3 million of the acquired assets.

First Southern Bank is the main subsidiary of First Southern Bancorp(FSOF).

Haven Trust Bank of Florida was organized in August 2006 and never achieved a profit, quickly becoming heavily concentrated in construction loans and commercial mortgages. The total for these two loan types peaked at $122 million in June 2009, or 68% of total assets.

The bank was operating under a Jan. 27 consent order -- essentially a cease-and-desist order -- from the FDIC and the Florida Office of Financial Regulation requiring the bank's board of directors to take a more active role in managing the institution, to meet regularly following a formal agenda, to make sure that board members were properly trained and to "retain qualified management." This type of requirement implies that board oversight may have been lacking even before the credit crisis began, raising the question why this part of the order wasn't handed down years earlier.

The order also required the bank to raise sufficient capital to increase its tier 1 capital to 8% of its total assets and its total risk-based capital ratio to 10% within 120 days. In order to be considered well-capitalized, most banks and thrifts have to maintain a tier 1 leverage ratio of at least 5% and a total risk-based capital ratio of at least 10%.
Haven Trust Bank of Florida's two branches were set to reopen during normal business hours as branches of First Southern. The FDIC estimated the cost of the bank closure to its deposit insurance fund would be $31.9 million. As of June 30, the capital ratios were 2.04% and 3.75%, respectively.

North County Bank

State regulators closed North County Bank of Arlington, Wash. The FDIC was appointed receiver and sold the failed bank's $276 million in deposits for a 2% premium to Whidbey Island Bank, Coupeville, Wash., which is held by Washington Banking Co.(WBCO).

Whidbey Island Bank also took on the failed bank's $289 million in total assets, with the FDIC agreeing to cover 80% of losses on $221.9 million.

The failed bank had been operating under an August 2009 cease and desist order from the FDIC and the Washington Department of Financial institutions, requiring North County Bank to retain qualified management and increase its tier 1 leverage ratio to 10% and its total risk-based capital ratio to 12.5% within 120 days. Four subsequent quarterly net losses left the capital ratios at 2.24% and 4.28%, respectively, as of June 30, and nonperforming assets -- including loans past due 90 days or more or in nonaccrual status, and repossessed real estate -- made up 22% of total assets.

The regulators ordered North County on June 24 to raise sufficient capital within 30 days to become adequately capitalized or arrange a merger with another institution. It's almost impossible in the current environment for a community bank with a high ratio of nonperforming assets to raise capital. That's because interested investors know it's better for them to wait for an institution to fail, given the generous terms the FDIC is offering to buyers of failed banks.

North County Bank's four branches were scheduled to reopen Monday as branches of Whidbey Island Bank. The FDIC estimated the cost of the failure to its deposit insurance fund would be $72.8 million.

Whidbey Island Bank also acquired the failed City Bank of Lynnwood Wash. in April.

Thorough Bank Failure Coverage

Florida Illinois GeorgiaFlorida leads all states with 24 bank closures this year, followed by Illinois with 15 and Georgia with 14.

All bank and thrift failures since the beginning of 2008 are detailed in TheStreet's interactive bank failure map:
The bank failure map is color-coded, with the states that have the greatest number of failures highlighted in dark gray, and states with no failures highlighted in light green. By moving your mouse over a state you can see its combined 2008-2010 totals. Clicking on the state will open a detailed map pinpointing the locations and providing additional information for each bank failure.

Friday, September 24, 2010

Bove: The Government's Killing Small Banks

Intelligent Investing
Alexandra Zendrian, 09.24.10, 1:00 PM ET
Forbes


Before Richard Bove, senior vice president of equity research at Rochdale Securities, sat down with Steve Forbes to discuss the banks that have raided their loan loss reserves, Bove took the pulse of the banking industry for me.

Alexandra Zendrian, Forbes: How do you see the top banks doing overall right now?

Bove: It's clear that they're struggling. A look at the core factors that drive the core earnings of the banks certainly indicates a couple of quarters that things aren't moving in a positive direction. In other words, their earnings assets, which would be their loans and their security holdings, are not going up, they're going down. Their net interest margin, which would reflect the impact of interest rates on their businesses, also going down because they cannot cut their cost of liabilities anymore even as their asset yields are declining.

Non-interest income, which is being impacted by all of this Dodd-Frank bill, is also going down. The only thing that's going up is their expenses. They're doing an extraordinarily poor job in both controlling their both their compensation expenses and their noncompensation expenses. So if you take a look at their earnings just based upon the core, they're going down. In the quarter that just came out, where the FDIC trumpeted as showing how improved the bank situation is, in my view bank earnings went down 6.5%.

What's causing the earnings to go up on a reported basis, even though on a core basis they're declining, and the reason is because they're lowering their loan loss provisions. Why are they doing that? Because they're taking money out of the reserves and putting it into earnings. They reduce their reserves during the quarter, all the FDIC insured banks basically took close to $12 billion out of the reserves and they reduced their loan loss provision by $11 billion and that was why they got an increase in earnings. There was no increase in earnings whatsoever based upon their normal operating activities. There was a huge increase in earnings as a result of the reduction of their reserves.

What impact will the limits on proprietary trading have?

The trading sector is doing particularly poorly right now and there's a seasonal, secular and cyclical reason for it. The seasonal reason is, of course, it's the summer. The cyclical reason is that the economy's slowing down, the markets are not performing particularly well. The secular reason is because certain fixed income products don't trade anymore. You don't have all the activity that one existed in structured financial products because nobody wants to buy them. The trading sector on handling transactions for others is not doing well. Most of the big banks have been cutting back their proprietary trading for about 18 months now. They started doing it when the financial crisis hit at the end of 2008 and they've continued to do it. I don't think that proprietary trading is as big a deal as it's touted to be.

There was the recent Securities and Exchange Commission settlement with Goldman Sachs. What do you think of Goldman Sachs now, and do you anticipate any future similar cases?

I think Goldman Sachs is going to be in courts for years. I think there are all sorts of lawsuits being introduced against Goldman Sachs and the legal business servicing Goldman Sachs is a growth industry. So I don't think Goldman Sachs will be out of the woods from the legal standpoint for quite some time.

I think the bigger question is whether there's been a structural change in their business which is going to make it more difficult for Goldman Sachs to make money in the future as it did in the past, and I don't believe there has been. The company makes money because it has trading systems which I believe are the best in the world, and I think that it has a very strong position in the equity portion of the industry which is our most unassailable. They basically have a very strong IPO business, a very strong merger and acquisition business. But the key reason that the company is not likely to see a substantial reduction in this is money supply keeps growing. The world money supply does not shrink. Money supply creates financial instruments and financial instruments are what Goldman Sachs trades.

There was an article a few days ago concerning that there were $4 trillion being traded every day in currencies. That shouldn't be surprising because the size of the market continues to grow. If we're right, the convertible currencies market is $40 trillion in size and it grows at 6% to 8% a year. The same thing will happen with the bond markets, government debt markets, equity markets. There's just too much money around to just assume that trading activity has been hurt for the longer term.

So could the case against Goldman Sachs happen to another firm?

Yeah, certainly I think it could. I don't think it will if the SEC really understands what's happening in the markets at the present time. I think that the United States government has convinced investors that the market is a place to avoid. Whether it's the president, whether it's Congress, whether it's the regulators, statements proliferated during this debate on this banking bill that's basically argued that people on Wall Street are corrupt, the products that they create are fraudulent, that the markets are not operating in a fair and even fashion.

When you have the president on down making these statements, it's pretty hard for the guy sitting in his living room saying, "I really want to put money in the stock market because I really believe in America and I believe in our financial system and I believe in where we're going as a country." Since there is no belief of that nature and since the government has gone out of its way saying that the markets are fraudulent, they passed this big bill in addition of all of their verbalizing that the markets aren't safe, people pulled their money out, which they should have done.

And the fact of the matter is, now you have the markets controlled by a very small number of traders, and this order-stuffing issue is overwhelming. According to the press reports, on one day there were 89 billion orders to buy and sell stock and one-and-a-half billion traded, which suggests that the market is being manipulated and controlled--and why should people get involved?

How do the community banks generally look to you?

It looks as if the government is driving them out of business, and the reason I say that is because in the Dodd-Frank bill, there's something called the Collins amendment, which was introduced by the senator from Maine, and basically this amendment disallowed the use of a type of security called a trust preferred. Now the trust preferred is a hybrid security, and I agree that it shouldn't have been allowed in the first place, but the fact is it was allowed, and it's been used aggressively for 20 years. It's become the primary source of funding for small banks in the United States. So now they're being told that they can't use it any longer and as a result, as these trust preferreds mature, these small banks are going to be forced to go out and find something to replace them.

At the same time as they're going to try to replace the capital, which is maturing, they're being told to increase the amount of capital they hold as a percentage of assets. So they've got two demands from the government, which is to get more capital and to stop using the primary instrument for getting capital, the result of which is they're going to go out of business. What you can see if you look, I said that there are roughly 7,900 banks in the United States, the number drops at an incredible rate every quarter.

We lose one bank every day, and that's been true for over 25 years, which means that we've lost over 7,000 banks. And that has not stopped; it's accelerating. So the net effect is we have this cross purposes type of legislation. On one hand, we've got the government demanding that the too big to fail issue go away. And on the other hand, they're forcing the small banks out of business, increasing the concentration of assets in the big banks.



Wednesday, September 22, 2010

Multifamily Sales Defy the Slump

SEPTEMBER 22, 2010

Apartment Deals Jump 32% as New Inventory Hits Market; Distressed Sellers

By DAWN WOTAPKA, Wall Street Journal


Home buyers might be sitting on the sidelines, but multifamily-building sales are on the rise, reversing the slowdown that followed the financial market's collapse two years ago.

Apartment transactions totaled $7.1 billion in the second quarter, up 32% from a year earlier, according to Marcus & Millichap Research Services. Real Capital Analytics reports that closed sales hit $2.6 billion in August, the highest month this year and the most active month since August 2008.

"That's more fuel, basically, for a fire that's going to continue into the fall," says Dan Fasulo, a Real Capital managing director.As sales heat up, plenty of new inventory is hitting the market—listings totaled $3.3 billion in August, on top of July's $3.5 billion.

To be sure, this activity still is well below peak levels: 2006's total topped $120 billion.

At the same time, the pickup in sales volume is pumping up prices from their depressed post-housing-crash levels, increasing the risk for buyers. "We see prices rising rapidly for apartment communities all around the country, even in some of those secondary markets that would make you shake your head," Mr. Fasulo says.

UDR Inc. earlier this month said it paid $455 million for five finished projects and one under development. The Denver-based company says it still got a deal: The price tag was a substantial discount to construction costs.

Looked at another way, buyers of top-quality properties in the best markets generally are getting yields of close to 5%, according to Haendel St. Juste, a real-estate-investment-trust analyst with Keefe, Bruyette & Woods Inc. In other words, an apartment complex that sold for $100 million would generate nearly $5 million in net income. One year ago, investors were getting yields of close to 6%, he says. Recently, Mr. Fasulo says he saw a 3% yield on a San Francisco deal.

The pickup in sales activity comes at a time of uncertainty as the market deals with a prolonged economic slump, and the sector could face pain. As of Aug. 31, 14.5% of multifamily loans held in commercial mortgage-backed securities were delinquent, a spike from 6.7% a year earlier, according to debt-analysis company Trepp LLC. About a quarter of recent transactions have come from distressed sellers, with many others coming from pressured sellers, Mr. Fasulo said.

Buyers maintain the sector is a sound bet, given that most of the current prices remain below construction costs. Apartment operators performed better than expected during the downturn, when some industry watchers feared renters would downgrade or move home in droves. Landlords had to offer rental discounts and other freebies to keep units filled, but most skirted drastic vacancy spikes and plunging rents. In the second quarter, rents climbed 0.6% to $946 a month, up from $940 in the first quarter but down from $959 a year earlier, according to Marcus & Millichap. Rent peaked at $1,000 in 2008's third quarter.

Also, there has been little new development in the past few years, which some industry watchers expect to create a supply shortage in some markets down the road. The vacancy rate, which peaked at 7.4% at the end of last year, is expected to drop to 5.5% by the end of 2011, according to CBRE Econometric Advisors.

Buyers have also been benefiting from government-sponsored enterprises Fannie Mae and Freddie Mac, which, as part of their mission to support housing markets, buy the multifamily loans that others originate and refinance. The process allows purchasing to continue, while refinancing helps owners avoid foreclosure.

As home-purchase-mortgage rates haven fallen, so have those for apartment buildings: Seven-to-10-year mortgages can be had for as little as 4%—at least a 50-year low—while five-year loans are available for less than 4%.

"I've never seen interest rates for multifamily loans this low," said Mike McRoberts, Freddie's vice president of underwriting and credit.

So far this year, Freddie has covered $6.5 billion in multifamily financing. While that is below last year's $8.5 billion, the bulk of this year's activity has come in recent months and the pipeline is picking up, Mr. McRoberts said. Sales remain rocky for office, industrial and shopping REITs, which don't benefit from the government support.

Write to Dawn Wotapka at dawn.wotapka@dowjones.com

Sunday, September 19, 2010

A Quiet Month Ends: Six Bank Failures Put Total for Year at 125

SEPTEMBER 18, 2010

By DAN FITZPATRICK, Wall Street Journal

Regulators seized six banks in the Southeast, Midwest and Northeast on Friday, marking 125 failures for 2010.


There were three in Georgia with a combined $864.2 million in assets, $801.7 million in deposits and 18 branches. Community & Southern Bank of Carrollton, Ga., assumed deposits at the three banks, agreeing to pay the Federal Deposit Insurance Corp. a 1% premium for the deposits of Bank of Ellijay and First Commerce Community Bank and a 1.25% premium for the deposits of Peoples Bank.

Community & Southern Bank also agreed to purchase virtually all assets of the failed Georgia banks and share losses with the FDIC on about $602 million of those assets.

The Georgia failures mark 14 for that state in 2010 and 45 since 2007. No state has more U.S. failures since the start of the crisis, said Alexandria,, Va.-based banking consultant Bert Ely. Other than Georgia, the largest number of bank failures since 2007 are 39 in Florida, 37 in Illinois and 32 in California.

The six failures on Friday followed three weeks during which only one bank was shut, spurring speculation that regulators had slowed down. Now "they are picking the pace back up a little bit," Mr. Ely said.

Regulators are still on pace to shut more banks this year than 2009, when 140 failed. All told, 293 banks have been seized since 2007, according to the FDIC. That total is still well short of the tally in the savings and loan crisis of 1987-1992 when over 1,000 failed.

The other banks that failed on Friday were in New Jersey, Ohio and Wisconsin. Phoenixville, Pa.-based New Century Bank assumed all deposits and agreed to purchase essentially all assets of the one-branch ISN Bank in Cherry Hill, N.J. New Century agreed to share losses on $64.8 million in ISN Bank assets.

In Ohio, Cincinnati-based Foundation Bank assumed all deposits and agreed to purchase all assets from the failed, one-branch Bramble Savings Bank of Milford, Ohio. In Wisconsin, regulators seized West Allis, Wis.-based Maritime Savings Bank, and Brookfield, Wis.-based North Shore Bank agreed to assume all of Maritime's deposits and purchase $177.6 million in assets.

Wednesday, September 15, 2010

Banking Market Gains Strength

SEPTEMBER 15, 2010, 10:52 AM ET

Why Banking On The FDIC Has Been A Less-Than-Sure Bet

By Shasha Dai, Wall Street Journal


In the spring of 2009, a golden age for private equity bank investment appeared to be in the offing.

The banking sector downturn was nowhere near the bottom, with many more expected to fail. The Federal Deposit Insurance Corp., facing soaring costs in its insurance fund, was eager to bring in private capital. The economics of buying closed institutions looked attractive, with the FDIC sharing the banks’ future losses.

In reality, the number and pace of FDIC-assisted deals has fallen far short of expectations, with only two outright acquisitions–IndyMac Federal Bank and BankUnited FSB–being done so far.

Potential buyers of FDIC-backed assets have found the deals harder than they expected because of regulatory scrutiny and rising valuations of bank assets. Many investors have therefore turned to recapitalizing existing banks.

“Six months ago, every private equity firm was looking to do FDIC deals,” said a partner at a New York firm, which has yet to do such transactions. “But look who has actually done them? They are very hard deals to do, and they caused a lot of brain damage.”

The FDIC maintains a higher standard for de novo banks, or start-up banks, and shelf charters, or institutions that have obtained bank charters but have yet to acquire assets, than that for an existing bank, said Brad Oates, co-managing partner of advisory firm Stone Advisors, who also heads a shelf charter, Stone Bank. Start-up banks are subject to strict vetting of their management’s track record and the banks’ financial strength.

“An assisted deal has a very high hurdle,” said Oates. “It is not just the FDIC, but the Federal Reserve is also carefully vetting such transactions.”

Michael Krimminger, the FDIC’s deputy to chairman for policy, admitted that de novo banks are subject to higher standards. “It is a historical fact that de novo institutions have a higher failure rate and a higher problem rate than existing institutions in any type of financial institutions, particularly in banks,” Krimminger said.

Rising bank valuations, the result of interest from financial and strategic bidders, led the FDIC this year to reduce the level of guarantee to a flat 80% of potential losses from the acquired banks. Before that, the FDIC typically offered to guarantee 80% of potential loses up to a certain threshold, and 95% thereafter.

As a result, many firms have turned their attention to recapitalizing existing banks, and using those as platforms to buy closed institutions. Firms such as Corsair Capital LLC, Ford Financial Fund LP, Warburg Pincus LLC and Thomas H. Lee Partners have done such deals.

And the FDIC said it welcomes that.

“We certainly have preference for new capital coming into existing banks or bank holding companies,” said the FDIC’s Krimminger. “New capital and an already proven management is a stronger combination.”

Tuesday, September 14, 2010

Bank Analyst Surprised by Friday Florida Bank Takeover

Arkansas bank's purchase of failed Horizon a surprise

By John Hielscher

heraldtribune.com

Published: Tuesday, September 14, 2010 at 1:00 a.m.

The Bank of the Ozarks' grab of the failed Horizon Bank of Bradenton Friday night took analyst Andy Stapp by surprise.


While Little Rock, Ark.-based Bank of the Ozarks had recently acquired two failed banks in the Southeast, Stapp said Monday the company had not disclosed any interest in jumping into Florida.

"This is the first I heard them talk about Florida," said Stapp, a senior analyst with B. Riley & Co. in Philadelphia who tracks the bank. "This deal caught me by surprise a little bit."

Bank of the Ozarks picked up 7,500 loan and deposit accounts from Horizon, a four-office, $187-million-asset bank in critical condition.

Horizon became the region's second bank failure of 2010 and the fourth Manatee County bank to fall during the recession.

It was the first U.S. bank failure in three weeks and the 119th of the year.

Bank of the Ozarks already installed temporary bag signs to cover up Horizon logos at branches in Bradenton, Palmetto and Brandon.

Deposits remain protected by the Federal Deposit Insurance Corp. Customers may be relieved to learn that Bank of the Ozarks is top-rated by BauerFinancial Inc., at five stars and has been one of its "recommended" banks for 16 straight quarters.

Only one bank has trekked farther than Bank of the Ozarks to take over a failed Southwest Florida bank. That would be Stearns Bank of St. Cloud, Minn., which bought First State of Sarasota and Community National of Venice in August 2009.

Stapp likes the deal. Monday morning, he reaffirmed his "buy" rating on Bank of the Ozarks' stock and said he expects it to boost the buyer's earnings right away.

"It's a relatively low-risk proposal to be able to expand into new markets and grow your balance sheet and earnings," he said.

Buyers love such FDIC-assisted deals. Bank of the Ozarks will pay nothing for Horizon's $164.6 million in deposits and will receive $27 million for taking over the assets.

In addition, the FDIC will reimburse up to 80 percent of any losses on loans the buyer inherits from Horizon.

In July, Bank of the Ozarks acquired the failed Woodlands Bank of Bluffton, S.C., expanding its footprint into Alabama and the Carolinas. Four months earlier, it bought Unity National Bank, a failed bank in Cartersville, Ga.

"They've been expanding into a variety of markets in the Southeast," Stapp said. "Arkansas is one of the healthier states in the country, and there are very limited opportunities to acquire failed banks in Arkansas."

Bank officials did not return calls Monday to comment on their plans for Horizon's 50-employee operation.

George Gleason, Ozarks' chairman and chief executive, on Friday called the acquisition "an entree for further expansion in Florida."

The $2.8-billion-asset bank now has 90 offices in seven states. It posted six-month earnings of $26.8 million, or $1.58 per share, up 42 percent from $18.7 million, or $1.11 per share, in the comparable 2009 period.

The company's shares, which trade under the symbol "OZRK" on the Nasdaq, were selling for $37.40 at the close of business Monday, up 79 cents.

2010 HeraldTribune.com

Monday, September 13, 2010

Basel III: Time Is On Bank's Side

Bloomberg News

Banks Rise as Basel Gives Firms Eight Years to Comply

Sept. 13 (Bloomberg) -- Bank stocks rose worldwide as regulators gave firms more time than analysts expected to comply with stiffer capital requirements aimed at preventing future financial crises.


JPMorgan Chase & Co. and Bank of America Corp. led the KBW Bank Index to a 2.6 percent gain at 12:35 p.m. in New York as 23 of the 24 companies climbed. France’s Credit Agricole SA and Dexia SA led gains in the Bloomberg Europe Banks and Financial Services Index, which rose 1.7 percent in London to a one-month high. The 224-company MSCI AC Asia Pacific Financials Index rose 2 percent, its biggest gain since July 6.

At a meeting in Basel, Switzerland yesterday, regulators reached a compromise that more than doubles capital requirements for the world’s banks, while giving them as long as eight years to comply. Germany had sought to give firms a decade to make the transition, while the U.S., U.K. and Switzerland pushed for a maximum of five years.

“The implementation period is much longer than expected,” Credit Suisse Group AG analysts including Jonathan Pierce wrote in a note to clients today. “The fact that the sector now has a greater degree of certainty about capital requirements going forward ought to act as a material positive catalyst.”

Seven Laggards

Of the banks represented in the KBW index, seven, including Bank of America and Citigroup Inc. would fall short of the new ratios based on calculations using the revised definitions of capital, Frederick Cannon, an analyst at KBW Inc. in New York, said in a Sept. 10 report. Sixty-one of the 62 largest U.S. banks would meet the new standards, Richard Bove, an analyst at Rochdale Securities LLC, said in a Bloomberg Television interview. He didn’t identify which one didn’t meet them.

The Basel Committee on Banking Supervision will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though they wouldn’t be forced to raise cash. Lenders will have less than five years to comply with the minimum ratios and until Jan. 1, 2019, to meet the buffer requirements.

The decision will reduce uncertainty about banks’ capital, and allow some to raise their dividends, Morgan Stanley analysts Henrik Schmidt and Huw van Steenis said in a report today.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net Michael J. Moore in New York at Mmoore55@bloomberg.net

Basel III: Quick Analysis

seekingalpha.com


The Basel Committee on Banking Supervision’s main governing body, meeting today in Basel, Switzerland, said banks worldwide need to have common equity equal to at least 4.5 percent of assets, weighted according to their risk profiles. Regulators will introduce a further 2.5 percent buffer. Banks that fail to meet that buffer would be stopped from paying dividends, though not forced to raise cash, the committee said in a statement.
So in absolute terms....
1 / 0.045 = 22:1 absolute maximum leverage.
1 / 0.07 = 14.3% leverage beyond which no dividends may be paid.
Sounds rather reasonable, doesn't it?
Well, the latter is. Indeed, it's about what the former legal limit was before Henry Paulson, as head of Goldman, got the SEC to lift it from the investment banks.
An act that, as I have repeatedly pointed out for three years, made possible the blow-off top in both housing and the debt markets, and materially increased the amount of damage done by the financial crisis.
But none of these figures matter a bit unless banks are forced to value assets fairly. And until we see the FDIC stop coming in and taking losses on banks that according to their alleged "call reports" are perfectly solvent, we will not have seen the end of the lies.
I'm sorry folks, but this is all political theater and BS so long as institutions like Wells Fargo (WFC), Bank of America (BAC), Citibank (C) and others can hold hundreds of billions or even more than a trillion - each - off balance sheet without no clean accounting for the value of the alleged "assets", and they both are and do.
By some figures many European banks are running actual leverage ratios closer to 50:1, mostly for the same sort of reasons. The so-called "stress tests" ignored anything not held in a trading book, which was dramatically more than the "trading" amount, and leaves open to question whether there was some hinky re-shuffling ahead of the so-called "test" as well.
The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year.
Yeah, that's one of the scams that has been run too - so-called "liquid assets" that aren't really liquid.
Hint: Only short-term (say, 26 week and less) government bonds andcash are truly liquid assets, as only debt instruments without material duration risk and actual vault cash can be counted on to be turned into cash during a liquidity squeeze. Don't hold your breath on the Basel Clowns restricting the definition to these instruments - in fact, I'll bet anyone a case of Scotch they won't.
Karl Denninger
Mr. Denninger is the former CEO of MCSNet, a regional Chicago area networking and Internet company that operated from 1987 to 1998. MCSNet was proud to offer several "firsts" in the Internet Service space, including integral customer-specified spam filtering for all customers and the first virtual web server available to the general public. Mr. Denninger's other accmplishments include the design and construction of regional and national IP-based networks and development of electronic conferencing software reaching back to the 1980s.

He has been a full-time trader since 1998, author of The Market Ticker (http://market-ticker.org), a daily market commentary, and operator of TickerForum, an online trading community, both since 2007.

Mr. Denninger received the 2008 Reed Irvine Accuracy In Media Award for Grassroots Journalism for his coverage of the 2008 market meltdown.

F.D.I.C. Takes Over Florida Bank

September 10, 2010

By THE ASSOCIATED PRESS
WASHINGTON (AP) — Regulators on Friday shut down a small Florida bank, bringing to 119 the number of bank failures this year.
The Federal Deposit Insurance Corporation took over Horizon Bank, based in Bradenton, Fla., with $187.8 million in assets and $164.6 million in deposits. Bank of the Ozarks, based in Little Rock, Ark., agreed to assume the assets and deposits of the failed bank.
In addition, the F.D.I.C. and the Bank of the Ozarks agreed to share losses on $150.4 million of Horizon Bank’s loans and other assets.
The failure of Horizon Bank is expected to cost the deposit insurance fund $58.9 million. It was the 23rd bank in Florida to fail this year.
With 119 closures nationwide so far this year, the pace of bank failures exceeds that of 2009, which was already a brisk year for shutdowns.

Friday, September 10, 2010

Community Banking Conundrum: How Does the Smaller Community Bank Diversify?

Friday, September 10, 2010

FDIC orders Main Street Bank to diversify lending operations

Houston Business Journal - by Casey Wooten Reporter


Main Street Bank has been ordered by federal regulators to diversify the institution’s loan portfolio, form a capital plan and improve liquidity.

The Kingwood-based commercial bank was the subject of a consent order published by the Federal Deposit Insurance Corp. in late August.

Main Street — which holds $455 million in assets — is required to expand a loan portfolio heavily focused on small business lending.

In an Aug. 27 statement, the bank attributed the consent order to the FDIC’s scrutiny of Main Street’s small business-centric business model during a recent examination.