FDIC Finds 829 U.S. Banks at Risk

The Wall Street Journal

More Than One-Tenth of Total Are on 'Problem List' as Smaller Lenders Take Time to Recover

 

More than a 10th of U.S. banks remain at risk of failure even as some industry indicators, including credit quality, show some nascent signs of revival.

The Federal Deposit Insurance Corp. said Tuesday that 829 of the nation's roughly 7,800 banks were on its "problem list" at the end of June, up from 775 at the end of the first three months of the year. Already 118 banks have failed this year, well ahead of the pace set last year when 140 were seized by regulators.

Lending by U.S. banks also continues to be stunted; loan balances across all major loan categories fell during the second quarter, and total loan and lease balances fell 1.3%. Total assets for the industry fell 1% to $13.2 trillion during the quarter.

FDIC Chairman Sheila Bair said banks are starting to ease their lending standards for some types of loans but warned that "lending will not pick up until businesses and consumers gain the confidence they need to hire and spend."

She suggested regulators are closely watching for any indications of how the economy is affecting banks, but played down the potential effects of another downturn.

"I think if we did have a double-dip [recession], and we are not predicting that would happen, it would have a less profound impact," she said.

The results highlighted the diverging fortunes of larger banks and their smaller rivals. Major firms, which benefited from outsize government support at the height of the financial crisis, have been able to recover faster as evidenced by their ability to set aside less money for future loan losses. Smaller banks, conversely, increasingly make up a greater portion of the banks on the FDIC's list of troubled banks and continued to set aside more money for future loan problems.

The number of banks in the U.S. continued to fall; the FDIC said there were 104 fewer banks in the second quarter compared with the first quarter. And for the first time in the 38 years that data have been collected, the FDIC didn't add any new banks.

"The smaller banks are recovering, but it is at a slower rate," Ms. Bair said. "It hit the large banks first and then the community banks, so they will be lagging the larger banks in terms of coming out of this."

Banks' second-quarter profits totaled $21.6 billion, reversing a combined loss of $4.4 billion in the second quarter of 2009. The latest results were the highest quarterly earnings since before the financial crisis. The FDIC said nearly two-thirds of U.S. banks reported a year-over-year improvement in their quarterly results, though 20% of firms still reported a net loss.

For the first time since 2006 the number of loans at least three months past due fell, declining nearly 5%, and the number of loans charged off by banks declined across most major loan categories.

Banks boosted their results by setting aside less to cover future loan losses than they have in recent quarters. The agency said firms set aside a total of $40.3 billion to gird against future credit-quality problems. That still is high by historic standards, but the figure is the lowest total reported by the industry in two years.

"Lower loss provisions suggest that many banks see asset quality problems moderating," Ms. Bair said.

Still, more than 60% of banks, mainly smaller institutions, continued to boost their loss reserves.

8 Banks Close in WA, FL, MI, MA, CA.

WASHINGTON (AP) - Regulators on Friday shut down eight banks - three in Florida, two in California, and one each in Massachusetts, Michigan and Washington - putting the number of U.S. bank failures this year at 50.

The Federal Deposit Insurance Corp. took over the three Florida banks: Riverside National Bank in Fort Pierce, with $3.4 billion in assets; First Federal Bank of North Florida in Palatka, with $393.3 million in assets; and AmericanFirst Bank in Clermont, with assets of $90.5 million.

TD Bank Financial Group, a division of Canada's TD Bank, agreed to acquire the deposits and nearly all the assets of the three Florida banks.

The FDIC also seized Innovative Bank, based in Oakland, Calif., with about $269 million in assets; Tamalpais Bank of San Rafael, Calif., with about $629 million in assets; City Bank, based in Lynnwood, Wash., with about $1.1 billion in assets; Butler Bank in Lowell, Mass., with $268 million in assets; and Lakeside Community Bank in Sterling Heights, Mich., with $53 million in assets.

Los Angeles-based Center Bank agreed to assume the assets and deposits of Innovative Bank. San Francisco-based Union Bank is acquiring the assets and deposits of Tamalpais Bank. Whidbey Island Bank, based in Coupeville, Wash., is assuming the deposits of City Bank and $704.1 million of its assets. People's United Bank in Bridgeport, Conn., agreed to assume the assets and deposits of Butler Bank.

The FDIC couldn't find a buyer for Lakeside Community Bank. First Michigan Bank in Troy, Mich., will take over the failed bank's direct deposit operations for federal payments, such as Social Security and veterans' benefits.

The failure of Riverside National Bank is expected to cost the deposit insurance fund $491.8 million. For the other banks, the estimated costs: First Federal Bank of North Florida, $6 million; AmericanFirst Bank, $10.5 million; Innovative Bank, $37.8 million; Tamalpais Bank, $81.1 million; City Bank, $323.4 million; Butler Bank, $22.9 million; and Lakeside Community Bank, $11.2 million.

Depositors' money is insured up to $250,000 per account by the FDIC, which is backed by the government.

Last year, 140 banks failed in the U.S. That was the highest annual number since 1992 during the peak of the savings and loan crisis. The failures last year cost the FDIC's insurance fund more than $30 billion.

Twenty-five banks failed in 2008 and three in 2007.

FDIC Chairman Sheila Bair has predicted that the number of bank failures will peak this year and be slightly more than in 2009.

FDIC Selling Busted Bank Loans on Terms That Make It `Hard to Lose Money'‏

Bloomberg

Wonder why we bailed the banks out

FDIC Offers Busted Bank Loans on Terms Buyers ‘Love’

 

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 in 2010 are on pace to reach at least $10 billion in book value by mid-year, matching the total for 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. A new sale of FDIC- owned loans with a book value of $1.97 billion is scheduled for June, according to documents obtained today by Bloomberg News.

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.

Flats at Loft 5

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.

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.

‘Dirt Cheap’

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.

“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 Redux

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.

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 from 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.

Reluctant Banks

Scheduled FDIC sales 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 preparing to sell $3 billion of loans from AmTrust Bank, the Cleveland-based lender seized in December.

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.

Three More Banks Seized By FDIC

Wall Street Journal

State and federal banking regulators seized three small lenders on Friday, lifting the total number of bank failures this year to 133.

The Federal Deposit Insurance Corp. estimated that the three failures—in Florida, Arizona and Kansas—would cost the agency's cash-strapped deposit-insurance fund a total of about $252 million.

In Friday's first failure, the FDIC sold Miami-based Republic Federal Bank NA's branches, deposits and most of its assets to 1st United Bank of Boca Raton, Fla. The failure, the 13th this year in Florida, is expected to cost the FDIC's insurance fund $122.6 million.

Later Friday, federal regulators seized Valley Capital Bank NA of Mesa, Ariz., and sold the one-branch bank's deposits and assets to Enterprise Bank & Trust of Clayton, Mo. The FDIC estimated the failure, the fourth in Arizona this year, will cost its insurance fund $7.4 million.

Finally, Kansas regulators shuttered SolutionsBank of Overland Park, marking the third bank to fail in Kansas this year. The FDIC sold the bank's deposits, branches and assets to Arvest Bank of Fayetteville, Ark. The FDIC said the failure will cost its insurance fund about $122.1 million.

In all three failures, the FDIC agreed to shield the acquiring banks from most losses on the failed banks' assets.

The 133 failures so far this year represent the largest number of bank collapses since 1992, when 181 lenders toppled during the tail end of the savings-and-loan crisis. Federal officials, bankers and analysts expect the number of bank failures to remain high at least through next year.

Banks have been failing at an especially rapid clip this year in Florida and Georgia, leading the FDIC earlier this year to open a "temporary satellite office" in Jacksonville, Fla., to facilitate closings of nearby banks. The FDIC said the office would be staffed by approximately 500 workers.

Deere Gets Backing in $2 Billion Debt Offer

As posted by: Wall Street Journal

The U.S. government is now in the farm- and construction-equipment business.

The Federal Deposit Insurance Corp. backstopped $2 billion of debt issued by farm-equipment maker Deere & Co. on Tuesday, a tangible sign of the government's unprecedented push into the private markets.

The offering, which is guaranteed by the FDIC's Temporary Liquidity Guarantee Program allowed Deere's credit arm to pay under 3% interest on its borrowing. That saved the firm tens of millions of dollars, compared with over 5% yields on some of its current, non-FDIC-backed debt, according to MarketAxess. The credit unit helps finance farmers' purchases of tractors and other machines.

The deal comes as the Federal Reserve threw all of its weight behind its efforts to spur the economy and stem a deflationary spiral. The central bank moved interest rates to near 0% and pledged to use "all available tools" to combat a deepening recession. The step sent investors further into the safety of Treasury bonds. The 10-year Treasury rose in price by 1 19/32 points,or $15.94 per $1,000 invested, to yield 2.4%. T-bills that mature in one month remain at yields close to zero.

"We are an eligible U.S. savings-and-loan holding company and, therefore an eligible entity and a participant under the TLG program by virtue of not electing to opt out of the TLG program," Deere said in its bond prospectus.

Thus far, Deere is an unusual entrant to this program, though General Electric Capital Corp., which also finances commercial-lending operations, and American Express Co., which funds consumer credit, also have used the program to access funds. Most of the borrowers have been large banks like Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America among others.

But companies such as Deere -- which maintain small, industrial banks used to finance consumer purchases -- will increasingly tap FDIC-backed markets. Over time that will makes the U.S. government a guarantor of debt used to make loans for everything from tractors and cars to credit cards and construction projects.

Absent FDIC-backing, credit markets remain mostly closed. They are extremely expensive for even the highest-quality borrowers, with bonds pricing at more than 7% interest. Investors also are flocking to this new FDIC insured debt market where they can buy bonds with guarantees as good as Treasurys but at three times the yields.

By comparison, the three-year Treasury bond ended Tuesday at 0.9%. Credit-rating companies rate all FDIC-backed debt triple-A, the highest credit ratings available.

Over $67.9 billion of the bonds backed by the FDIC have been sold since Goldman Sachs was first with a $5 billion offering Nov. 25. Issuers have until June 30, 2009 to sell the debt, which must mature in three years or less.
Illinois Muni Bonds Are Hit by Scandal

Amid the scandal plaguing the governorship of of the state, investors in Illinois municipal bonds were mostly scared off from investing in $1.4 billion of state bonds used to pay state employees and meet other obligations.

Illinois got the deal done Tuesday after delaying it last Thursday, but only because J.P. Morgan Chase & Co. bought the entire $1.4 billion at a cost to the state of about 4% in an auction that included bids as high as 8.5%, according to people familiar with the deal.

Investors balked at the deal in part due to the charges of fraud and bribery brought against the state's governor Rod R. Blagojevich, a notice about which leads the official notice for the offering that investors would review. Investors were also concerned because ratings firms deemed the offering less than pristine, which surprised investors who are used to a higher rating for the state of Illinois.

"None of the allegations have any relationship to or impact on the State of Illinois' cash position, the need for short-term financing or the ability of the State to repay the short-term financing," writes Ginger Ostro, a director in the governor's office of management and budget.
Treasurys Rally

Prices of Treasurys jumped across the board after the Federal Reserve signaled plans to keep interest rates low while using all tools available to aid growth as it concluded the last monetary policy meeting of the year. John Deere has many products besides tractors including: John Deere Ag Equipment, John Deere Golf & Turf Equipment, John Deere Parts, John Deere Used Parts, John Deere Lawn & Garden Equipment, John Deere Construction Equipment, John Deere 6x4 Gator, John Deere Clothing, John Deere Gifts, John Deere Collectibles, John Deere Toys, John Deere T Shirts, John Deere Hats, John Deere Caps, John Deere Pink Clothing, Pink John Deere, Pink JD and John Deere Women's Clothing. Yields on two-, five-, 10- and 30-year maturities hit record lows. The 10-year note rose 1 19/32 points, or $15.9375 per $1,000 invested. Its yield fell to 2.364% from 2.535% as bond yields fall when prices rise.

Raising FDIC Cap

FDIC Appears Strapped For Cash

May Cloak Trouble

Only in this topsy-turvy credit crisis can this make sense: The Federal Deposit Insurance Corp.'s fund is running low.

The FDIC's proposed solution for its funding problem? To more than double the amount it is willing to insure each bank depositor, to $250,000.

The idea, as explained by Karen Garrett, a partner in law firm Bryan Cave's banking practice, is that raising insured deposits to $250,000 from $100,000 would give depositors more comfort that their money is safe. That would prevent runs on banks. Fewer bank runs would mean the FDIC wouldn't have to reach deep into its fund to insure more banks. "The point is just to calm people down," Ms. Garrett said.

Is the FDIC paying now for keeping premiums low between 2004 and 2007? "If there's a question, it should be whether a bigger fund shouldn't have been built up as we headed into this crisis," said Ms. Garrett. "This didn't just happen overnight for them." The FDIC could make up for it now with the Senate's plan to provide the agency with unlimited temporary funding from the Treasury.

John Douglas, a former FDIC general counsel who is a partner with law firm Paul Hastings, Janofsky & Walker, opposes increasing the FDIC's deposit cap. "I think it increases the risk of the deposit insurance fund at a time when it's not particularly healthy," he said. In addition, he argued, keeping the cap at $100,000 encourages market discipline among the banks. Customers will flee a bank that is struggling, which is a sign the FDIC should be concerned about that bank.

By raising the cap, it will take more time to see the signals of distress, and federal regulators, as well as customers, may be caught unaware by a failing bank, Mr. Douglas said.

By: Heidi Moore
Wall Street Journal; October 2, 2008