BankNotes ...

First Quarter 2008 FDIC Banking Profile Highlights

Posted by Wendell Brock on Thu, May 29, 2008


The results are in for the First Quarter 2008 Banking Profile - and they are not looking good! The squeeze is getting tighter, but, taking a comprehensive perspective, it does look like we'll make it through. Among the first quarter challenges and trends, real estate problems continued to hold down earnings; restatements dramatically shrank fourth quarter, 2007 profits; market-sensitive revenues remained weak; interest rates tightened margins; charge-offs hit a five-year high; noncurrent loans grew; reserve coverage shrank; dividends were cut; growth in credit slowed; interest-bearing retail deposits posted strong growth; and the number of problem banks grew.  The following are some key highlights.

Earnings were hit hard as banks suffered from "deteriorating asset quality concentrated in real estate loan portfolios." Higher loan loss provisions reduced quarterly earnings to $19.3 billion compared to $35.6 billion a year earlier. Insured institutions set aside $37.1 billion in loan loss provisions, four times the $9.2 billion set aside a year earlier. This really hit earnings - return on assets (ROA) was only 0.59 percent compared to 1.20 percent in the first quarter of 2007. The downward trend in profitability was broad; slightly more than half of all insured institutions reported declines in quarterly earnings, however, more than half the $16.3 billion decline in industry net income came from four large institutions.

Industry net income for the fourth quarter of 2007 was restated to $646 million from a previously reported $5.8 billion. This is the lowest quarterly earnings since 1990. First quarter, 2008 was also the second consecutive quarter that lower noninterest revenues contributed to the decline in earnings. The net interest margin checked in at 3.33 percent, compared to 3.32 percent for the first and fourth quarters of 2007. For community banks, those with less than $1 billion in assets, the rate fell to 3.70 percent - the lowest level since the fourth quarter of 1988.

Banks charged off $19.6 billion during the first quarter, 2008, an increase of $11.4 billion over the same quarter in the previous year. This is a five-year high. The first quarter was also the second consecutive quarter of very high charge-offs, following the previous quarter's charge-off total of $16.4 billion. "The average net charge-off rate at institutions with more than $1 billion in assets was 1.09 percent, more than three and a half times the 0.29 percent average rate at institutions with assets less than $1 billion." 

With the high level of charge-offs, noncurrent loans (loans 90 days or more past due) rose by $26 billion in the first quarter, following a $27 billion increase in the fourth quarter of 2007. "Loans secured by real estate accounted for close to 90 percent of the total increase, but almost all major loan categories registered higher noncurrent levels." Total noncurrent real estate construction and development loans increased by $9.5 billion, and 1-4 family residential loans increased by $9.3 billion. 

The reserve coverage continues to lose ground after adding $37.1 billion in loan loss provisions. "The industry's ratio of loss reserves to total loans and leases increased from 1.3 percent to 1.52 percent, the highest level since the first quarter of 2004." The growth in reserves was outpaced by noncurrent loans, allowing the "coverage ratio" to slip for the eighth consecutive quarter to 89 cents for every $1.00 of noncurrent loans.

Most institutions cut dividends to preserve capital - only $14 billion in total dividends were paid in the first quarter, down from $12.2 billion from the first quarter of 2007. Of the 3,776 banks that paid a dividend in the first quarter of 2007, 666 paid no dividend in 2008. Those that did pay a dividend, paid 48 percent less, on average. This assisted the banks' ability to bolster their capital levels; tier 1 capital increased by $15 billion and tier 2 capital increased by $10.5 billion.

Loan growth slowed in the first quarter, increasing by only $335.4 billion or 2.6 percent. At the same time, interest-bearing deposits increased by $150.4 billion or 1.8 percent. Savings accounts and interest-bearing checking accounts accounted for more than three-quarters of the growth. Non-deposit liabilities increased by $171.6 billion, or 5.2 percent, led by securities sold under repurchase agreements (accounting for $65 billion of the increase) and trading liabilities (accounting for $63.2 billion of the increase).

The number of banks on the regulators' problem list grew from 77 to 90, while the number of total banks decreased from 8,534 to 8,494 during the first quarter. In this quarter, there were two bank failures, 38 new charters issued, 77 institutions merged into other banks, and two mutual banks converted to stock ownership. With 82 banks converting to Subchapter S Corporations during the first quarter, almost 30 percent of all banks now operate under that structure.

You may download the full report at:

Topics: FDIC, banks, Bank Regulators, Economic Outlook, Credit

Bank Failures

Posted by Wendell Brock on Mon, May 26, 2008

MarketWatch posted an article titled "Bank failures to surge in coming years", which addresses a few issues surrounding the anticipated surge of bank failures, so far this year there have been three bank failures.  Overall, the article is very good and interesting - I just wanted to post a couple comments. 

As mentioned in the FDIC's annual plan they have been planning for such events (see BankNotes), in terms of additional work force and new systems.  They have carefully tested these systems to further prepare for financial disasters.  In the past few years they have been strongly encouraging banks to reduce their ratio of commercial real estate loans to below 300% of capital or lower depending on the bank's particular circumstances.  The regulators have done their job - in fact if anything they have been aggressively though. 

One challenge is that the banks are competitive and they are looking for deposits as well as loans.  The markets are demanding a rate of return.  The competition has caused banks to narrow margins, which are being squeezed tighter and tighter, and their overhead continues to climb.  At times, they may look at loans that perhaps they would normally not write. 

So now it appears that there will be more bank failures, what do we do?  It seems that patience is needed at all levels.  The regulators, can be a little slower to close banks, which they really do not want to close banks in the first place.  The banks can slow down on their aggressive lending practices and work to solve the issues with the problem loans, which they have done.  Now we need to wait to see - not 30 or 60 days but a year or more.  Banks will need time to work out these loans.  So, they can see their Texas Ratio start heading back down to lower levels.

Our economy has gone through these cycles before and they will go through them again - we all just need to be patient and let the dust settle.  When that happens we will see a little clearer and be able to better judge what to do next.  It's the old saying that ‘assets are soft and debts are hard', the assets and debts of the bank are no different.  How do you match up assets that are soft against hard debts - you can't - you have to wait until the assets rebound.  That takes patience!  But they will rebound - I don't think any piece of real estate in this country has ever been deem - ‘completely worthless' if it has it has not been there for long - someone has made some value out of it in the future.  Moreover, they will do it again with any property a bank has on its books.

Topics: Bank Failure, Bank Regulators

Proposed Changes to Regulation D

Posted by Wendell Brock on Wed, May 21, 2008

New opportunities for Raising Capital for Bank Holding Companies

Regulation D, which was adopted in 1982, contains several different exemptions for private or limited offerings. Regulation D was designed to facilitate capital formation while protecting investors by simplifying and clarifying existing exemptions for private or limited offerings, expanding their availability, and providing more uniformity between federal and state exemptions.  An offering under one of the exemptions in Regulation D can be beneficial for a bank holding company because the offering does not have to be registered with the SEC, which can be expensive and time consuming. However, an offering under Regulation D may not be right for all bank holding companies due to the specific requirements that must be met in order to fall under the various exemptions from registration contained in Regulation D.

On August 3, 2007, the SEC issued a release that proposed certain revisions to Regulation D. The comment period ended on October 9, 2007, and the SEC is expected to release the final revisions soon. The objective of the proposed revisions is to modernize and clarify Regulation D to bring it more in line with the modern market and communications technology, while still providing protection for investors. The focus of this article is to discuss the proposed changes to Regulation D and the impact the proposed changes may have on offerings for Release No. 33-6389 (Mar. 8, 1982). Release No. 33-8828 (Aug. 3, 2007). bank holding companies. The proposed changes include the following:

  • revising the definition of "accredited investor";
  • creating a new exemption for limited offers and sale to "large accredited investors";
  • shortening the integration safe harbor for Regulation D offerings from six months to 90 days; and
  • applying uniform disqualification provisions to all Regulation D offerings.

For a complete copy of the white paper titled Proposed Changes to Regulation D - click on this link Bank Capital.

Hunton & Williams
Dallas office
1445 Ross Avenue, Suite 3700
Dallas, Texas 75202-2799
(214) 979-3000
(214) 880-0011 fax
Jacquelyn Bateman Kruppa

Topics: Bank Capital, De Novo Bank Capital, Regulations, Reg. D Stock

Remote Deposit Capture Brings Opportunities and Challenges

Posted by Wendell Brock on Mon, May 19, 2008

While Remote Deposit Capture brings many exciting new opportunities to small community banks, it also brings increased challenges.  Even though there are challenges and operational considerations, we must face the reality that the larger banks are aggressively promoting Remote Deposit (Merchant Capture) and targeting our core deposits.  We must position our banks to meet the challenges.  Face the facts, Remote Deposit Capture is here to stay, and will keep growing. The larger banks are aggressively promoting it, and if we offer Remote Deposit, the regulators will be scrutinizing our operational processes.

If Remote Deposit is implemented properly with the basic infrastructure in place, the bank can increase and sustain its core deposits, effectively compete in the Remote Deposit arena, minimize risk and satisfy regulatory requirements.

 If you are considering Remote Deposit, go through the short term pain and implement a program that will sustain the growth.  You may already be offering Remote Deposit Capture, just re-evaluate the program and be sure the infrastructure postures your bank for success while minimizing risk.

 A Remote Deposit operational infrastructure, which addresses program growth, controls, and regulatory requirements include, but are not limited to:

  • Policies, procedures and controls which integrate documentation and processes from the lending department to deposit operations
  • A monitored and perpetuated selling component which gets the same level of focus that loans in the pipeline receive
  • An aggressive bank-wide training program which includes teaching lenders the importance of Remote Deposit as it relates to enhancing banking relationships, building core deposits and retention of business customers
  • Proper staffing of Cash Management Departments to support the day-to-day functions and servicing of business customers
  • Customer evaluation and underwriting process to minimize risk and potential losses
  • Established daily thresholds monitored by operations
  • Review of your blanket bond insurance coverage to minimize liquidity risk, if the bank sustains a material loss from fraud
  • Fraud related security-exception reports to monitor and minimize risk integrated into the operations department
  • Consideration of "holds" on transmitted funds
  • Annual creditworthiness review and audits of customers
  • Perpetual staff training to focus on Remote Deposit Capture features and opportunities to grow the bank and its core deposits
  • BSA Officer review for changes in patterns and trends to minimize money laundering and illicit activity
  • Required regulatory risk assessments of the Remote Deposit Service Providers and the Remote Deposit product offering which is considered an electronic banking product

We have to think of obtaining and sustaining customers while implementing a basic infrastructure to control risk and address regulatory compliance requirements.

With challenges come opportunities when promoting Remote Deposit. The bank will enjoy core deposit growth, sustain their current customer base, reduce lines at their counters, have a potential new source of fee income, be able to compete in the market and have new opportunities to increase loan volume.

Article Submitted by: Carolyn C. Dowdy, President of Bank Project Solutions

T: (770) 653 2389

Topics: Community Bank, Commercial Banks, Bank Regulations, Remote Deposit, Bank Staff Training

The Great Credit Squeeze For Mortgages

Posted by Wendell Brock on Fri, May 16, 2008


FDIC Chairman Sheila Bair at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another; Washington, DC
May 16, 2008

Good morning and thank you for inviting me to speak.

Let me first say that this new study by Martin Bailey, Douglas Elmendorf, and Bob Litan comes at the right time.

It gives a comprehensive overview of how we got to where we are and covers the key issues policymakers must deal with to fix a broken mortgage market and ultimately stabilize housing prices.

Importantly, it connects the dots between some of the seemingly disparate financial developments of the past year. Among these is the direct connection between protecting consumers and safe and sound lending.

It's one of the best volumes I've seen since the one written last year by the late Ned Gramlich on subprime lending.

As a former academic, I can appreciate all the time and energy that went into it.

Housing crisis

Without a doubt, we have some significant challenges ahead of us. And while some credit markets may be stabilizing, families, communities, and the economy continue to suffer.

Frankly, things may get worse before they get better.

As regulators, we continue to see a lot of distress out there.

Foreclosures keep rising as mortgages reset to higher rates, home prices keep sinking, and millions of families continue to struggle with unaffordable mortgages.

I can sympathize with these families.

I've seen hundreds and hundreds of ordinary people at foreclosure workshops desperately looking for ways to keep their homes.

And all of us can see the strain on state and local government budgets and the impact on the banking and financial systems.

And there is more uncertainty ahead.

Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.

Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.

The slowdown we've seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.

This is why regulators and policymakers continue to focus on the housing market.

We need to find better ways to help struggling homeowners.

Case for greater government action

Over the past year, federal and state governments, and consumer groups have worked with some success to encourage the industry to modify loans.

But it's just not happening fast enough. Given the scale of the problem, this cannot go on loan-by-loan as it has.

Solutions must be simple and practical, and quick to implement. And they must be designed to result in limited or no cost to taxpayers.

Congress and the White House are working on proposals that would expand the role of the Federal Housing Administration (which insures mortgages).

These are laudable efforts. They will help certain borrowers.

But the FHA approach has its limitations. And new refinancing options may take more time than we have. We need something that is more immediate.

Home Ownership Preservation Loans

I think the next line of attack should be using low-cost government loans to help borrowers pay down unaffordable mortgages.

We need to take a systematic approach that pays down enough of these mortgages to make them affordable.

And it can be done at zero cost to taxpayers.

The FDIC is calling for up to $50 billion in new government loans that would pay down a portion of the value of over a million existing loans. (The Treasury would sell debt to fund the plan.)

We're calling these new government loans Home Ownership Preservation Loans - HOP loans for short.

Eligible borrowers could get a HOP loan to pay off up to 20 percent of their mortgage.

Mortgage holders would get the cash. As their part of the deal, they would restructure the remaining 80 percent into fixed rate, affordable payments. And they would agree to pay the government's interest for the first five years.

That way, the HOP loans would be interest-free to the borrower for the first five years.

After that, borrowers would begin repaying them at fixed Treasury rates.

This would give borrowers a breather, and dramatically reduce the chance of foreclosures.

As another part of the deal, the mortgage holders would agree that the government would be paid first after any sale or refinancing of the house.

As a result, taxpayers would be protected from any losses, even if the borrower cannot repay the mortgage for any reason.

The plan would leverage the government's lower borrowing costs to significantly reduce foreclosures with no expansion of contingent liabilities and no net exposure to taxpayers.

The HOP loan program has a number of major advantages.

First, it's not a bailout. (That's a very big plus.)

Second, it would help stabilize a huge number of high-cost mortgages, (which would be good for credit markets).

And it would also keep people in their homes, and making their payments (which would slow the decline in home prices).

HOP loans would essentially give borrowers breathing room by reducing their debt burden to a more manageable level.

And they would focus on homeowners who want to stick it out and stay in their homes long-term.

Let me explain how HOP loans would work with a brief example.

Take a look at this projection on the screen.

Loan Restructuring Example - PowerPoint (PPT Help)

For a borrower with a $200,000 mortgage in this example, the HOP loan program would slash the current payment by about $500 to $1,200 a month. (That's a 30 percent reduction.)

After five-years, when it's time to repay the Treasury, the HOP loan payment plus the regular mortgage payment would push the monthly total to about $1,400 a month.

That's still $300 less a month than the original payment.

And it's now five years down the road, giving borrowers time to stabilize their finances and to rebuild some home equity.

There are other advantages.

The HOP program focuses on making unaffordable mortgages affordable. And it has incentives for mortgage investors to qualify borrowers who have a good chance of paying-off a restructured loan over the long term.

It would complement the current FHA proposals now before Congress, which may be most effective for people who are deeply underwater with mortgages worth much more than their homes.

It also works within existing securitization contracts, avoiding costly legal disputes.

Unlike any other current proposal there would be no need to negotiate with the owners of second-liens, such as a home equity loan.

And it can be implemented quickly because it's administratively simple.

In most cases, eligibility can be determined with information readily available from existing records.

No property assessments are required.

So, what about the naysayers?

No matter your political stripes or economic interests, foreclosures, especially preventable ones, are to be avoided.

They cost lenders and borrowers a lot of money.

A modified, performing loan is almost always of significantly greater value to mortgage investors than a foreclosed home.

As for the taxpayer, as I said, this is no bailout at taxpayer expense. The HOP loan program is designed to result in no cost to the government.

The loans and their financing costs would be fully repaid.

What about the speculators?

I was at a foreclosure prevention meeting in Los Angeles a few weeks ago.

The place was filled with hundreds of families wanting to fix their mortgages, with hundreds more lined up around the block.

I saw a lot of anxious, terrified faces.

But I didn't see any loan flippers or condo speculators.

Yes, there are borrowers out there who knowingly overleveraged, hoping to make a quick profit as home prices rose.

But there are also many people who were the unknowing subjects of misleading marketing and inexcusably lax underwriting.

All they wanted was to live in a home of their own. What they got was a mortgage they couldn't repay.

What is accomplished when these good faith borrowers are forced into foreclosure?

  • Another empty house on the market.
  • Another blight on a neighborhood.
  • Another hit to surrounding property values.
  • More erosion of local tax bases.

These foreclosures are hurting us all.

Is the HOP loan program the Holy Grail?

No. But it could help break the logjam.

Too many unaffordable mortgages are causing a never-ending cycle, a whirlpool of falling house prices and limited refinancing options that contribute to more defaults, foreclosures and the ballooning of the housing stock.

And the only way to break this perilous cycle is by a wholesale restructuring of these unaffordable mortgages.


I think it's time we come to grips with the need for more pro-active intervention. And we need to act soon.

The housing crisis is now a national problem that requires a national solution. It's no longer confined to states that once had go-go real estate markets.

Creating additional tools to help borrowers that are cost neutral and are systematically applied makes too much sense to not act upon.

The FDIC has dealt with this kind of crisis before.

Remember the S&L disaster of the 1980s and 1990s?

Fortunately, we're in a much stronger position today. Banks are healthy, and we want them to stay that way.

But we haven't forgotten the lesson. Not by a long shot.

We learned the hard way that early intervention always costs less, and is always better than a policy of after-the-fact clean-up.

I hope that is the path we follow.

And I urge all of you here today to climb on board, help us make the right policy choices, and help restore the American promise.

Thank you very much.

Topics: FDIC, banks, Bank Regulators, Economic Outlook, Credit

ANB Financial - Bank Failure

Posted by Wendell Brock on Fri, May 09, 2008

I. Introduction

On May 9, 2008, ANB Financial, NA, Bentonville, AR was closed by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled the following information which should help answer many of your questions.

II. Press Release

The FDIC has issued a press release (PR-33-2008) about the institution's closure. If you represent a media outlet and would like information about the closure, please contact David Barr at 202-898-6992.
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III. Acquiring Financial Institution and Your Insured Deposits

All insured deposit accounts have been transferred to Pulaski Bank and Trust Company, Little Rock, AR ("assuming institution") and will be available immediately. Your bank will re-open on Monday at 8:30 am at the former ANB Financial, NA main office and branch. You may view more information about Pulaski Bank and Trust Company by visiting their web site.
Pulaski Bank and Trust Company Web Site (

Principal and interest on insured accounts, through May 9, 2008, are fully insured by the FDIC, up to the insurance limit of $100,000. You will receive full payment for your insured account. Certain entitlements and different types of accounts may be insured for more than the $100,000 limit. IRA funds are insured separately from other types of accounts, up to a $250,000 limit.

If it is determined that you have uninsured funds, the FDIC will mail you a Receiver Certificate. This certificate entitles you to share proportionately in any funds recovered through the assets of ANB Financial, NA. This means that you may eventually recover some of your uninsured funds.

All accounts that exceed the $100,000 insurance limit, and/or all accounts that appear to be related and exceed this limit, are reviewed by the FDIC to determine their ownership and insurance coverage. If it appears that you have potentially uninsured funds, an FDIC Claim Agent will contact you, by either telephone or mail, regarding your account(s). Or, you may call 1-877-367-2719 up to 9:00 pm Central on May 9, 2008 and between 8:00 am and 6:00 pm Central thereafter, to arrange for a telephone interview with a Claim Agent. The Claim Agent may direct you to download and submit a particular form that will assist in expediting the processing of your claim.

List of Affidavits, Declarations, and Forms available for download

Your transferred deposits will be separately insured from any accounts you may already have at Pulaski Bank and Trust Company for six months after the failure of ANB Financial, NA. Checks that were drawn on ANB Financial, NA that did not clear before the institution closed will be honored up to the insurance limit. You may speak to an FDIC representative regarding deposit insurance by calling: 1-877-ASK-FDIC (1-877-275-3342).

You may withdraw your funds from any transferred account without an early withdrawal penalty until you enter into a new deposit agreement with Pulaski Bank and Trust Company by either making a deposit to or a withdrawal from your account, provided the deposits are not pledged as collateral for loans.

For all questions regarding new loans and the lending policies of Pulaski Bank and Trust Company, please call 1-888-226-5262.

For additional information on deposit insurance visit EDIE the FDIC's Electronic Deposit Insurance Estimator.

EDIE - FDIC's Electronic Deposit Insurance Estimator

V. Banking Services

You may continue to use the services to which you previously had access, such as automatic teller machines (ATMs), safe deposit boxes, night deposit boxes, wire services, etc.

Your checks will be processed as usual. All outstanding checks will be paid against your available insured balance(s) as if no change had occurred. Pulaski Bank and Trust Company will contact you soon regarding any changes in the terms of your account. If you have a problem with a merchant refusing to accept your check, please contact Pulaski Bank and Trust Company, Customer Service Department, at 1-888-226-5262. An account representative will clear up any confusion about the validity of your checks.

After May 9, 2008, your account will earn interest at a rate determined by Pulaski Bank and Trust Company. You will be notified by letter regarding this matter.

Your automatic direct deposit(s) and/or automatic withdrawal(s) should be transferred automatically to your Pulaski Bank and Trust Company. You should contact Pulaski Bank and Trust Company, however, to discuss your account(s) and to insure that service is not delayed or discontinued.

All your deposit account histories and records will be transferred to Pulaski Bank and Trust Company. If Pulaski Bank and Trust Company requires any additional signatures or forms, it will notify you. If you have any questions or special requests, you may contact a representative of Pulaski Bank and Trust Company at 1-888-226-5262.
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VI. Loan Customers

If you had a loan with ANB Financial, NA, you should continue to make your payments as usual. The terms of your loan will not change under the terms of the loan contract because they are contractually agreed to in your promissory note with the failed institution. Checks should be made to your former bank and sent to the same address until further notice.
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VII. Possible Claims Against the Failed Institution

Claims against failed financial institutions occur when bills sent to the institution remain unpaid at the time of failure. Shortly after the failure, the FDIC sends notices directly to all known service providers to explain the claim filing process.

Please note: there are time limits for filing a claim, as specified in the notice.

If you provided a service for ANB Financial, NA and have not received a notice, please contact:

Federal Deposit Insurance Corporation
Receiver: ANB Financial, NA
Attention: Claims Department, DRR
1601 Bryan Street
Dallas, Texas 75201

Call toll free 1-800-568-9161
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VIII. Priority of Claims

In accordance with Federal law, allowed claims will be paid, after administrative expenses, in the following order of priority:

1. Depositors
2. General Unsecured Creditors
3. Subordinated Debt
4. Stockholders

IX. Dividend Information

No dividends have been paid at this time.
Dividend Information on Failed Financial Institutions
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X. Brokered Deposits

The FDIC offers a reference guide to deposit brokers acting as agents for their investor clientele. This site outlines the FDIC's policies and procedures that must be followed by deposit brokers when filing for pass-through insurance coverage on custodial accounts deposited in a failed FDIC Insured Institution.

Topics: FDIC, Bank Failure, Bank Regulators

Major Opportunity for De Novo Banks

Posted by Wendell Brock on Sat, May 03, 2008

According to a recent article by Douglas McIntyre on 247wallstreet a number of large banks are going to be closing branches, which makes good-sense, as the overhead can be a heavy burden. Closing branches for these mega banks is a good idea easing their cash flow and saving them money.

This can be a phenomenal opportunity for de novo bank projects in the industry.

One critical challenge in starting a bank is finding the real estate - some groups spend months, up to a year, to secure the right space. Many of these ‘closed' branches offer an opportunity to obtain ideal locations at lower price points. Depending upon the location you may be able to save quite a bit on your build out as well. Either way, organizers in the de novo market need to move smartly and capitalize on this opportunity

Aside from great locations during this industry adjustment there are going to be great bank employees and many customers searching for greener pastures.

By Wendell Brock 

April 28, 2008
Large Banks Beginning To Close Branch Locations (C)(WB)(WFC)(BAC)

Consumers and businesses are faced with two difficult problems as a result of major banks taking huge write-offs. The first is that, even though the Fed is chopping rates, lower interest loans are not making it to consumer or business lending departments. The banks have elected to use the money they get inexpensively from the Fed to improve their own balance sheets. They want to take as little lending risk as possible while the economy is still in trouble.

The other by-product of troubles at large money center banks like Citigroup (C), Wachovia (WB), Wells Fargo (WFC), and Bank of America (BAC) is that closing local branches is a fast way to bring down costs. Doing this without losing customers is somewhat easier because of online banking and ATMs.

Banks in the deepest have already begun the process. Washington Mutual (WM) plans to take out over 3,000 jobs in the short-term and Citigroup has said it will lay-off 9,000. Some of those jobs will be administrative, but these financial firms have huge numbers of people in location through-out the regions which they serve.

Bank of America operates 6,200 branches. Operating a local office can cost $1 million a year when employees, overhead, and rent are factored in. If the bank shuts 10% of its locations it can save over $600 million a year.

Mid-sized regional banks may be under even more pressure to cut costs. National City Corp (NCC) recently reported a huge loss and had to raise over $7 billion. It has eliminated its dividend and must now look for new places to take out costs. Regional bank Peoples recently closed 20 branches in one small section of Connecticut. Banks usually look for locations outside where their core customer "foot prints" are and shutter locations there.

To a large extent banks are willing to let some consumer and smaller business customers go. These groups tend to have high default rates in a recession. Individuals and companies with relatively small revenue often are in no position to weather a downturn in the economy and lending to these groups has already slowed to a crawl.

Businesses which have been under-served by banking institutions are about to see that situation get worse as banks which invested in risky assets try to save themselves from insolvency. Borrowing money has gotten tough, and it is about to get worse.

By Douglas A. McIntyre

Topics: Bank Opportunities, Community Bank, Bank Executives, Commercial Bank

FDIC’s Annual Plan: Insurance Fund and Risk Management

Posted by Wendell Brock on Thu, May 01, 2008

As we know, the FDIC is an insurance company-its primary purpose is to insure the deposits of the banks in the United States. Because the FDIC provides the insurance, the FDIC gets to make many of the rules! (Congress, of course, has its hand in rule-making also.) After all, if a bank fails, this creates a crack in the financial system. If many banks fail or an extremely large bank fails, then we experience a financial earthquake. The FDIC's job is to make sure we do not experience a crack, let alone an earthquake. This is one reason is why starting a new bank is so difficult. The regulations are tough, the experience bar for management to clear is very high, and the barriers to entry are difficult. Again, all of this is to protect the public's trust in where people place their money.

So in difficult times, as we are experiencing now, the strategic plan of the FDIC is in place to guide the regulators in managing the complex issues they experience in the financial/banking environment. The targeted loss reserves are between 1.15 and 1.50 percent of estimated insured deposits. The loss reserve is the insurance fund, which is financed by charging the banks an insurance premium based on the risk exposure of the bank and its insured deposits. This premium is derived from the FDIC's Financial Risk Committee (FRC) assessments, quarterly failure projections and loss estimates. The FRC analyzes the risk exposure of the insurance fund based on the risks of the insured banks. When bank loans go bad, the risk exposure of the bank goes up and the FRC reevaluates the risk of the fund. This, in turn, sets a new premium for the bank and for other similar banks.

The FDIC reviews the assessment history of all failed banks on an ongoing basis to determine if the system is working properly. In 2007, after much research and testing, a new risk-based assessment system was implemented through the modification of FDIC systems and business procedures. This updated system is designed to measure the risk of individual banks more accurately, which allows for the assessment of fees that are more in line with the risk level. Currently, the FDIC is the primary regulator for 5,197 state-chartered banks that are not members of the Federal Reserve System or are national banks or thrifts which are regulated by the OCC and OTS respectively.

Because of the complexity of the analysis that is required to develop accurate pricing and review the effectiveness of new regulations, the FDIC will require additional staff. Further demands will arise from the combining of the Bank Insurance Fund and the Savings Association Insurance Fund; the merger affected 48 information systems and resulted in some changes in deposit coverage. As a result, the FDIC will require new analysis techniques and will be tasked with extensive testing of the systems. All of these systems are necessary to manage the risk of consumers and businesses not being able to pay their debts, while keeping consumer and commercial deposits safe and accessible.

This enormous balancing act adds to the challenge of starting a new bank. The risks to a new bank are great because they have new capital to employ; new banks need assets on the books and many deposits to help fund the new loans. However, because of the strict regulatory controls, new banks succeed more often than not. It is rare that a de novo bank fails. If the right organizers and bank board, management team, business plan and capital are in place, chances are great that a de novo bank will succeed.

By Wendell Brock, MBA, ChFC
De Novo Strategy, Inc. 

Topics: FDIC, Bank Risks, Risk Management, Deposit Insurance Fund

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