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Third Quarter 2009 FDIC Banking Profile

Posted by Wendell Brock on Wed, Nov 25, 2009

FDIC member institutions' earnings improved this quarter to a modest $2.8 billion, which is significant over last quarter's net loss of $4.3 billion and third quarter of 2008 of $879 million. Loan loss provision continued to affect the profitability of the industry as banks continued to cover their bad assets. Growth in securities and operating income helped the industry realize the profit, with 43 percent of the institutions reporting higher profits this quarter over the same quarter last year.  Just over one in four banks reported losses this quarter of 26.4 percent, which is slightly up from 24.6 percent a year ago.

Net Interest Margin, ALLL

Net interest was higher this quarter, rising to a four-year high of 4.6 billion. The average net interest margin (NIM) was 3.51 percent, slightly higher than last quarter. Most banks, 62.1 percent, reported higher NIM than last quarter; however only 42.2 percent had an NIM increase year over year. Provisions for loan and lease losses increased and total set aside, remained over $60 billion for the fourth straight quarter, rising to $62.5 billion. While the quarterly amount banks set aside was only 11.3 billion, $4.2 billion less than the second quarter, it was 22.2 percent higher than last year. Almost two out of three institutions, 62.6 percent, increased their loan loss provisions.

Net Charge Offs Remain High

Loan losses continued to mount, as banks suffered year over year increases for 11 straight quarters. Insured institutions charged off a net of $50.2 billion this quarter, a $22.6 billion increase or an 80.5 percent increase compared to third quarter of 2008. This is the highest annual charge off rate since banks began reporting this information in 1984. All major categories of loans saw significant increases in charge offs this quarter, but losses were largest amongst commercial and industrial (C&I) borrowers. While noncurrent loans continued to increase, the rate of increase slowed; noncurrent loans and leases increased $34.7 billion or 10.5 percent to $366.6 billion, which is 4.94 percent of all loans and leases. This is the highest level of noncurrent loans and leases in 26 years. The increase of noncurrent loans was the smallest in the past four quarters.

Eroding reserves

The reserve ratio increased as noncurrent loans increased, however the spread continued to widen. While the industry set aside 9.2 billion, 4.4 percent in reserves, which increased the reserve level from 2.77 percent to 2.97 percent. This increase was not enough to slow the slide - it was the smallest quarterly increase in the past four quarters and the growth in reserves lagged the growth of noncurrent loans, which caused the 14th consecutive quarterly decline in this ratio from 63.6 percent to 60.1 percent.

Loan Balances Decline Deposits Are Up

Loan and lease balances saw the largest quarterly decline since the industry started keeping track of these numbers in 1984; they fell by $210.4 billion or 2.8 percent. Total assets fell for the third straight quarter; assets at insured institutions fell by $54.3 billion, which follows a decline of $237.9 billion in the second quarter and a $303.2 billion decline in the first quarter. Deposits increased $79.8 billion or 0.4 percent during the third quarter, allowing banks to fund more loans with deposits rather than other liabilities. At the end of the quarter deposits funded bank assets was 68.7 percent, the highest level since second quarter 1997.

Troubled Banks Increase

The number of reporting insured institutions at the end of the quarter was down to 8,099  from 8,195; there were fifty bank failures and forty-seven bank mergers. This is the largest number of banks to fail since fourth quarter of 1992, when 55 banks failed. The number of banks on the FDIC's problem list increased from 416 to 552 at the end of the second quarter.

During the quarter, the number of new banks chartered was three.  This is the lowest level since World War II. This begs the question on what is the best way to get new capital into the banking industry. Should we recapitalize the existing banks including those in trouble? Or, should we start fresh with a new bank that can build a new, clean loan portfolio?

Another Item

CREED - a 501(c)3 nonprofit has started a Crowdfunding project/contest to help a small business - Look at the opportunity to be a part of something truly great! We will follow this closely as we are strong supporters of CREED.

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Topics: Interest Rates, FDIC, banks, Community Bank, FDIC’s, Loans, Bank Capital, CREED, capital, equity capital, De Novo Banks, Noncurrent loans, community banks, Crowfunding

A De Novo Strategy for the FDIC: Prepaid Insurance Premiums

Posted by Wendell Brock on Thu, Oct 01, 2009

The ongoing wave of bank failures related to the financial crisis continues to impact the health of the FDIC's Deposit Insurance Fund (DIF). At the end of the second quarter, the DIF balance was down to $10.4 billion. Compared to a year ago, when the DIF amounted to $45.2 billion, this is a decline of some 77 percent.

As at-risk banks continue to deteriorate, the DIF's growing loss provisions have simply outpaced accrued and collected premiums, including a special assessment that was levied on insured institutions at the end of the second quarter. Rather than demand another special assessment, the FDIC is trying a new tactic to deal with the fund's depletion: prepaid premiums.

According to an FDIC press release, the FDIC Board "has adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012." The prepayments should generate roughly $45 billion in cash, a much-needed infusion for the anemic DIF.

Numbers game

Time Magazine is calling the tactic "an accounting trick," (http://www.time.com/time/business/article/0,8599,1926877,00.html?iid=tsmodule ) but FDIC Chair Sheila Bair sees it as a necessary step in the fund's restoration. The move won't impact banks' profitability, since they won't recognize the expenses any sooner under prepayment. It will impact liquidity, but the FDIC's position is that banks have sufficient cash to absorb these prepayments.

The push for prepayments underscores the FDIC's commitment to manage through this crisis without asking the Treasury or taxpayers to foot the bill.

Assessment increase ahead

The aforementioned NPR also included an assessment increase of three basis points across the board, to be made effective on January 1, 2011.

Topics: FDIC, treasury department, Bank Regulators, Bank Capital, Deposit Insurance, FDIC Insurance Fund, Bank Regulations, Deposit Insurance Fund, Bank Liquiditity, Assessment Plan

Supervisory Changes for De Novo Banks

Posted by Wendell Brock on Fri, Sep 11, 2009

The FDIC has announced its intention to extend the de novo period for certain new banking institutions. The previous de novo period was three years; the new one will be seven years. This change is significant because newly insured institutions are subject to more scrutiny and higher minimum capital ratios during that de novo period. Along with extending the de novo period, the FDIC will also subject de novos to more risk management examinations and require prior approval for any de novo business plan changes.

Heightened risk for seven years

Regulators say the supervisory updates are needed because de novos pose a heightened risk to the banking system. According to the FDIC, too many of the actual failures that occurred in 2008 and 2009 were banks that had been open for fewer than seven years. On top of that, a good number of those failures were banks that had been operating between four and seven years-banks that, under current policy, were not subject to the heightened de novo regulations.

According to data compiled by FinCriAdvisor (http://www.fincriadvisor.com/2009-09-07/FDICdenovopolicy), twenty-three, or 19.6 percent, of the 109 bank failures occurring between January 1, 2008 and August 21, 2009 were de novos. Of those twenty-three, six were within the three-year de novo period; the rest, 74 percent, failed between their fourth and seventh years of operation.

Exceptions

The extended de novo period will apply to existing newly insured institutions as well as banks for which charters have not yet been issued. Since the number of new charters awarded by the FDIC in recent months is relatively minimal, the changes affect existing banks far more than would-be banks. The only de novos that won't be subject to the extension and heightened scrutiny are those that are subsidiaries of eligible holding companies.

Eligible holding companies must have consolidated assets of $150 million or more. Bank holding companies are required to have BOPEC ratings of at least 2; thrift holding companies must have an A rating.

Details

Capital requirement.

A primary change implied by the extension of the de novo period is an increased capital requirement. De novos are currently required to maintain a Tier 1 leverage ratio of at least 8 percent during the de novo period. A longer de novo period means that young institutions will have to maintain this higher ratio for seven years instead of three.

Examination frequency

. Along with extending the de novo period, the FDIC will also increase the frequency of risk management exams for de novo banks. Periodic risk management exams, which begin after the institution's first birthday, will occur once annually rather than once every eighteen months. De novos will have to budget for the extra costs associated with the additional examinations.

The first year examination requirements for de novos will be as follows:

  • Limited risk management exam during first six months of operation
  • Full risk management exam during first twelve months of operation
  • Compliance exams during first twelve months of operation
  • CRA evaluation during first twelve months of operation

Thereafter, under the new policy, a risk management exam will be conducted every twelve months until the expiration of the de novo period. Compliance exams and CRA evaluations "will alternate on an annual basis."

Business plan changes

. The new policy also requires de novos to get FDIC approval prior to implementing any material changes to the institution's business plan during the seven-year de novo period. Previously, newly insured institutions had to provide the FDIC with a written notice of proposed business plan changes within the three-year de novo period.

The FDIC argues that experience shows the necessity of this requirement; when newly insured institutions deviate from their original business plans, those deviations can often lead them into areas of business where they do not have adequate risk management expertise or resources. "Significant deviations from approved business plans" was one of several common elements the FDIC identified among troubled institutions that have not yet completed their seventh year of operation.

Change requests will be reviewed to ensure that:

  • There is a defensible business reason for the change.
  • The de novo has the resources-financial and human-to manage any risks created by the change.

While this requirement keeps de novos from jumping into risky lines of business without adequate forethought, it also limits the de novo's ability to adapt quickly to changing circumstances. Should the bank implement changes or deviate from the original business plan without FDIC approval, fines or other penalties could result.

Financial statement updates

. In the third year of operation, de novos must now provide the FDIC with current financial statements along with strategic plans and projected financial statements covering years four through seven. This applies to existing institutions that are less than three years old, as well as newly chartered institutions. The FDIC will want to know specifically about the de novo's expansion plans, product/service strategies and the outlook for capital expenditures and dividend payments.

To read the full Financial Institution Letter explaining and defending the altered supervisory procedures, click here: http://www.fdic.gov/news/news/financial/2009/fil09050.html

Topics: FDIC, regulators, Bank Capital, Bank Regulations, tier 1 capital, De Novo Banks, De Novo Banking

Federal Reserve Announces Launch of National Minority-Owned Bank Program

Posted by Wendell Brock on Thu, Aug 07, 2008

The Federal Reserve System today announced the nationwide launch of Partnership for Progress, an innovative outreach and technical assistance program for minority-owned and de novo institutions.  The program seeks to help these institutions confront their unique challenges, cultivate safe and sound practices, and compete more effectively in today's marketplace through a combination of one-on-one guidance, workshops, and an extensive interactive web-based resource and information center (http://www.fedpartnership.gov/).

"The program's overarching mission is to preserve and promote minority-owned institutions and to enhance their vital role in providing access to credit and financial services in communities that have been historically underserved," said Federal Reserve Board Chairman Ben S. Bernanke. "The Federal Reserve is committed to helping minority-owned and de novo banks achieve long-term success."

Partnership for Progress provides insight on key issues in three distinct stages of a bank's life cycle: "Start a Bank," "Manage Transition," and "Grow Shareholder Value." Topics covered include credit and interest rate risk, capital and liquidity, and banking regulations. To ensure broad access to the program, all aspects of the training will be available through workshops, online courses, and the program's interactive website.

"This cutting-edge program, which draws on insights from economics, accounting, finance, and regulatory compliance, will become a valuable resource for institutions at different stages of their development," said Federal Reserve Board Governor Randall S. Kroszner.

In developing the program, Federal Reserve officials met with minority-owned and de novo banks across the country as well as trade groups, bank consultants, and state and federal banking agencies to better understand the challenges these institutions face in raising capital, growing their institutions, and attracting talent. This process provided valuable insight and contributed significantly to the design of the program, which was spearheaded by the Federal Reserve Bank of Philadelphia. Key concepts from the program will be incorporated into the Federal Reserve System's examiner training to provide a deeper understanding of the issues unique to minority-owned institutions.

The nationwide launch of Partnership for Progress follows a successful pilot for the program that began last fall. Questions and comments regarding the program should be directed to Marilyn Wimp at the Federal Reserve Bank of Philadelphia, 215-574-4197.

Note:  While at the Minority Depository Institutions National Conference we received a preview to this program.  This will be a great help to all de novo and emerging banks.  Take a few minutes to view some of the information on the site.

Topics: Community Bank, Bank Regulators, Commercial Banks, De Novo Bank, Bank Capital, Minority Banks

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
214-468-3347
jkruppa@hunton.com

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

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