BankNotes ...

European Debt

Posted by Wendell Brock on Thu, Jun 03, 2010

When the European Union and International Monetary Fund bailed out Greece last month to the tune of 750 billion of fresh capital, there was no guarantee of how effective these actions would be.

And with the euro trading unpredictably, EU finance ministers are worried that it wasn't enough. The Euro's value has been up and down, at times losing as much as 12%.

As with the talk in America that our government's first bailout wasn't enough to buoy the economy, there are rumblings in Europe that more needs to be done with Greece to ensure that their problems don't spread to other European nations.

German Chancellor Angela Merkel defied German public opinion and supported the bailout. A Reuters article quotes her as saying, "We've done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual euro zone countries. If we simply ignore this problem we won't be able to calm down this situation."

Currency-wide problem

Greece, with its $236B (US) of debt, may be in the direst situation. But it certainly isn't the only EU economy that's racking up debt.

  • Portugal: $286 billion
  • Ireland: $867 billion
  • Spain: $1.1 trillion
  • Italy: $1.4 trillion

Each country owes money to one another in a web of loans so complicated and precarious that each country is dependent on the others to stay solvent.

The New York Times elegantly illustrates the problem with a tangled web of arrows signifying the various debt obligations of each country.

In the accompanying article, Eric Fine of Van Eck G-175 Strategies says, "This is not a bailout of Greece. This is a bailout of the euro system."

Will they or won't they?

Many people-from traders to government heads to ordinary citizens-aren't sure that Greece's government will be able to implement cost-cutting measures in the wake of stiff opposition from their constituency.

In return for their first 110 billion euro bailout package, Greece was required to levy stiff wage cuts to government workers and implement hefty tax increases. The government hopes to slash its debt from 13.6 percent of GDP to 3 percent by 2013.

On May 31, Greeks took to the streets in a 24-hour protest that shut down cruise ships. Labor unions are warning that more strikes are possible as the summer progresses.

Topics: debt, capital, euro, european debt, central banks, European Union

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.


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

How to Buy a Bank

Posted by Wendell Brock on Tue, Aug 11, 2009

An early decision bank organizers must address is whether to buy an existing bank or create a de novo bank. The right choice among these two options is always dictated by the particular set of circumstances faced by the group. At times, as circumstances and opportunities develop, bank organizers may even switch strategies in the middle of the process.

If the decision is made among the organizers to buy a bank, certain steps must be completed in order to get the transaction finalized. While each bank acquisition is unique, the steps generally fall into four major phases.

Phase One: corporation formation

Once the decision is made among the organizers to buy a bank, the group members create a stand-alone corporate entity. The newly formed corporation has two purposes: to purchase a bank and manage the organization’s funds. Other steps that are completed during this phase include:

•    Identification of the target bank
•    Negotiation of the purchase agreement
•    Sourcing and hiring of executive officers
•    Selection of a new bank location, as dictated by the business plan and/or assess the condition of the existing bank location

Phase Two: application

After the target is identified and the stock purchase agreement is in place, the group begins on the change of control application. The business plan within the application includes 10 separate sections; these sections are broken down and worked on until each is at least 80 percent or more complete.

Typically, each organizer must also complete an Interagency Biographical Financial Report (IBFR). This can be one of the most difficult sections; it must include each organizer’s personal and financial records for the previous two years and the current year, as well as projected records for the next year. The organizers should be compiling this information while the other sections of the application are being completed.

Phase Three: pre-file and comment letter  

Once the business plan is 80 to 90 percent complete, the organizers schedule a meeting with the regulating agency. At this meeting, the organizers must explain and defend their business plan to the regulators.

After the pre-file meeting, the group fine tunes and completes the business plan and sends it off to the regulating agency. The agency then has 30 days to make comments and request additional information. Once that request is made, the organizers have 30 days to compile the requested data.

Phase Four: Sell stock/capital and open doors

Often, when a bank is being purchased, a substantial amount (greater than 75 percent) of the capital must be raised by the time the application is filed with the regulators. In the current economic environment, regulators only want to approve “sure deals.” They are so busy with all the banking issues, that capital uncertainty is one issue they do not want to worry about in a purchase transaction.

For this reason, the organizing group is typically left with a private placement offering as the simplest way to raise the capital. Often this is done amongst the organizing group plus a few outsiders. The amount of capital required is dependent on the business plan approved. Typically, the regulators will require additional capital above the purchase price of the target bank to ensure that the new business plan has enough capital to succeed.

Once the capital has been transferred to the sellers of the bank, the doors may open “under new ownership.”

This is just a broad overview of the bank purchase process; each deal has unique circumstances that must be addressed. These circumstances could be legal in nature and involve counsel. Others are small details that can be easily overlooked by organizers. De Novo Strategy, Inc. has the experience and dedication to make the bank purchase project a reality and to help with every step.

Topics: bank buy out, Buy a bank, bank acquisition, bank aquisition, De Novo Strategy, organizers, capital, bank investors, buying a bank, bank applications

Sluggish Bank Regulators: How Much Are They Costing Taxpayers?

Posted by Wendell Brock on Tue, May 19, 2009

Seventy-three start-up banks opened their doors in 2008, according to industry data provider SNL Financial. The number compares unfavorably to what happened in years prior: there were 146 start-ups in 2007, 152 in 2006, and 135 in 2005. The drop-off in bank start-up activity has several contributing factors, but a big one is the ever-lengthening approval cycle. FDIC regulators, ever-conscious about squeezing risk out of the banking system and short on manpower, are taking longer and longer to provide final approvals on new bank applications. It appears that each de novo application now has to be sent to Washington DC for final approval.

Two years ago, a start-up bank could set aside about six months to receive an application approval. However, sometime in early-2008, things began to slow down. Now, a bank organizing group can expect twelve months or more to go by as the FDIC ponders the new bank’s worthiness.

Because time is money

The added caution on the part of regulators is understandable, but it doesn’t come without a cost. A de novo bank typically brings $10 to $25 million of new private capital into the industry. SNL Financial estimates that new banks last year brought in an average of $18 million apiece, or roughly $1.3 billion in total. But a look at the same numbers in prior years indicates that this figure could have been much higher; the 146 start-ups in 2007, for example, delivered a cumulative $2.67 billion in new funds to the industry.

Manpower constraints

Caution, unfortunately, isn’t the only obstacle new bank applications face. Another issue is lack of manpower. De novo applications are processed in the examination side of the FDIC. But many of those examination employees are now being diverted to the resolution department that manages the closing of  banks. A typical bank closure can require the participation of ninety or more FDIC employees—which is a lot of human resources to shuttle away from examining banks and application processing. Last year, the FDIC shut down 25 failed institutions; the count this year has nearly matched that figure.  While the FDIC works hard to help banks survive and keep our financial system healthy, they also look for the least costly solution to the insurance fund as they close an institution.

Private capital, ready and willing

At a time when the feds are dumping money into the financial sector to loosen up lending, the banking system could sorely use the extra capital provided by de novo banks. It was just recently that the Congressional Budget Office (CBO) increased the expected 2009 cost of TARP by more than $150 billion. The estimated total cost is now $356 billion. Meanwhile, the Obama administration is also tinkering with the idea of selling bailout bonds to generate private capital that could fund bailout efforts.

Given that start-up banks bring their own capital—along with clean balance sheets, banking expertise and a willingness to lend—now might be the opportune time to fast-track bank applications. Finding a way to do that might be a practical addition to the existing banking recovery programs.  

Topics: FDIC, regulators, capital, bank applications

Feds Make a Change to Bank Capital Rules

Posted by Wendell Brock on Fri, Dec 19, 2008

The OCC, Federal Reserve Board, FDIC and OTS have collectively approved a final rule that permits banking organizations to reduce the goodwill deduction to tier 1 capital by the amount of any associated deferred tax liability. Banks, savings associations and bank holding companies are allowed to adopt this rule for the reporting period ending December 31, 2008.

 Prior to the adoption of this rule, the tier 1 capital calculation required banking organizations to deduct the full carrying amount of goodwill and other intangible assets resulting from a taxable business combination. This full deduction, however, was inconsistent with other aspects of the tier 1 capital computation. Other intangible assets acquired in nontaxable transactions, for example, could be deducted from tier 1 capital net of any associated deferred tax liability.

In a taxable business combination, the deferred tax liability arises from differences between tax treatment and book treatment of the asset. And, that deferred tax liability is not routinely settled for financial reporting purposes; it remains until the goodwill is written down, written off or otherwise derecognized. If the entire amount of the goodwill is impaired, the banking organization would also derecognize the associated deferred tax liability for financial reporting purposes. Therefore, the banking organization’s maximum exposure to loss with respect to the goodwill asset would be the full carrying value of that goodwill less the deferred tax liability. The spirit of this rule change is to improve the tier 1 capital computation by reflecting the banking organization’s actual exposure to loss with respect to goodwill arising from taxable business combinations. Also, the banking organization that deducts goodwill net of the associated deferred tax liability from tier 1 capital may not net that deferred tax liability against deferred tax assets for the computation of regulatory capital limitations on deferred tax assets.

 Comments largely positive

 On September 30, 2008, the regulatory agencies published a notice of proposed rulemaking requesting comments on this change. Of the thirteen comments received, only two opposed the change. Five comments suggested that the rule be adopted and available to banking organizations for the reporting period ending on December 31, 2008. The agencies have agreed with this request.

 Some of the comments also requested that the change be applied to other intangible assets as well, but did not provide sufficient data or analysis to support that request.


Other miscellaneous changes

 The OCC is also adopting other miscellaneous changes as noted in the proposed rule, including:


·         Clarification of the current treatment of intangible assets acquired due to a nontaxable purchase business combination

·         Replacement of the term “purchased mortgage servicing rights” with “servicing assets”

·         Clarification of OCC’s interpretation of existing regulatory text

·         Amendment of the goodwill definition to conform to GAAP


To review the full text of the final rule, please click here (

Topics: Bank, FDIC, OCC, OTS, capital, savings associations, tax liability, asset

Subscribe by Email

Most Popular

Browse By tag

To Obtain a White Paper


BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at