Bank failures to surge in coming years - part I

[luv2read]

Bank failures to surge in coming years
By Alistair Barr (http://www.marketwatch.com/news/mailto.asp?x=65+66+97+114+114&y=Alistair+Barr&z=marketwatch.com&guid=%7B2fca4a0c-227d-48fe-b42c-8ddf75d838da%7D&siteid=mktw), MarketWatch
Last update: 6:27 p.m. EDT May 23, 2008
SAN FRANCISCO (MarketWatch) -- By April, Gary Holloway was almost three years into retirement.
He'd built a new home by a lake in Texas, bought a boat and was working on his golf game. While taking on some part-time work, Holloway also traveled for months across the U.S. with his wife, from Seattle to Washington D.C., catching up with old friends and family.
That life of leisure abruptly changed about six weeks ago when Holloway got a phone call from his former employer, the Federal Deposit Insurance Corp., or FDIC, which regulates U.S. banks and insures deposits.
Holloway, a 30-year FDIC veteran, had worked extensively with failed lenders in Houston during the savings and loan crisis in the late 1980s and early 1990s, when thousands of thrifts collapsed.
Earlier this year, the FDIC began trying to lure roughly 25 retirees like Holloway back to prepare for an increase in bank failures. It's also hiring about 75 new staff.
Holloway quickly went back to work. ANB Financial N.A., a bank in Bentonville, Ark. with $2.1 billion in assets and $1.8 billion in customer deposits, was failing and an expert like Holloway was needed to value the assets and find a stronger institution to take them on.
"I was very excited about coming back," Holloway said in an interview. "I'm now 57. There's still a lot of life left and the juices are flowing again."
On May 9, life for ANB ended when the FDIC and the Office of the Comptroller of the Currency, another bank regulator, announced that the lender was closing. See full story. (http://www.marketwatch.com/News/Story/anb-financial-closure-marks-third/story.aspx?guid=%7BC0A569C7%2D25FF%2D46D3%2DB49E%2 D33242D70AB45%7D)
Only three banks have failed so far in 2008. But that number is set to surge as the credit crunch slows economic growth and hammers some lenders that grew too fast during the recent real-estate boom, experts say.
The roots of today's banking crisis grew out of the boom and bust in the real estate market. Lenders originated more and more mortgages, while other banks, particularly smaller and medium-sized institutions, ploughed money into construction and development loans.
While loan growth soared in 2004 and 2005, most regulators failed to scrutinize many banks or restrain this heady expansion of credit. Now that the loans have been made and delinquencies are climbing, some banks may already be doomed.

Marriages and managing
"At this point in the crisis, you can't stop bank failures," said Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business, who has studied past financial crises.
"At this point you manage through failures and arrange marriages where another stronger bank takes on the assets and deposits," he said. "You move through the problem. You don't avoid the problem. It's too late to wait and hope that things get better."
Things may get worse before they get better.
At least 150 banks will fail in the U.S. during the next two to three years, according to a projection by Gerard Cassidy and his colleagues at RBC Capital Markets.
If the current economic slowdown deteriorates into a recession on the scale of those from the 1980s and early 1990's, the number of failures will be much higher this time around -- probably as high as 300 of them, by RBC's reckoning.
That's a massive surge compared to the recent boom years of the credit and real estate markets. From the second half of 2004 through end of 2006 there were 10 consecutive quarters without a bank failure in the U.S. -- a record length of time, Cassidy notes.
"This downturn will trigger a significant amount of bank failures relative to the past five years," he said. "There has been excessive loan growth and some banks won't be able to access capital markets to replace the money that will disappear as credit losses rise."

Texas Ratio
Cassidy and his colleagues have developed an early-warning system for spotting future trouble at banks called the Texas Ratio.
The ratio is calculated by dividing a bank's non-performing loans, including those 90 days delinquent, by the company's tangible equity capital plus money set aside for future loan losses. The number basically measures credit problems as a percentage of the capital a lender has available to deal with them.
Cassidy came up with the idea after covering Texas banks in the 1980s. Until the recession hit that decade, many banks in the state were considered some of the best in the country. But as problem assets climbed, that view was cruelly challenged, Cassidy recalls.
The analyst noticed that when problem assets grew to more than 100% of capital, most of the Texas banks in that precarious position ended up going under. A similar pattern occurred in the New England banking sector during the recession of the early 1990s, Cassidy said.
Along with his colleagues, Cassidy applied the same ratio to commercial banks at the end of this year's first quarter and found some disturbing trends.
UCBH Holdings Inc., a San Francisco-based bank, saw its Texas Ratio jump to 31% at the end of the first quarter from 4.7% in 2006, according to RBC.
The Texas Ratio of Colonial BancGroup , based in Montgomery, Ala., jumped from 1.5% in 2006 to 25% at the end of March.
Sterling Financial Corp., headquartered in Spokane, Wash., had a Texas ratio of 1.9% in 2006. It was nearly 24% at the end of the first quarter, RBC data show.
These banks are no where near RBC's 100% critical threshold, and several lenders have raised new capital since the first quarter. For instance, National City Corp. topped RBC's list with a Texas Ratio of 40% at the end of March, though the bank did raise $7 billion in new capital in April.
"But these ratios have skyrocketed in recent years," Cassidy warned. "If that trend continues, some of these banks may be in trouble."
CONTINUED....

[luv2read]

Continued from previous...


CD signs of stress
Other lenders are already in more dire straits.
IndyMac Bancorp, a large savings and loan institution and a leading mortgage lender, is one of Cassidy's biggest concerns, with a whopping Texas Ratio around 140%.
IndyMac is finding it much tougher to package up and sell the mortgages it originates in securitizations. That used to be a major source of new money for the company to turn around and use in further lending.
When lenders need to raise new capital, they can try to boost deposits by offering attractive interest rates on certificates of deposits, or CDs.
IndyMac is currently offering the highest rates on one-year CDs, according to Bankrate.com. Others in the top 10 include Corus Bankshares , Imperial Capital Bancorp and GMAC bank.
When Countrywide Financial was struggling last year, its federal savings bank unit began offering some of the highest CD rates in the U.S. to build deposits.
Bank of America has since agreed to acquire Countrywide and it didn't make it onto Bankrate.com's list of top 10 CD rates this week.
"These banks that are challenged for liquidity are having to go out and pay up in the market for CDs," Joe Morford, a colleague of Cassidy's at RBC, said.
Imperial Capital stopped paying dividends earlier this year. GMAC, owned by leveraged buyout giant Cerberus Capital Management and General Motors (GM (http://www.marketwatch.com/quotes/gm)
General Motors Corporation, is struggling to keep its Residential Capital mortgage business afloat.
Corus, offering the fifth-highest rates on one-year CDs, had a Texas Ratio of nearly 70% at the end of the first quarter, up from 9.1% in 2006, according to Morford.

Construction loan destruction
Corus is also highly exposed to types of loans that some experts worry will be the next major source of losses for banks after the mortgage meltdown.
Construction and development, or C&D, loans made up 83% of the Chicago-based bank's total loans at the end of 2007, according to RiskMetrics Group.
This type of loans helps to pay for things like the building of real-estate development projects and the construction of office buildings.
Small and medium-sized banks found it difficult to compete with large lenders in the national markets for mortgages and other consumer loans. So many focused on C&D loans because this type of financing relies more on local, personal connections, said Zach Gast, financial sector analyst at RiskMetrics.
As the real estate market boomed, C&D loans did too. A decade ago, bank holding companies had $60 billion of these loans. That number is now $480 billion, according to Gast, who also notes that C&D loans are almost never securitized, so they're held on banks' balance sheets.
Such rapid loan growth usually creates trouble later. Indeed, delinquencies represented 7.1% of total C&D loans at the end of the first quarter, up from 0.9% at the end of 2005, Gast said.
"It's a huge increase. Most of the deterioration seems to be coming from residential construction projects, but certainly there's deterioration in commercial projects too," the analyst said. "The rate of deterioration is still accelerating."
Colonial BancGroup had 37% of its loans in C&D loans at the end of last year, while Sterling Financial had 33% and UCBH had 20%. East West Bancorp, a rival to UCBH, is also exposed, with 25% of total loans in C&D assets at the end of 2007, RiskMetrics data show.

Regulators
Where were regulators when these banks built up such large exposures?
That's a question RBC's Cassidy has been asking himself, noting that "they dropped the ball in a big way." Officials at the FDIC declined to comment.
Efforts by the Securities and Exchange Commission to make sure banks report accurate earnings may have made the situation worse, Cassidy says.
Bank regulators try to encourage institutions to build reserves in good times, so they're ready for downturns. But the SEC has been worried that banks might use reserves to smooth reported earnings, so it advised some lenders that they couldn't set aside reserves if they weren't experiencing commensurate credit losses, Cassidy explained.
That left reserves relatively low at the end of 2007, as the credit crunch was building momentum, Gast said.
Still, regulators have responded strongly so far this year. In addition to the FDIC's efforts to bolster its staff, the Office of the Comptroller of the Currency has been telling banks to boost reserves even if accountants worry that such steps will stray from SEC guidance, Gast explained.

Crisis redux?
The FDIC had highlighted 76 banks that it considered troubled at the end of 2007. That's up from 50 at the end of 2006, which was the lowest level for at least 25 years.
Once identified by regulators, troubled banks are often required to limit or halt loan growth and shrink their balance sheets by selling some assets, Cassidy said.
Resolution and receivership specialists at the FDIC, like Gary Holloway, value troubled banks' assets as quickly as possible and try to find a stronger bank to absorb the weaker entity through an acquisition.
The current crisis hasn't reached the scale of the savings and loan crisis. In 1990, more than 1,500 banks were on the FDIC's troubled watch list, out of a total of roughly 15,000. More than 1,000 banks failed in 1988 and 1989, FDIC data show.
But it's possible for such comparisons to understate the scope of the coming wave of insolvencies.
During the late 1980s, banks in Texas couldn't open a new branch in another county without forming a new commercial bank. That meant there were lots more lenders in the state when the S&L crisis struck.
So when a bank failed, "40 of its other banks failed on the same day," Cassidy recalls.
Today, no states have such requirements, so there will be fewer bank failures this time, but those that do fail may be larger.
That means each bank failure may have a larger effect on the U.S. economy, withdrawing a bigger chunk of capital from the financial system each time.
"Bank failures don't cause recessions, they lengthen them," Mason, the Drexel professor, explained. "We could get a mild recession that could linger for a while longer because of the inability to recharge capital in the banking and financial system."

[Fivetears]

U.S. regulators seize two more banks.
U.S. regulators took over two banks on Friday and sold them to Mutual of Omaha Bank, the sixth and seventh bank failures this year as financial institutions struggle with a housing bust and credit crunch.
http://news.yahoo.com/s/nm/20080726/bs_nm/banks_fdic_dc_4

[mick504]

Wow, this is very inciteful and interesting reading! The luring of FDIC employees to come back; kinda like an outbreak of a dreaded biological disease....serious stuff. You just don't get this in the Newspapers etc....it's like insider stuff...very useful. I figured companies are hiding their losses in order to keep stock prices propped up, hoping for the economy to improve and thereby saving them from disaster and a run on the bank and loss of employees.

[Birchtree]

If the adolescents would borrow money from Mom and Dad we wouldn't be having this crisis of not meeting our mortgage obligations and moving back home. Kids....

[Fivetears]

Perhaps we failed to tell all the kids they had to do something other than screw, eat Pringles, lay on the couch and play video games all day. Poor kids. :(

[Fivetears]

Small Florida bank is 8th U.S. failure this year
Bank regulators closed a small Florida-based bank on Friday, the eighth U.S. bank to fail this year under pressure from a weak economy and a credit crisis precipitated by falling home prices. The Federal Deposit Insurance Corp said First Priority Bank had $259 million in assets and $227 million in deposits and its failure will cost the federal fund that insures deposits an estimated $72 million. SunTrust Banks Inc has agreed to assume the insured deposits of First Priority, whose six branches will reopen Monday as branches of SunTrust Bank. Customers can access their money over the weekend by check, teller machine or debit card.
http://news.yahoo.com/s/nm/20080802/bs_nm/firstpriority_fdic_dc_4

[Birchtree]

Not to sound ridiculous or selfish but I'm actually glad we're having this housing correction even if my own home is being devalued - all pricing will eventually right itself. My stock portfolio will also survive with more shares in preparation for the coming rebound. If a grub wants to run from their mortgage obligations they will pay a deeper price down the line with no assets or credibility. So what if their house is currently up side down - what ever happened to patients and saving for value and building equity? These fools will earn what they deserve.

[Skooby]

Is there a list somewhere of banks they think are going to fail?

[Show-me]

Is there a list somewhere of banks they think are going to fail?

I tried to find that and it is keep secret so that people do not run on the banks. I did read a post here by someone that if you go to bankrate.com and look and see who has the best rate on a 6 or 12 month CD you will get a good idea.

[Guest2]

Is there a list somewhere of banks they think are going to fail?

ITS ALL I COULD FIND SKOOBY

Several Georgia banks rank high in terms of the so-called "Texas ratio,"
a risk measure from the days of the savings and loan debacle that sank
hundreds of financial institutions in that state in the 1980s. The ratio
measures problem loans compared to the banks' equity capital and
reserves for loan losses.

National rankAssets*Texas ratio (%)
Integrity Bancshares, Alpharetta$1.21 billion 3724.
Triangle Financial Group (The Community Bank), Loganville$625 million 2468.
FirstCity Bank, Stockbridge$255 million 21111.
First Georgia Community Corp., Jackson$293 million 18214.
Omni Financial Services (Omni National Bank), Atlanta$997 million 17819.
First Security National Bank, Norcross$140 million 15420.
Southern Community Bank, Fayetteville$372 million 14723.
FirstBank Financial Services, McDonough$432 million 14425.
Newnan-Coweta Bancshares,** Newnan$240 million 130

* As of the end of March
**Formerly Neighborhood Community Bank
Source: SNL Financial, Federal Deposit Insurance Corp.

[Show-me]

http://www.bankrate.com/brm/rate/high_ratehome.asp?web=brm&prodtype=invest&product=15&sort=2

http://www.bankrate.com/brm/rate/high_ratehome.asp?web=brm&prodtype=invest&product=14&sort=2

[hessian]

I tried to find that and it is keep secret so that people do not run on the banks. I did read a post here by someone that if you go to bankrate.com and look and see who has the best rate on a 6 or 12 month CD you will get a good idea.
I believe above to be correct -direct info is witheld. Best I've seen, was posted by Alevin's in his Acct Talk posts #30 & #33) - to see if YOUR Bank/Credit Union is safe, try this... http://bankrate.com/brm/safesound/ss_home.asp

Also, for latest failures & cautionary notices, check here...
http://bankimplode.com/

Again, courtesy, Alevin's early July posts...;)
http://www.tsptalk.com/mb/showpost.php?p=170875&postcount=33

[luv2read]

regulators limit some downey activities
bank sees net deposit inflows after period of 'elevated' withdrawals
by alistair barr (http://www.marketwatch.com/news/mailto.asp?x=65+66+97+114+114&y=alistair+barr&z=marketwatch.com&guid=%7be42720ce-b4fb-48e5-8959-9ce189bffc2c%7d&siteid=mktw), marketwatch
last update: 6:23 p.m. Edt aug. 11, 2008
san francisco (marketwatch) -- downey financial corp.'s main regulator has imposed several restrictions on the lender's activities, including limits on dividends, asset growth and new borrowing, according to a filing monday.
downey also said that it's experienced "elevated" levels of deposit withdrawals after reporting a $218.9 million second-quarter net loss in late july. The company stressed that net deposit inflows returned more recently, but also warned that if outflows resume it would have to raise new capital or borrow more to meet liquidity needs.
http://www.marketwatch.com/charts/gifquotes/story-sm-ss.img?symb=dsl&time=8&freq=1&compidx=aaaaa:0&comp=&uf=0&lf=1&lf2=0&lf3=0&state=0&sid=1649&startdate=&enddate=39671&nosettings=1&style=1012&size=1&mocktick=1&rand= (http://www.marketwatch.com/tools/quotes/intchart.asp?symb=dsl)
shares of downey fell 8.1% to $1.93 during after-hours trading on monday. The stock dropped 6.3% in regular trading.
Since downey reported its second-quarter loss on july 24, the office of thrift supervision, its main regulator, has imposed several restrictions, the company said in its quarterly filing with the securities and exchange commission.
The newport beach, calif.-based thrift has been hit hard by a surge in bad loans. Nonperforming assets made up more than 15% of total loans at the end of june. The company said earlier this year that it has set up a special committee of directors to explore strategic alternatives, including raising more capital. see related story. (http://www.marketwatch.com/news/story/us-banks-remain-under-pressure/story.aspx?guid=%7b3e4887f1%2d39da%2d4598%2d9fd7%2 d1083bcf40f62%7d)
downey can't pay dividends without checking with the office of thrift supervision first. The company's bank can't increase assets beyond net interest credited on deposits without ots approval. It can only renew debt or borrow more money if the ots doesn't object, according to the filing.
Downey also can't pay certain types of compensation and severance; it must tell the ots before changing directors or executives, and before going ahead with transactions between any of its affiliates or subsidiaries, the filing also disclosed.
"we don't comment on supervision of individual companies," said william ruberry, an ots spokesman. Downey chief financial officer brian côté declined to comment.
A search of formal, public-enforcement actions by the ots in relation to downey on the regulator's web site yielded two actions from 1999 and aug. 30 last year.
Downey's main source of borrowing is the federal home loan banks, or fhlb. At the end of june, the thrift said it had borrowed $1.5 billion from the fhlb, which was a little more than 12% of total assets.
By the end of friday, downey's fhlb borrowing had jumped to $2.8 billion. It's allowed to borrow another $200 million, downey noted in its quarterly sec filing.
Downey also said its bank is allowed to borrow up to $1.5 billion from the federal reserve bank of san francisco. At the end of friday, it hadn't borrowed any money from this source, according to the filing.
...

[Silverbird]

Anyone got any recent news on National City Mortgage? There was a slew of bad news, company reaction, then silence. I'm hoping that means no news is good news, but just checking.

[luv2read]

Large US bank collapse ahead, says ex-IMF economist
Tue Aug 19, 2008 12:58am EDT
By Jan Dahinten
SINGAPORE, Aug 19 (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.
"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.
"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.
"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.
"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."
Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae (FNM.N: Quote (http://www.reuters.com/stocks/quote?symbol=FNM.N), Profile (http://www.reuters.com/stocks/companyProfile?symbol=FNM.N), Research (http://www.reuters.com/stocks/researchReports?symbol=FNM.N), Stock Buzz (http://reuters.socialpicks.com/stock/r/FNM)) and Freddie Mac (FRE.N: Quote (http://www.reuters.com/stocks/quote?symbol=FRE.N), Profile (http://www.reuters.com/stocks/companyProfile?symbol=FRE.N), Research (http://www.reuters.com/stocks/researchReports?symbol=FRE.N), Stock Buzz (http://reuters.socialpicks.com/stock/r/FRE)) on Monday after a newspaper report said government officials may have no choice but to effectively nationalise the U.S. housing finance titans.
A government move to recapitalise the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses. [ID:nN18494933]
Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.
"There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they're great buys, sovereign wealth funds come in and make a lot of money by buying them.
"That view neglects the point that the financial system has become very bloated in size and needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek [TEM.UL] have invested billions in Merrill Lynch (MER.N: Quote (http://www.reuters.com/stocks/quote?symbol=MER.N), Profile (http://www.reuters.com/stocks/companyProfile?symbol=MER.N), Research (http://www.reuters.com/stocks/researchReports?symbol=MER.N), Stock Buzz (http://reuters.socialpicks.com/stock/r/MER)) and Citigroup (C.N: Quote (http://www.reuters.com/stocks/quote?symbol=C.N), Profile (http://www.reuters.com/stocks/companyProfile?symbol=C.N), Research (http://www.reuters.com/stocks/researchReports?symbol=C.N), Stock Buzz (http://reuters.socialpicks.com/stock/r/C)).
In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S. Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.
Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it did.
"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States." (Editing by Neil Chatterjee)
http://www.reuters.com/article/newsOne/idINSP21695020080819?sp=true
...

[Miss_Piggy]

Really cool link to the status of US Banks - check it out: http://xserve.osgcorp.com/flex/fdicdemo/