The New M&A
The New M&A
The banking industry is in the midst of a major consolidation phase that is likely to reduce the number
of banks by at industry percent between 2009-2015. Thisphase that is likely to reduce the to the
The banking least 25 is in the midst of a consolidation consolidation will be realized due
number of failed banks taken 25 percent before the end of the decade. This merger and acquirisition of
number of banks by at least over by the FDIC, sold by the FDIC, and by consolidation
troubled realized due Bank merger and failed banksactivity willby the FDIC, sold by during 2010 -2011.
will be institutions. to the number of acquisition taken over rise to record levels the
The bankingby mergeris undergoing a restructuring and a major exodus back to community banking
FDIC, and industry and acquirisition of troubled institutions. Bank merger and
models coupled withwill rise to record levels during 2010 -2011. The banking industry is
acquisition activity associated conservative risk management maxims.
undergoing a restructuring and an major exodus back to community banking principles
The number ofassociated risk management maxims.
coupled with failed banks is likely to exceed 500 between 2010-2011 alone. This presents an
opportunity to acquire banks at such an undervaluation as to be almost a steal. Banks deposits are
selling at a premium ofbanks is likely to exceed 500 between 2010-2011 alone. This
The number of failed 0 – 1.5%. Assets maybe cherry picked and insured by the FDIC under an 80/20
Loss Share Agreement. Recent acquisitions have proven that banks may be purchasedsteal.
presents an opportunity to acquire banks at such an undervaluation as to be almost a for pennies on
the dollar, with the net result of premium of 0 – 1.5%. Assets maybe cherry of 50% and
Banks deposits are selling at a deposit increases of 75% +, asset increases picked +, increase in
offices/branchesFDIC under animmediate market share at the stroke of a pen.
insured by the of 40%+ and 80/20 Loss Share Agreement. Recent acquisitions have
proven that banks may be purchased for pennies on the dollar, with the net result of
Enclosedincreases a few related banking articles in which the reader will see the validity of the
deposit are only of 75% +, asset increases of 50% +, increase in offices/branches of
40%+ and immediate market share at the stroke of a pen.
aforementioned introductory statements. The opportunity is now and on a diminishing timeline of
opportunity. A number of the articles will define the opportunity, reinforce the opportunity, present the
players/investors and provide keen insight.
Enclosed are only a few related banking articles in which the reader will see the validity
of the aforementioned introductory statements. The opportunity is now and on a
diminishing timeline of opportunity. A number of the articles will define the opportunity,
reinforce the opportunity, present the players/investors and provide keen insight.
Article 1:Florida Deal a Microcosm of New M&A -American Banker 12/10/09 -Page
Article 2: AmTrust reopens, name unchanged -Ackron Beacon Journal 12/06/09- Page 7
Article 3: Prepping for The Weekend: Buying Banks from the FDIC -BAI 12/01/09-Page 9
Article 4: Multiple Charters Under More Pressure-American Banker 11/23/09-Page 12
Article 5: Texas billionaire trolling for failed Florida Banks-Herald Tribune 11/21/09-
Article 6:Banking woes seen by La. Company as opportunity-AP 11/19/09-Page 16
Article 7: This bank is suddenly a player in Florida-Herald Tribune 11/18/09-Page 18
Article 8: FDIC Board Adopts Proposed Interim Final Rule To Provide A
Transitional Safe Harbor For All Participations And Securitizations FDIC Press
Release 11/13/09- Page 20
Article 9: Robust M&A activity lies ahead, but FDIC deals are near-term focus Bank
& Thrift 11/13/09- Page 21
Article 10: Remarks by FDIC Chairman Sheila Bair at the Institute of International
Bankers Conference; New York, NY-FDIC Press Release 11/10/09- Page 23
Article 11:Small Banks Dip Toes into IPO Waters -AmericanBanker 10/24/09Page 29
Article 12: Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance
Corporation on Examining the State of the Banking Industry before the
Subcommittee on Financial Institutions, Committee on Banking, Housing and
Urban Affairs, U.S. Senate, Room 538, Dirksen Senate Office Building FDIC Press
Release 10/19/09- Page 31
Article 13: Bank failures create regional winners-Market Watch 10/16/09-Page 41
Article 14: FDIC Approves Rules for Private Equity Buying Banks Private Equity
Council 10/12/09- Page 44
Article 15: Firms poised to bet billions on real estate-Herald Tribune10/12/09Page 46
Article 16: Man on a Mission -US Banker 10/10/09- Page 51
Article 17: Ross Gets Nod for a Bank Charter-Wall Street Journal 9/11/09-Page 55
Article 18: The FDIC's Statement Of Policy On Qualifications For Failed Bank
Acquisitions-Cadwalader, Wickersham & Taft LLP 8/13/09- Page 58
Article 19: Preparing for a major bank shakeout-CNN Money 8/28/09-Page 66
Article 20 & 21: FDIC soften bank investment restrictions & FDIC to soften stance,
luring private capital -Reuters 8/26/09-Pages 69 & 70
Article 22: FDIC may ease private equity buys of failed banks-AP 8/20/09-Page 73
Article 23: FDIC Board Approves Proposed Policy Statement on Qualifications for Failed Bank
Acquisitions-FDIC Press Release 7/2/09-Page 75
Article 24: Psst! Wanna own a bit of a failed bank?-CNN Money 6/30/09-Page 77
Article 25:Treasury’s Bill Gross on Speed Dial-Wallstreet Journal 6/20/09-Page 82
Article 26: Banking on opportunity-Boston Globe 5/08/09-Page -98
Article 27: Planning and Executing a Successful Troubled Bank Acquisition Western
Independent Bankers 4/01/09- Page 100
Article 28: How Many to Fail; Do We Hear 1,000?-American Banker 3/24/09- Page 103
Article 29: Carlyle Group Said to Raise $1 Billion to Buy Stakes in Banks-Bloomberg 2/15/09
Article 30: Failed banks for sale...who's buying?-CNN Money 12/19/08-Page 108
Article 31: Insiders Reap Huge Profits on Purchase of Failed South Carolina
Bank-Problem Bank List-Page 111-113
Article 32: Bank big shots eying Ga. apply to start bank in Fla.-Tampa Bay Journal-
April 9, 2010-Page 115-116
Article 33: A rush to buy failed Florida banks: Miami Herald-04-10-2010
December 10, 2009
Florida Deal a Microcosm of New M&A
By Marissa Fajt
When a group of would-be bank organizers recently landed a small Florida institution, they
were foreshadowing the near-term future of industry M&A.
Frustrated by a wait for a charter, Apollo Bancshares went hunting for a small bank in its
target market of south Florida. It found such a launch vehicle in Miami, where Union Credit
Bank was willing to give up a controlling stake in return for a recapitalization. Apollo agreed
to buy that stake in the $154 million-asset Union Credit for $15 million.
The Apollo team had formed early last year to start a south Florida bank from scratch and
applied for a license in mid-2008. But federal regulators made obtaining deposit insurance
too difficult, and in March of this year Apollo started shopping for small acquisitions.
"The opportunity changed - the de novo scenario became less attractive. To work with the
regulatory process was longer, which meant more expensive, and the requirements laid out
once we open were a lot more complicated and going to affect our investment. The
opportunity to acquire a bank became more attractive," said Eduardo Arriola, Apollo's
chairman and chief executive.
Industry watchers said they expect more of the same in the coming year.
"We are not going to see a lot of traditional M&A," said Rusty LaForge, a lawyer at McAfee &
Taft in Oklahoma City.
"As bank failures come along, we are going to see traditional buyers are going to sit and
watch for those failures," LaForge said.
"But these organizing groups can't get into a failure as easily, and those organizing groups
know they can't get FDIC approval for new insurance. So they are who we see buying banks.
That is their only way to get a hold of a charter, and I don't see anything that would cause it
to change for next year."
As for true start-ups, "I think they are going to get to the point that I doubt we see any in the
next year," said Byron Richardson, the president and CEO of Bank Resources Inc., a
consulting and investment banking firm in Atlanta.
"If you see one or two new banks in the coming year, they will be the exceptions. More often,
individuals who want to get into the banking business are going to buy control or 100% of
Usually these erstwhile start-ups look for targets with few credit problems, investment
"They tell us, 'We want the smallest, cleanest bank you can sell us,' " said Wes Brown, a
managing director for St. Charles Capital in Denver.
The smaller the bank, he noted, the less risk associated with the loan portfolio that is
acquired with it.
"They are willing to pay a premium for that. They plan to branch from that initial market into
their market. Generally, they want to buy a bank in the state they are going to operate in, but
not necessarily in the area they are going to operate in."
Union Credit, founded in 2001, may have been the cleanest bank Apollo could find, given
that it was looking in troubled Florida. But the bank is not quite pristine. Its net loss swelled
to $3.8 million in the third quarter from $94,000 a year earlier.
Union Credit's total risk-based capital ratio dropped over the same period from 21.59% to
9.55% - 45 basis points below the threshold regulators consider well capitalized.
Nonperforming loans jumped from 1.81% of the bank's portfolio to 6.88%. The average for
Florida banks with assets of $100 million to $300 million was 6.04% at the end of the third
Arriola said Apollo talked to more than 30 banks in the southern Florida market that were
interested in selling, before deciding on Union Credit.
"They weren't truly a troubled bank," he said. "They weren't on the FDIC watch list. The
capital came down, but it was a yellow light, not a red light. They had just come under the
well-capitalized ratio ... and our coming in with capital addresses that immediately."
Around the country, other organizing groups have been making decisions similar to the one
the Apollo group made. For example, organizers of what would have been the biggest start-
up bank in Virginia, Xenith Corp. in Richmond, struck a deal instead in May to acquire the
$175 million-asset First Bankshares Inc. in Suffolk, Va., after they couldn't get over
regulatory obstacles. And AustinBancshares Inc. agreed to buy La Grange Bancshares Inc.,
the parent of the $29 million-asset Colorado Valley Bank, for similar reasons.
Roughly 25 banks have opened this year, versus 95 in 2008, according to Federal data.
(The agency has repeatedly said there is no moratorium, formal or otherwise, on new deposit
Overall, bank merger and acquisition activity has also slowed considerably this year.
According to the investment bank Carson Medlin Co., 139 bank deals have been announced
this year, down from 179 in all of last year and 322 in 2007. (The tally includes
recapitalizations and excludes deals that were later canceled.)
Recapitalizations are hardly confined to Union Credit or south Florida - or to investors that
shelved start-up plans.
Other recent examples include a $40 million infusion that a group of private-equity firms
made in Three Shores Bancorp., the parent company of Seaside National Bank and Trust in
Orlando, in central Florida; and Ohio Legacy Corp.'s deal to sell a majority stake to Excel
Financial LLC for $15 million.
Besides returning Union Credit to well-capitalized status, its seller, a wealthy Chilean family,
also wanted to find a partner so it could resume growth after several years of stagnation,
The deal was announced last week and is expected to close in the first quarter.
Charlie Crowley, a managing director in investment banking at Stifel, Nicolaus & Co. Inc.,
said there was a similar lull in traditional M&A during the savings and loan crisis in the late
1980s and early 1990s.
A rebound followed, and the same could happen after this slow period, Crowley said. "What
we saw 20 years ago is once the FDIC had done a fair amount of the cleanup and after the
healthier part of the industry became stronger, there was a little bit of pent-up demand
among both buyers and sellers, and that led to a fairly prolonged period of M&A activity," he
said. "We wouldn't be surprised to see that again, but it will be a while."
Before M&A activity picks up, Crowley said, bank valuations will have to increase - both for
the stock that buyers use as currency and the prices sellers expect.
Also, overall confidence in loan portfolios will need to improve before buyers are willing to
take on other companies' loans, Crowley said.
"It is better than it was six or nine months ago, but we still need a fair deal of healing in the
real estate environment and the industry, and then it will pick up a lot," he said.
AmTrust reopens, name unchanged
New ownership says Cleveland headquarters, all 66 branches still in business.
By Teresa Dixon Murray
Plain Dealer Reporter
Published on Sunday, Dec 06, 2009
The new owners of AmTrust Bank plan to keep all branches open with the same name and employees and
the Cleveland headquarters.
AmTrust Bank, which opened with one office on Valentine's Day 120 years ago and grew to one of the
nation's 100 largest banks, was seized by federal regulators Friday and bought by New York Community
Bank of Westbury, N.Y.
Branches reopened on Saturday.
New York Community Bank Chairman and Chief Executive Joseph Ficalora said in an interview that the
bank plans to keep all 66 AmTrust branches open, keep the Cleveland headquarters and keep all the branch
employees, at least for the foreseeable future.
''We have a great deal of confidence in the people who've been doing the job,'' Ficalora said. ''We are
definitely interested in working with them to make the bank the larger bank it once was.''
Branch employees are critical, he said. ''The thing we most appreciate is the relationship that's established''
between customers and employees they know. As for management, ''those decisions will be made person-
by-person,'' he said.
New York Community Bank also plans to keep the AmTrust name. The bank will be known as AmTrust, a
division of NYCB.
AmTrust is the first Northeast Ohio bank to fail since TransOhio Federal Savings Bank of Cleveland was
seized 17 years ago. AmTrust, the latest calamity in the nation's two-year-old banking crisis, became the
128th bank to fail this year, and the second in Ohio. Six banks in all failed Friday, bringing the year's total to
130. With assets of $12 billion, AmTrust was the fourth-largest to fail this year.
New York Community Bank, one of the nation's 25 largest banks and one of its strongest, paid nothing to
take over AmTrust's $8 billion in deposits, which indicates AmTrust was essentially worth nothing, analysts
said. About 77 percent of the privately owned bank was held by the Goldberg family, which had controlled it
for nearly five decades.
While the closure is not surprising — given the parent company's bankruptcy filing last week — it is still
stunning to the bank's 280,000 local customers, 1,400 local employees and a community that had watched
the sleepy thrift become a national powerhouse and an important philanthropic force across Northeast Ohio.
For most customers, there's no issue in the short term. ''Depositors are not losing a penny,'' said FDIC
spokesman David Barr.
Customers can access the money in their accounts as usual through ATM/debit cards or by writing checks in
the branches. Direct deposits and payments already scheduled will continue as if nothing had changed.
Customers who have questions can call the FDIC toll-free at 1-800-450-5143 from noon to 6 p.m. today.
The main group who will be affected are those who had loan applications in process. They could get stalled
While depositors aren't losing anything, the FDIC fund is taking an estimated $2 billion hit, Barr said. The
FDIC entered into an agreement to cap New York Community Bank's potential losses on the loans it's
buying. NYCB agreed to buy about $9 billion in AmTrust assets. The FDIC will keep the remaining $3 billion
in loans to sell later.
Among the nation's 8,100 banks, AmTrust was the 92nd largest as of June 30. At its height, it was the 68th
largest in 2006 and 2007. In the last two years it's lost nearly 40 percent of its assets and deposits as its
loans lost value, CDs matured and customers left. AmTrust was simply into mortgage lending too deep,
much of it risky or in markets that were about to implode.
''It's a terribly tragic situation but they weren't alone in the problem,'' said Karen Hopper Wruck, a finance
and banking professor at the Ohio State University's Fisher College of Business.
AmTrust's failure follows its financial report two weeks ago that showed the bank was spiraling toward
insolvency. The bank's parent company, AmTrust Financial Corp., filed for bankruptcy on Monday. The bank
was not included because banks can't file for bankruptcy protection.
Banking analyst Terry McEvoy of Oppenheimer & Co. in Maine said NYCB is a bit of a surprise because the
bank had no presence in Ohio, Florida or Arizona, the three markets where AmTrust has branches. But he
said NYCB is ''highly regarded.''
AmTrust has 25 branches in Cleveland and Akron, 25 in Florida and 16 in Arizona.
Michael Van Buskirk, president and CEO of the Ohio Bankers League, an industry trade group, said it's
better for the region that AmTrust was bought by a bank with no local presence. The purchase by a bank
with existing branches might have meant big losses in jobs and branches. ''I think this is a positive for
Prepping for The Weekend: Buying Banks from the FDIC
Buying failed banks from the regulators can bring growth at a cheap price – but only if acquirers
do their homework first.
BY SHAHAB CHOUDHRY AND CHRISTOPHER P. TERILLI BAI BANKING STEATEGIES
Dec 1, 2009
There has never been a better time for growth-hungry banks to find bargains. That’s a fact.
Failing banks abound, and some once-active acquirers are pushing back from the table, leaving
the Federal Deposit Insurance Corp. (FDIC) in a bargaining mood.
But here’s another fact: with the oversupply of distressed banks, there has never been a better
time for caveat emptor. While failed banks may tantalize with attractive price tags, buyers also
need to see the failed institution behind the paint job. These banks are failures because they
have things wrong with them. And that makes them risky.
On the other hand, the FDIC is eager to price accordingly and mitigate the risk via loss-share
agreements and good asset/bad asset separations. So how does a prudent bank look over the
landscape, identify valuable assets at great prices and prepare to participate wisely and
confidently in the bidding process?
Many healthy banks can rightly claim to be M&A experts after decades of participating in the
industry’s consolidation, successfully integrating one acquisition after another. How different can
an FDIC-assisted transaction be?
The answer lies in the FDIC’s own charter: Restore public confidence… Promote the safety and
soundness of the nation’s banking system…. What we call an acquisition, the FDIC calls a
“divestiture.” Its divestiture process, like its seizure process, is geared to bolstering public
confidence. The agency needs to be confident that each divestiture fulfills the spirit of its charter
and produces a healthy institution.
Keeping those points in mind, we recommend that banks entering into FDIC-assisted transactions
embrace a three-part approach:
1. Put “resourceful” in front of “due diligence.”
For traditional acquisitions, bank acquirers have developed a crisp and thorough expertise in due
diligence. They know what to ask, where to find the answers and how to analyze the information.
They take the time to go to the source, get the right data and validate it.
In an FDIC divestiture, by contrast, acquirers receive slim packets of distilled data about the
target; they are not allowed to contact the failing bank for additional information. This leaves
prospective acquirers with myriad questions and no traditional avenues for getting them
answered. What customer strategy has this bank pursued? What was their pricing strategy? How
much customer traffic do they get at their branches? What is their corporate culture? Why do
people bank with them? Have they been losing or gaining customers recently?
And then there’s the ultimate question that is absolutely core to any prudent decision: Why did
this institution fail?
Resourceful due diligence means finding novel ways of getting those questions answered.
Secrecy and discretion are paramount, ruling out most ordinary research via conversations with
the failed bank’s competitors, customers, vendors and others familiar with the target bank.
Instead, acquirers must be resourceful in seeking out available existing data and research on real
estate, demographics, market economics, etc. For example, to gain added insight into the make-
up of the customer base, it is helpful to tap the local newspapers for historical research on the
bank’s marketing and advertising campaigns. The failed bank’s servicer can also be a source of
detailed information, often at a price.
2. Have a Great Weekend.
Caveat emptor or not, FDIC divestitures usually allow prospective acquirers less than 30 days to
prepare their bids, a breathtaking pace even for experienced acquirers whose well-oiled M&A
machines can make quick work of traditional acquisitions. Traditional acquirers can also, if
business or technical conditions allow, delay a conversion date to effect the cleanest conversion
possible with minimal customer impact. It is not unusual for a conversion of bank systems to take
place a full year after an announcement.
But for the FDIC, speed and customer impact go hand-in-hand. The faster the customer can
become a customer of a real bank rather than the FDIC, the faster confidence is restored. This
imperative usually rules out a methodical assessment of resources, systems and products. It also
rules out the traditional staged communications plans carefully calibrated by acquirers to soothe
employees and shareholders of the acquired institution.
Instead, it’s all about The Weekend. Between the Friday announcement of the seizure and the
failed bank’s reopening on Monday morning under new ownership, an extraordinary number of
decisions must be made and executed, among them a communications plan designed to instill
public and customer confidence. The last thing the acquirer or the FDIC wants to see on Monday
is a line of customers anxious to move their accounts to a “safer” bank. If the public is not
confident, the FDIC’s mission fails. If customers depart in droves, the acquirer’s mission fails.
No surprise that the FDIC’s normal interest in a speedy turnover has been heightened lately. As
of this writing, regulators have seized 98 banks this year, with new failures announced every
Friday. No one sees this trend abating. Having already had to raise premiums and impose a
special assessment on its members to pay off depositors, the FDIC cannot afford to stay in the
business of running failed banks any longer than is absolutely necessary. When assessing
potential acquirers of failed institutions, the FDIC is certain to gauge their commitment to a rapid
3. Demonstrate a new kind of M&A readiness.
This is a new field of competition, calling for a new kind of competence. Before making a bid and
getting caught up in an unfamiliar process, interested banks need to revisit their current M&A
readiness plans and create one geared to FDIC transactions.
Traditionally, acquirers have been at pains to show how they would treat management and
employees of acquired banks, increase the bank’s value for shareholders, maintain the quality of
service for customers, leverage its technology innovations and so on.
But the FDIC has three main questions: How high is your bid? Do you have the capital strength to
carry it out? Can you take over and operate the failed bank on The Weekend?
Buried in the last question are the questions that top managers of prospective acquirers must ask
themselves: If the deal of the century were to surface soon, are we ready to take advantage of it?
Before we can convince the FDIC, can we convince our board – and, yes, ourselves – that we
have what it takes to succeed in this high stakes business?
Can we, for example, assemble the infrastructure for servicing a sudden increase in troubled
assets? Can we handle the expected customer retention challenges? Can we quickly decide
whether our best strategy in a given situation is to completely integrate the failed bank, run it as a
standalone or simply buy the deposits and get rid of everything else? Can we handle the added
real estate challenges? Can we operate effectively in this new, fast-paced environment?
Bidders on FDIC divestitures increasingly line up partners to help them fill experience gaps and
give the FDIC confidence that, when choosing a winner, they will resolve a failed bank, not create
another larger problem.
Growth will never be this affordable again. The past twelve months have produced a steady
accumulation of expertise on this subject. Healthy banks need not shy away because the risks
are unfamiliar or because the prospect of The Weekend is daunting. For the present, at least, this
is one of the most important fields of competition. The results will reshape the competitive
landscape and the payoff for the winners will be long-lasting.
Mr. Choudhry is the managing partner, M&A Solutions, with Morristown, N.J.-based Collabera
Inc. and can be reached at firstname.lastname@example.org. Mr. Terilli is the vice president,
professional services, with Quincy, Mass.-based ADS Financial Services and can be reached
November 23, 2009 By Paul Davis
Multiple Charters Under More Pressure
The decentralized banking model, which has been losing favor for years, may be killed off by
Leaving decisions to local executives who knew their markets, the thinking went, would allow
big lenders to be nimble and small ones to grow. But a stricter, more streamlined regulatory
system and second-guessing of the credit-granting processes are forcing change.
Executives at companies such as Fulton Financial Corp. and Synovus Financial Corp. say
they have not given up on their longtime models, but many say the strategy of using lots of
charters and letting front-line managers make tough decisions might become another
casualty of the financial crisis.
"The future of decentralized banking is a legitimate question," said Kevin Fitzsimmons, an
analyst at Sandler O'Neill & Partners LP. "I don't think the model is dead, but it has been
dealt a harsh blow. It will be harder to justify due to new regulatory and capital burdens."
Government responses to the crisis present the biggest challenge to decentralized models,
especially legislation that would create a single bank regulator.
"If we have one monstrous regulator, there would be no point to having separate
banks," Fitzsimmons said. "It raises the question of whether such a structure would be
Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc., agreed.
"The biggest challenge will be on the regulatory side," he said. "It is more expensive to run a
Another strike against the model is the perception that decentralized banking may have
exposed companies to more problems leading up to the financial crisis partly because of
inconsistent and at times lax lending standards. Likewise, some are concerned that the model
may have prevented banking companies from reacting swiftly to tackle problems.
The former GB&T Bancshares Inc. in Gainesville, Ga., reported in early 2007 that one of its
bank presidents had failed to comply with a number of company policies and procedures,
including collateral requirements. The president was fired and within a year GB&T sold itself
to SunTrust Banks Inc.
Another mounting concern is that undercapitalized banks could offset gains at healthier
affiliates, forcing companies to shift capital around or weakening the overall strength of the
parent. The model received its darkest black eye earlier this month when the Federal
Deposit Insurance Corp. seized the $19 billion-asset FBOP Corp. Several of the Oak Park, Ill.,
company's nine banks were undercapitalized, including its biggest subsidiary, California
National Bank, which weighed heavily against its healthier banks. U.S. Bancorp bought all
nine banks Nov. 2.
Richard Anthony, the chairman and CEO at Synovus,, has acknowledged the Columbus, Ga.,
company's model may have contributed to credit problems.
"Some of the growth we had in construction and development [lending] that was more than
we really wanted ... has been because of the decentralized model," he said during an August
2008 conference hosted by Keefe, Bruyette & Woods Inc.
Still, Anthony disagrees that the model kept Synovus from taking prompt action to confront
issues. Local CEOs have been critical to helping Synovus identify and vet local investors
interested in buying distressed real estate. Selling to local buyers has yielded pricing that on
average is 30% higher than bulk sales to outsiders, according to company data.
"In some ways we did act pretty quickly," Anthony said in an interview. "Particularly in
Florida, we did take some decisive action."
Capitol Bancorp Ltd. of Lansing, Mich., may be the most noticeable convert.
In March, Capitol combined nine banks in Michigan as part of a plan to spin them off into a
new company, Michigan Bancorp Ltd. The move, which is still under regulatory review,
would relegate about a third of Capitol's nonperforming assets to the new entity, while also
slightly raising Capitol's capital levels.
Capitol has eliminated 13 charters since mid-2008, slimming to 51 charters by consolidating
banks or selling them. Last week the $5.3 billion-asset company sold Bank of Santa
Barbara to investors.
Synovus has shrunk to 30 charters from more than 40 in 2005. It also tightened up in recent
years, implementing consistent standards and placing credit administration and senior credit
officers in its worst-hit regions.
Executives who still embrace the model feel it fulfills two key objectives of banking:
empowering employees and developing strong relationships with clients. "When they retain
their bank's name, it sends a message from corporate that they are still in charge," said R.
Scott Smith Jr., Fulton's chairman, president and CEO. "It brings responsibility and
Fulton Financial, of Lancaster, Pa., merged three of its Maryland banks this summer, leaving
the $16.6 billion-asset company with eight banks.
Decentralized models can boost deposit gathering and liquidity because they can offer the
$250,000 deposit insurance limit across multiple banks.
Wintrust Financial Corp. of Lake Forest, Ill., has promoted a MaxSafe money market product
that allows customers to have account balances across the $12.1 billion-asset company's 15
bank charters. Anthony at Synovus said his company holds about $2 billion in pooled
deposits that are held at multiple banks.
Smith said Fulton's ability to offer more deposit insurance to individual clients proved
beneficial during last year's financial crisis. "It was a nice way to hold on to customers'
deposits and keep them from going somewhere else," he said.
Texas billionaire trolling for failed Florida banks
Companies are out to buy sick banks, like IberiaBank last week bought Century Bank, headquartered in downtown Sarasota.HERALD-
TRIBUNE ARCHIVE / 2009
By John Hielscher
Published: Monday, November 23, 2009 at 1:00 a.m.
Last Modified: Saturday, November 21, 2009 at 5:43 p.m.
A BILLIONAIRE TEXAS BANKER received swift approval from Florida banking regulators to buy
failed or ailing banks.
The Florida Office of Financial Regulation issued an emergency order this month for Andrew Beal,
giving him authority to charter a new Florida bank that would acquire failed or failing banks.
Beal is the chief executive and sole owner of Beal Financial Corp., a Plano, Texas, company that owns
Beal Banks in that state and Nevada.
Forbes magazine recently called him the 52nd richest person in America, with a net worth of $4.5
billion. He can definitely cover the tab for a few failed banks.
Beal and associate M. Molly Curl applied for a Florida bank charter on Oct. 19 and won approval on
Nov. 5, less than three weeks later. New bank charters typically take months to review and approve.
Beal was rumored to be a possible buyer of either Century Bank of Sarasota or Orion Bank of Naples,
both of which failed on Nov. 13. Those banks were sold to IberiaBank of Lafayette, La.
Beal Bank of Plano, at $2.5 billion in assets, and Beal Bank Nevada, at $5.5 billion, aren't typical
retail banks with checking and savings accounts. They are wholesale banks that buy troubled loans, at
cheap prices, from banks or regulators.
Beal isn't the only big-money name looking to make a deal on failed banks in Florida.
Miami Dolphins owner Stephen Ross and two executives from his Related Cos. have formed a new
bank to bid on sick banks.
SJB National Bank has been approved by the Federal Deposit Insurance Corp. to bid on banking
operations of failed lenders.
High cost of Coast
First Banks Inc. bought Bradenton's Coast Bank for a bargain-basement price in late 2007, but Coast
is proving costly today.
Nearly one-fourth of the Florida mortgage portfolio First Banks acquired from Coast is delinquent or
restructured, the bank said in a regulatory filing last week.
On Sept. 30, the bank reported $29.6 million in nonaccrual loans, $7.6 million in loans 30 to 89 days
past due and $8.5 million in restructured loans.
The has bank charged off $26.5 million of the Florida loans so far this year.
First Banks, a privately held company based in suburban St. Louis, knew it was taking on problems
when it bought Coast. The Bradenton bank was near failure after loan losses depleted its capital, and it
was mired in a lending scandal involving its chief lender and a home builder. That executive, Philip
Coon, has pleaded guilty to loan fraud and is awaiting sentencing.
Foxworthy on Trust board
Ron Foxworthy has joined the board of directors of Trust Companies of America, the parent of
Caldwell Trust Co. of Venice.
He is filling the term of Jack Meyerhoff, a Caldwell Trust founder who died in September.
Foxworthy started Rusty Plumbing Inc. and operated it until 1999. He also was a residential and
commercial developer and served as a director of a number of local banks. He was a founder of The
Suncoast Foundation for Handicapped Children.
November 19, 2009
Banking woes seen by La. company as
By ALAN SAYRE
AP Business Writer
A Louisiana banking company sees the worst rash of bank failures in two decades as fertile
ground to expand well beyond the state line.
Two Florida banks recently acquired by Iberiabank Corp. may be only the start for the
Lafayette-based company. Analysts say the takeovers — which doubled Iberiabank's asset
base — will likely be emulated by other companies as smaller banks fail and megabanks
reduce their loan exposure in states with real estate problems.
So far this year, there have been 123 U.S. bank closures.
"What you're going to have is a void of decent size banks that can loan," said Michael Rose,
industry analyst for Raymond James.
On Nov. 13, after the Federal Deposit Insurance Corp. shuttered Naples, Fla.-based Orion
Bank and Sarasota, Fla.-based Century Bank, Iberiabank assumed $3.1 billion in assets,
$2.5 billion in loans and $2.5 billion in deposits, along with 34 banking offices in six Florida
metropolitan areas. Loss-share agreement with the FDIC put the company's maximum
exposure at $252 million. Overnight, the company with the Louisiana name became Florida's
20th-largest bank in deposits.
During a conference call with analysts after the takeover, Iberiabank chief executive Daryl
Byrd said the "right time, price and risk structure" paved the way for his company to step into
"They got to grow about 45 percent overnight. In essence, the FDIC is going to pay them to
clean up these banks. It'sa low-risk proposition for shareholders," said Peyton Green,
banking analyst with Sterne, Agee & Leach.
Rose said that despite recent crises with residential and commercial loans that helped sink
Orion and Century Bank, Florida is likely to be a banking profit center after the
recession, provided a company has capital and patience.
"Florida is a deposit-rich state," Rose said. "Demographic forecasts see larger numbers of
people moving in. That could be a couple of years away, but it will be a good place to be if
you are well capitalized and have good people in place."
The Florida deals, which did not require Iberiabank to raise additional capital, followed the
Aug. 21 assumption of all the deposits and some of the assets of Birmingham, Ala.-based
CapitalSouth Bank, which was closed by regulators. That brought 10 additional offices into
the Iberiabank fold.
Established in 1887 as the Iberia Building Association, the company went public as ISB
Financial Corp. in 1995 before becoming Iberiabank Corp. in 2000. Iberiabank broke out of
its Louisiana roots in 2006 with the acquisition of two Arkansas banking companies — Little
Rock-based Pulaski Investment Corp. and Jonesboro-based Pocahontas Bancorp Inc.
Iberiabank now has 135 banking offices in Louisiana, Arkansas, Tennessee, Alabama,
Texas and Florida, in addition to 26 title offices in Louisiana and Arkansas and mortgage
representatives in 11 states.
In March, Iberiabank drew attention when it became the first bank to give back federal
money from a program designed to stimulate lending during the credit crisis, saying the
funding came with too many federal strings attached. The company took a $2.2 million
charge to redeem preferred stock that had been issued to the U.S. Treasury in exchange for
the $90 million.
Since then, 24 other U.S. banking companies have returned the money.
With $273.5 million from two stock offerings over the last year, Iberiabank is watchful for
other acquisitions, though company officials have refused to speculate on specifics since the
FDIC doles out assumptions on a bid basis.
Green said he expected more action to come from Iberiabank after settling into Florida.
"I think Iberiabank will continue," Green said. "It will be a temporary resting point until they
get the people in place. But I think they will continue to be an active player."
In Sarasota, this bank is suddenly a player in Florida
By John Hielscher
Published: Wednesday, November 18, 2009 at 1:00 a.m.
Last Modified: Tuesday, November 17, 2009 at 6:32 p.m.
In one swift move, IberiaBank has become the fifth-largest bank in Sarasota and Manatee counties.
Click to enlarge
• Ousted Orion Bank CEO drawing scrutiny
• Federal regulators close Century, Orion banks
• Search ratings: How safe is your bank?
By taking over the failed Century Bank of Sarasota and Orion Bank of Naples last Friday, IberiaBank
grabbed $928 million in deposits and a 5.1 percent share in the Bradenton-Sarasota-Venice market.
Not bad for a bank from Lafayette, La., that was not even here before.
Statewide, IberiaBank vaulted from 215th place, with $132.5 million in deposits, to No. 20, with
nearly $3 billion.The timing was perfect to expand in Florida, says chief executive officer Daryl G.
Byrd."When everyone wanted to be in Florida and pay five times book for overvalued assets, we
expanded in Louisiana and Arkansas," Byrd said this week. "We believe this is the right time, price
and risk structure to enter these Florida markets.
"We like the changing competitive landscape in Florida. As you know, we like competing with large,
clumsy, line-of-business banks. We also believe there will be significant consolidation in Florida
through this cycle," he said.
IberiaBank acquired 34 offices, $3.1 billion in assets and $2.5 billion in loans from Century and
Orion. Loss-share agreements with the Federal Deposit Insurance Corp. cover $2.6 billion in assets.
Before the deals, IberiaBank's Florida presence was three offices in the Jacksonville area bought in
August from the failed CapitalSouth Bank of Birmingham, Ala.
Now, Florida will account for 36 percent of its loans and 35 percent of its deposit base, said John
Davis, senior executive vice president.
The bank, a consumer and commercial lender, is excited about growth opportunities in this part of
Florida, Byrd said, but it expects to take a "thoughtful" approach to lending.
Both Century and Orion were crippled by huge levels of bad loans.
"We are fortunate to be in a position to be patient from a lending perspective, given our strong
pipeline across our entire system," he said.
The Sarasota and Naples markets, among the most affluent in Florida, were especially attractive for
the wealth-management and private-banking business that IberiaBank wants to grow.
The bankers did not comment on whether they will close any of Century's 11 or Orion's 23 offices.
Century employs 133, Orion 260.
Before last week's deal, IberiaBank was a $6.5-billion-asset bank with 101 offices in six states. It also
operates title insurance offices and 43 mortgage offices in 11 states.
Analyst Michael Rose of Raymond James Equity Research kept his "strong buy" recommendation on
shares of parent IberiaBank Corp. following the acquisitions.
The company earned $24.3 million, or $1.22 per share, in the third quarter, up from $8.5 million, or 66
cents per share, a year earlier. Analyst BauerFinancial Inc. rated it a four-star "excellent" bank in the
IberiaBank's shares, which trade under the symbol "IBKC" on the Nasdaq, were selling for $56.64 at
the close of trading on Tuesday, up $2.21, or 4.2 percent. The shares jumped 18 percent on Monday,
the first day investors could act on news of the company's acquisitions of Century and Orion.
FDIC Board Adopts Proposed Interim Final Rule To Provide A Transitional
Safe Harbor For All Participations And Securitizations
FOR IMMEDIATE RELEASE Media Contact:
November 13, 2009 Andrew Gray at (202) 898-7192
On November 12, 2009, the Board of Directors of the Federal Deposit Insurance Corporation
(FDIC) adopted a proposed Interim Final Rule amending 12 C.F.R. § 360.6 to provide a
transitional safe harbor effective immediately for all participations and securitizations in
compliance with that rule as originally adopted in 2000. In summary, the Interim Final Rule
confirms that participations and securitizations completed or currently in process on or before
March 31, 2010 in reliance on the FDIC's existing regulation will be 'grandfathered' and continue
to be protected by the safe harbor provisions of Section 360.6 despite changes to generally
accepted accounting principles adopted by the Financial Accounting Standards Board.
"The Board's action provides needed clarity to the financial markets," said FDIC Chairman Sheila
C. Bair. "With changing accounting rules, we need both to ensure that participations and
securitizations that have relied on our existing regulation retain that protection and to consider
needed reforms for securitization going forward."
At the meeting, Chairman Bair also announced that FDIC staff would propose to the Board at its
December meeting a set of conditions that securitizations initiated after March 31st must meet to
receive 'safe harbor' treatment. "We have seen the problems that the 'originate to distribute'
model played in the build-up to the financial crisis," Chairman Bair concluded, "and we must
ensure that future securitizations do not place the Deposit Insurance Fund and our financial
system in jeopardy."
The safe harbor protection provided by the Interim Final Rule continues for the life of the
participation or securitization if the financial assets were transferred into the transaction or, for
revolving securitization trusts, beneficial interests were issued on or before March 31, 2010 and
the participation or securitization complied with Section 360.6. Under this transitional safe harbor,
the participation or securitization will comply with the Section 360.6 requirement that any transfers
into the transaction meet all conditions for sale accounting treatment under generally accepted
accounting principles, other than the 'legal isolation' condition, if the transfers satisfied generally
accepted accounting principles in effect for reporting periods prior to November 15, 2009.
For participations and securitizations that meet those requirements, the Interim Final Rule
provides that the FDIC shall not, by exercise of its authority to disaffirm or repudiate
contracts, seek to reclaim, recover, or recharacterize as property of the institution or the
receivership any financial assets transferred in connection with the securitization or
participation, even if the transaction does not satisfy all conditions for sale accounting
treatment under generally accepted accounting principles as effective for reporting
periods after November 15, 2009. As a result, any financial assets transferred into such
securitizations or participations will not be treated as property of the institution or
receivership, and consequently the consent requirement of 12 USC §1821(e)(13)(C) will
Robust M&A activity lies ahead, but FDIC deals are
Bank & Thrift - Industry News
November 13, 2009 1:24 PM ET
By Nathan Stovall
Bankers at the Sandler O'Neill & Partners East Coast Financial Services Conference said Nov. 12
that the industry is gearing up for robust M&A activity, but forecast that near-term opportunities
will likely be limited to government-assisted transactions given the difficulty in gauging another
bank's asset quality.
Broadcasting plans to hunt for FDIC-assisted deals has been a common refrain heard from
bankers in the past few months. It seems that many bankers feel the need to offer investors
an offensive story, even if they do not see that many bank failures arising either in their footprint
or nearby. Some bankers, including a few at the Sandler conference, do have their finger on the
deal trigger and are ready to move quickly when an opportunity arises in their market.
There should be plenty of chances to pull the trigger and execute FDIC-assisted transactions,
according to bankers at the Sandler event. State Bancorp Inc. President and CEO Thomas O'Brien
predicted that close to 500 banks will fail this cycle and thinks a substantial number of other
capital-starved institutions will seek merger partners as well. The shakeout would decrease the
number of banks in the U.S. to roughly 5,000, from the current level of 8,000-plus.
At least in the short run though, most bankers at the Sandler event did not see themselves buying
live banks due to concerns over the health of sellers' balance sheets. Valley National
Bancorp Chairman and CEO Gerald Lipkin said he would much prefer buying failed banks from
the FDIC — transactions that usually come with limited asset risk given the presence of a loss-
sharing agreement on the failed institution's loan portfolio.
"A non-FDIC [deal] will be very difficult, not impossible, but very difficult to do in today's
economy," Lipkin said.
Seacoast Banking Corp. of Florida Chairman and CEO Dennis Hudson III was even less
optimistic about the prospect of live bank deals. With asset values declining significantly, Hudson
said accounting rules make it nearly impossible to get a clean M&A deal done.
United Community Banks Inc. President and CEO Jimmy Tallent seemed to agree, arguing that
bank mergers will be restricted to government-assisted deals. He said bank failures will create
opportunities for some banks, but noted that there will be closures where there are no buyers,
particularly in Georgia, where a number of failures have already occurred.
Other bank executives at the conference took a different stance and said bidders for failed
institutions would actually increase going forward as the pace of failures ramps up. Even if that
happened, it seems unlikely that it would change the stance of some banks at the Sandler
conference, which seem to be taking a deliberate approach to government-assisted deals.
Capital City Bank Group Inc. falls in the category of potential acquirers that will remain patient
regardless of the number of bidders or availability of government-assisted opportunities in the
market. Capital City Chairman and CEO William Smith Jr. said the company has $80 million in
excess capital and is looking for FDIC-assisted opportunities in towns outside of Jacksonville and
Tampa, Fla.; Birmingham and Mobile, Ala.; and Atlanta.
"There are more opportunities and assisted transactions than we have money (for) today," Smith
said. He noted that the company is conducting due diligence on a number of banks; however,
Smith said he plans to wait for those institutions to fail before making an offer.
Smith said the company went through one bidding process with the FDIC and despite losing,
found the process helpful. He further said the company does not review FDIC deals from only a
financial standpoint, noting that targets must also represent a strategic fit. For example, he said
Capital City would not disrupt its attractive deposit makeup by acquiring a failed institution
whose cost of funds was five times as high as its own.
Other bankers at the Sandler event noted that they might not be able to participate in FDIC-
assisted transactions simply due to the lack of many bank failures in their respective
footprints. Hudson City Bancorp Inc. Chairman and CEO Ronald Hermance Jr. said he gets to
look at every FDIC deal that comes down the pike and believes many of those transactions "look
terrific" from a financial standpoint. However, he noted that no bank failures of significant size
have occurred within his company's footprint.
Even if FDIC-assisted deals do not surface in their markets, a few executives said they were
willing to look at live banks. Danvers Bancorp Inc. Chairman, President and CEO Kevin
Bottomley said he certainly is not averse to doing more acquisitions. And a NewAlliance
Bancshares Inc. executive said at the event that the company would look at transactions along the
Amtrak corridor from Boston to New York and even as far south as Maryland.
FirstMerit Corp., which just inked a transaction to buy 24 branches in the Chicago area, is still on
the prowl for deals. CEO PaulGreig said the company has the capacity in its systems to handle
another $8 billion in assets and noted that the company has prepared for acquisitions for over a
It seems that FirstMerit is not alone in its preparations, as most of the aforementioned institutions
have also been getting ready for deals for some time. The intentions of the bankers at the Sandler
event seem clear; the question is when will they act?
Speeches & Testimony
Remarks by FDIC Chairman Sheila Bair at the Institute of International Bankers
Conference; New York, NY
November 10, 2009
Today I want to talk about how we can strengthen our banking system by
restoring market discipline.
Looking back over just the past 12 to 18 months, it's abundantly clear that the
market failed to prevent the excessive risk-taking that drove our financial system
to the brink of collapse. Of course, the government also failed to prevent the
So the critical question is do we now have the willpower -- both in government
and in the industry -- to address a root cause of the crisis by eliminating the belief
that the government will always support large, interconnected financial firms? Or
will we maintain the status quo and risk a repeat of this episode sometime down
Key resolution features
To end too big to fail, we need an effective mechanism to close large, financial
intermediaries when they get into trouble. A good model is the FDIC process for
banks. To prevent bank runs from spreading and affecting the broader financial
system, insured deposits must be made immediately available to the customers
of failed institutions. To achieve this, the insurer itself must have ready access to
funding. In the case of the FDIC, this is accomplished by maintaining a Deposit
Insurance Fund and by the existence of government lines of credit as an
emergency backstop for potential liquidity needs.
A second feature of our resolution scheme is the ability to recycle valuable
banking relationships and assets from the failed bank back into the private sector
via acquisition. This allows the FDIC to reduce losses to the Deposit Insurance
Fund while ensuring that these valuable relationships and assets can continue to
finance economic activity that creates new jobs. Banking relationships with
businesses and consumers are costly to establish and valuable to maintain.
Whenever possible, they should be preserved in the resolution process.
A third feature of our resolution scheme is that we can provide continuity for the
capital markets, trust and transactions services that were being provided by
failing institution to its customers. Similar to traditional bank lending relationships,
these services also cannot be immediately replaced without substantial cost or a
significant disruption to real economic activity. An efficient resolution process
ensures continuity for such transactions. In the case of larger institutions, this
continuity is sometimes preserved by the temporary creation of a bridge bank.
The FDIC is the only Federal government agency with the responsibility for
resolving failing banks and thrifts. The FDIC seamlessly resolves failing
institutions using a receivership system separate from the court-administered
bankruptcy process. Since 1934, the FDIC has been involved in more than 3,000
insured depository institution failures and assistance transactions. This year
alone, the FDIC has resolved 120 institutions that held total deposits of $112
billion, almost all of which will turn out to be fully insured.
Resolution vs. bankruptcy
While the FDIC has, for the most part, the legal authorities and resources to
efficiently resolve insured depository institutions that have failed, a large share of
financial intermediation now takes place outside of traditional insured
depositories. When these institutions become critically undercapitalized, there is
no recourse other than the commercial bankruptcy process. While bankruptcy
works well to resolve the vast majority of business failures, it is not well-suited for
resolving large interconnected financial firms.
As we saw with the financial crisis, large financial firms are subject to the same
types of liquidity runs as banks. And when they run into trouble, it's essential to
have the ability to act quickly and decisively to maintain critical operations, retain
franchise value, and protect the public interest.
By contrast, the commercial bankruptcy process begins by freezing creditor
claims and giving management a right to reorganize. This process does not
provide the type of continuity and certainty embodied in the rules that govern the
FDIC's receivership authority. Forcing large, non-bank financial institutions
through the bankruptcy process can create significant risks for the real economy
by disrupting key financial relationships and transactions.
In bankruptcy, there is no readily available funding to ensure the continuity of
operations. Absent bankruptcy financing, the courts will typically force liquidation
even if that raises the costs to claimants and disrupts essential services. In
bankruptcy, there is no option for a bridge bank that can provide continuity of
operations until the failed institution is sold. The lack of an acceptable alternative
to bankruptcy tied the hands of policy makers in the recent crisis.
It was clear that these non-depository financial institutions were too important to
the global financial system to subject them to the costs and economic
uncertainties of the bankruptcy process. But absent an alternative process for
intervention and resolution, policy makers were forced to extend the public safety
net at taxpayer expense to support a number of financial institutions. In doing so,
governments made explicit the fact that some institutions are simply too big to
Addressing too big to fail
This crisis has given us an opportunity to achieve significant regulatory reform. It
is imperative that we meet this challenge head-on and not sidestep our
responsibilities to ensure financial stability and to protect the taxpayers. We must
create a more resilient, transparent, and better regulated financial system – one
that combines stronger and more effective regulation with market discipline.
Our first task is to end too big to fail. Only by doing so can we ensure a
competitive balance between large and small institutions and limit the built-in
incentives for large, complex financial firms to take on greater risk, greater
leverage and greater size. There are four elements to this task.
First, we must have an effective and credible resolution mechanism that provides
for the orderly wind-down of systemically important financial firms, while avoiding
financial disruptions that could devastate our financial markets and the global
economy. I believe that the best option is to create a resolution mechanism that
makes it possible to break-up and sell the failed firm. It should be designed to
protect the public interest, prevent the use of taxpayer funds, and provide
continuity for the failed institution's critical functions.
The FDIC's present receivership authority is a good model. We have the
authority if necessary to temporarily move key functions of the failed institution to
a newly chartered bridge bank. We also have the obligation to impose losses on
those who should bear them in the event of a failure. Shareholders of the failed
bank typically lose all of their investment, and unsecured creditors generally lose
some or all of the amounts owed to them. Top management is replaced, as are
other employees who contributed to the institution's failure. And the assets of the
failed institution are eventually sold to a stronger, better managed institution.
This type of resolution mechanism should be applied to all systemically important
financial institutions – whether banks or non-banks. We should require that these
firms prepare detailed plans for their dissolution (so-called "living wills"). This
would assist the receiver, and allow financial markets to continue to function
smoothly while the firm's operations are transferred or unwound in an orderly
manner. This process could address the potential for systemic risk without a
bailout and without the near panic we saw a year ago.
Importantly, over the long run, it would provide the market discipline that is so
clearly lacking from the present arrangement. A new resolution scheme for
systemically important non-banks would need access to liquidity in order to effect
a resolution, provide continuity of services and complete transactions that are in
process at the time of failure. This would facilitate an orderly wind down. And
costs associated with the resolution would be borne by shareholders and
In my view, it is vital that the funding for working capital should come from the
industry. A reserve fund should be established, maintained and funded in
advance of any failure by imposing risk-based assessments on the industry. This
would not be a bail-out fund. This would not be an insurance fund. It would
provide short term liquidity to maintain essential operations of the institution as it
is broken up and sold off. It would not be used to `recapitalize or prop-up failing
firms. Only this pre-funded approach can assure that taxpayers will not once
again be presented the bill for these failures.
Building a resolutions fund balance in advance would also help prevent the need
for imposing assessments during an economic crisis, and assure that any failed
firms will have paid something into the fund. Loss absorption by the shareholders
and creditors would provide clear rules and signals to the market that will be
crucial to restoring market discipline in our financial sector.
Second, a more resilient resolution process also requires greater international
cooperation, as our largest financial firms now span the globe. Under current
resolution protocols, systemically important institutions operate under national
laws that focus on domestic concerns. In a crisis, the domestic resolution laws of
most countries are simply inadequate to deal with the complexities posed by
cross-border financial firms. As a consequence, there is no functioning
international resolution process.
The FDIC has co-chaired a working group under the auspices of the Basel
Committee to evaluate current law and policy and make recommendations for the
future. The report recommends reform and greater harmonization of national
laws to achieve more effective tools to resolve cross-border institutions. It also
recommends specific steps to reduce the likelihood that a failure in one country
will create a crisis in another.
Moving toward a more 'universal' resolution approach will require us to address
some difficult issues – such as how to share the costs of a resolution and how to
provide an international forum to resolve disputes. Today, the lack of any
internationally agreed upon protocols means that ring-fencing or a territorial
approach is the likely outcome. Recognizing this reality, we must consider how
improvements in governance and operational autonomy within an international
holding company structure could enhance the ability to conduct resolutions and
avoid future bailouts.
Living wills are one key initiative supported by the Basel Committee working
group and the G-20 leaders. These plans would be developed in cooperation
with the resolution authority and reviewed and updated annually. Clearly, this
would be helpful to any future receiver. But I believe they also would be of
immense assistance to financial institutions themselves by highlighting
dependencies, risks, and ways to improve their own resiliency in a crisis.
Tougher bank capital standards needed
Third, stronger bank capital standards also are urgently needed. There's an
emerging consensus among policymakers around the world on this point. I'm
encouraged by some of the capital reform discussions under way in the Basel
Committee. Yet while international regulators certainly are "talking the talk", it is
far too early to declare victory.
Despite almost universal agreement the Basel I-based capital requirements were
too low, bank supervisors around the world are diligently implementing a rule
designed to lower those requirements still more. I refer to the advanced
approaches of Basel II. The advanced approaches were designed at a time when
confidence in the reliability of banks' internal models and risk estimates went
almost unchallenged. Banks outside the U.S. have been reporting lower capital
requirements from Basel II even during the depths of the current downturn, when
the risk estimates driving those requirements are surely as pessimistic as they
will ever be.
There is little doubt that there will be eye-popping reductions in required capital
when the good times return to banking. The obvious lesson of the crisis is that
we need to strengthen capital standards at our large banks, not weaken them.
From the FDIC's perspective, banks may not use the advanced approaches to
lower their capital. I expect our supervisors to require the general risk-based
capital requirements to serve as a floor under the advanced approaches, as a
condition of any bank's approval. For now, that means Basel I will serve as a
floor. Once we finalize the new rules for the standardized approach under Basel
II, I anticipate that will serve as a new higher floor.
To repeat: large banks today need more capital, not less.
Incentives to reduce size and complexity
The fourth and final major task in creating a new resolution process is
considering alternative measures that will curb the unbridled growth and
complexity of large, systemically important firms.
One way to achieve this is to significantly raise the cost of being too big or
interconnected. Institutions deemed to pose a systemic risk by virtue of their size
or activities should be subject to higher capital and liquidity requirements – as
well as higher deposit insurance premiums – commensurate with the risks they
pose to the system and the competitive benefits they derive from their unique
In addition, large financial holding companies should be subject to tougher
prompt corrective action standards under U.S. law. And they should be subject to
holding company capital requirements that are no less stringent than those for
insured banks. Off-balance-sheet assets and conduits, which turned out to be
not-so-remote from their parent organizations in the recent crisis, should be
counted and capitalized as on-balance-sheet risks.
As you know, Congress is tackling these very serious issues. The FDIC is
working closely with Chairman Barney Frank in developing a responsible
approach that will end bail-outs, promote competition and restore market
discipline for our largest institutions. I'm very pleased with the progress to date in
the House Financial Services Committee toward ending too big to fail.
It is my understanding Chairman Frank's proposed legislation will be
strengthened. Including certain areas: the elimination of assistance to specific
open firms so that firms that fail are closed; a ban on capital investments so that
in the future government will not take an ownership interest in financial
institutions; a resolution process that makes shareholders and creditors, not
taxpayers, bear the losses; a pre-funded systemic resolution fund paid by the
largest financial firms, to provide working capital for orderly resolutions; and a
higher standard for both the FDIC and the Federal Reserve to provide support to
healthy institutions in the event of a systemic meltdown of the type that we saw
Chairman Frank will conclude his committee work next week. And I believe the
House will consider this tough legislative proposal in December.
We've had too many years of unfettered risk-taking, and too many years of
government subsidized risk. It's time we changed the rules of the game. It's time
we closed the book on the doctrine of too big to fail. Only by instituting a credible
resolution process and removing the existing incentives for size and complexity
can we limit systemic risk, and the long-term competitive advantages and public
subsidy it confers on the largest institutions.
September 24, 2009
Small Banks Dip Toes into IPO Waters
By Marissa Fajt
A small Florida bank raised $70 million through an initial public offering Wednesday, in
what is believed to be the first such deal in the banking sector in two years.
With another one on the way from a Texas bank, some industry observers said more privately
held companies could be encouraged to test the thawing capital markets now.
Though none predict an IPO onslaught, they called the warm reception for 1st United
Bancorp in Boca Raton notable, given that Florida is among the states hardest hit by the real
estate meltdown. The $633 million-asset bank even had enough investor interest to upsize
the offering; it initially sought $50 million.
Rudy Schupp, its president and chief executive officer, said 1st United wanted the capital
immediately to buy struggling or failed banks in its home state. But he acknowledged that
general market conditions for IPOs are less than ideal.
"It was probably a brave thing to do, and it is probably timing that many would not choose,"
Schupp said. "But from our perspective, the opportunity for growth is now."
1st United started the process of going public earlier this year, and several lawyers and
investment bankers said more banks are likely to do so now that the flow of capital into the
industry is picking up.
One IPO is already in the works from the $4.4 billion-asset PlainsCapital Corp. in Dallas. It
filed with the Securities and Exchange Commission in August to raise up to $140 million.
PlainsCapital executives would not discuss the offering.
Before 1st United, the most recent IPO in the banking industry had been from Encore
Bancshares Inc. in Houston in July 2007, according to information provided by Stifel,
Nicolaus & Co. Encore raised $41.6 million.
But the capital crunch is not isolated to banks. Over the past two years the IPO market has
slowed down across all industries. According to data from IPOfinancial.com, 23 IPOs have
priced so far this year, versus 43 in the same period last year and 144 in 2007.
David Menlow, the president of IPOfinancial.com, said it appears the market is beginning to
rebound. There were nine deals scheduled to price this week.
"This week is the kickoff to what we expect to be a fairly respectable fourth quarter," Menlow
Some said other banks are likely to come to market.
"We think there will be more to come," said Will Luedke, a partner in the Houston office of
the law firm Bracewell & Giuliani LLP. "It is abundantly clear now, either through a couple
IPOs or a number of private placements, there is capital for banks. We are convinced that
capital is available." But others contend that 1st United was an exception to the IPO freeze.
"I think they were in a unique position," said Jack Greeley, an attorney with Smith
MacKinnon Pak in Orlando. "I don't think in today's environment you will start to see a
Most agreed that the ones who succeed in finding investors will likely have a similar profile to
1st United: a clean balance sheet, a good standing with regulators and the chance to use the
capital for acquisitions.
"It is a very selective market," said Ben Plotkin, the vice chairman of Stifel, Nicolaus. "You
have to have a company that is clean and has an experienced management team and has
shown an ability to do deals and leverage the capital. It is a positive sign for the market, but
not a green light for all." (Stifel was the lead manager and sole book runner for the 1st
Some industry observers said 1st United's stock sale does not fit the standard definition on an
IPO because its shares had been on the pink sheets. However, others familiar with the IPO
market disagreed with that assessment, arguing that the company has never done a public
offering previously and had virtually no stock trades.
Schupp said the company had to register after it bought the $180 million-asset Equitable
Bank in Fort Lauderdale last year for $55.6 million in cash and stock. That pushed the
number of shareholders above the threshold for a private company.
In the offering Wednesday, 1st United sold its shares at $5 each, a slight discount to tangible
On Wednesday the shares closed at $6.10. Schupp said the management of 1st United has
experience with acquisitions and plans to use it.
The company's three top executives have overseen 31 bank deals in their careers. They also
have completed two acquisitions since joining 1st United in 2003, when it had $68 million of
Besides Equitable, the company also acquired most of Citrus Bank from CIB Marine
Bancshares Inc. in Pewaukee, Wis. 1st United took the Citrus branches, $188 million in
deposits and about $40 million in loans in the deal.
Now the company intends to look for acquisitions in markets where the leadership team -
which includes Warren S. Orlando, the chairman, and John Marino, the chief operating
officer and chief financial officer - have operated banks before. Before joining 1st United,
Orlando co-founded and was CEO and president of the former 1st United Bancorp in Boca
Raton, which sold itself to Wachovia Corp. in 2002. That company had grown to $1.2 billion
in assets through 11 acquisitions before being sold. Marino was the chief financial officer
"In our past, we stretched from the Keys to Orlando and over to Tampa - central and south
Florida," Schupp said. "All those markets are appealing to us. Ideally, in this business, it
makes sense to stay close to your legacy markets.
Speeches & Testimony
Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on
Examining the State of the Banking Industry before the Subcommittee on Financial
Institutions, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Room 538,
Dirksen Senate Office Building
October 14, 2009
Chairman Johnson, Ranking Member Crapo and members of the Subcommittee, I appreciate the
opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) regarding the
condition of FDIC-insured institutions and the deposit insurance fund (DIF). While challenges
remain, evidence is building that financial markets are stabilizing and the American economy is
starting to grow again. As promising as these developments are, the fact is that bank
performance typically lags behind economic recovery and this cycle is no exception. Regardless
of whatever challenges still lie ahead, the FDIC will continue protecting insured depositors as we
have for over 75 years.
The FDIC released its comprehensive summary of second quarter 2009 financial results for all
FDIC-insured institutions on August 27. The FDIC's Quarterly Banking Profile provided evidence
that the difficult and necessary process of recognizing loan losses and cleaning up balance
sheets continues to be reflected in the industry's bottom line. As a result, the number of problem
institutions increased significantly during the quarter. We expect the numbers of problem
institutions to increase and bank failures to remain high for the next several quarters.
My testimony today will review the financial performance of FDIC-insured institutions and
highlight some of the most significant risks that the industry faces. In addition, I will discuss the
steps that we are taking through supervisory and resolutions processes to address risks and to
reduce costs from failures. Finally, I will summarize the condition of the DIF and the recent steps
that we have taken to strengthen the FDIC's cash position.
In the wake of the financial crisis of last Fall and the longest and deepest recession since the
1930s, the U.S. economy appears to be growing once again. Through August, the index of
leading economic indicators had risen for five consecutive months. Consensus forecasts call for
the economy to grow at a rate of 2.4 percent or higher in both the third and fourth quarters. While
this relative improvement in economic conditions appears to represent a turning point in the
business cycle, the road to full recovery will be a long one that poses additional challenges for
While we are encouraged by recent indications of the beginnings of an economic recovery,
growth may still lag behind historical norms. There are several reasons why the recovery may be
less robust than was the case in the past. Most important are the dislocations that have occurred
in the balance sheets of the household sector and the financial sector, which will take time to
Households have experienced a net loss of over $12 trillion in net worth during the past 7
quarters, which amounts to almost 19 percent of their net worth at the beginning of the period.
Not only is the size of this wealth loss unprecedented in our modern history, but it also has been
spread widely among households to the extent that it involves declines in home values. By some
measures, the average price of a U.S. home has declined by more than 30 percent since mid-
2006. Home price declines have left an estimated 16 million mortgage borrowers "underwater"
and have contributed to an historic rise in the number of foreclosures, which reached almost 1.5
million in just the first half of 2009.1
Household financial distress has been exacerbated by high unemployment. Employers have cut
some 7.2 million jobs since the start of the recession, leaving over 15 million people unemployed
and pushing even more people out of the official labor force. The unemployment rate now stands
at a 26-year high of 9.8 percent, and may go higher, even in an expanding economy, while
discouraged workers re-enter the labor force.
In response to these disruptions to wealth and income, U.S. households have begun to save
more out of current income. The personal savings rate, which had dipped to as low as 1.2 percent
in the third quarter of 2005, rose to 4.9 percent as of second quarter 2009 and could go even
higher over the next few years as households continue to repair their balance sheets. Other
things being equal, this trend is likely to restrain growth in consumer spending, which currently
makes up more than 70 percent of net GDP.
Financial sector balance sheets also have undergone historic distress in the recent financial crisis
and recession. Most notably, we have seen extraordinary government interventions necessary to
stabilize several large financial institutions, and now as the credit crisis takes its toll on the real
economy, a marked increase in the failure rate of smaller FDIC-insured institutions. Following a
five-year period during which only ten FDIC-insured institutions failed, there were 25 failures in
2008 and another 98 failures so far in 2009.
In all, FDIC-insured institutions have set aside just over $338 billion in provisions for loan losses
during the past six quarters, an amount that is about four times larger than their provisions during
the prior six quarter period. While banks and thrifts are now well along in the process of loss
recognition and balance sheet repair, the process will continue well into next year, especially for
commercial real estate (CRE).
Recent evidence points toward a gradual normalization of credit market conditions amid still-
elevated levels of problem loans. We meet today just one year after the historic liquidity crisis in
global financial markets that prompted an unprecedented response on the part of governments
around the world. In part as a result of the Treasury's Troubled Asset Relief Program (TARP), the
Federal Reserve's extensive lending programs, and the FDIC's Temporary Liquidity Guarantee
Program (TLGP), financial market interest rate spreads have retreated from highs established at
the height of the crisis last Fall and activity in interbank lending and corporate bond markets has
However, while these programs have played an important role in mitigating the liquidity crisis that
emerged at that time, it is important that they be rolled back in a timely manner once financial
market activity returns to normal. The FDIC Board recently proposed a plan to phase out the debt
guarantee component of the Temporary Liquidity Guarantee Program (TLGP) on October 31st.
This will represent an important step towards putting our financial markets and institutions back
on a self-sustaining basis. And even while we seek to end the various programs that were
effective in addressing the liquidity crisis, we also recognize that we may need to redirect our
efforts to help meet the credit needs of household and small business borrowers.
For now, securitization markets for government-guaranteed debt are functioning normally, but
private securitization markets remain largely shut down. During the first seven months of 2009,
$1.2 trillion in agency mortgage-backed securities were issued in comparison to just $9 billion in
private mortgage-backed securities. Issuance of other types of private asset-backed securities
(ABS) also remains weak. ABS issuance totaled only $118 billion during the first 9 months of
2009 in comparison to $136 billion during the first 9 months of 2008 and peak annual issuance of
$754 billion in 2006.
Significant credit distress persists in the wake of the recession, and has now spread well beyond
nonprime mortgages. U.S. mortgage delinquency and foreclosure rates also reached new historic
highs in second quarter of 2009 when almost 8 percent of all mortgages were seriously
delinquent. In addition, during the same period, foreclosure actions were started on over 1
percent of loans outstanding.2 Consumer loan defaults continue to rise, both in number and as a
percent of outstanding loans, although the number of new delinquencies now appears to be
tapering off. Commercial loan portfolios are also experiencing elevated levels of problem loans
which industry analysts suggest will peak in late 2009 or early 2010.
Recent Financial Performance of FDIC-Insured Institutions
The high level of distressed assets is reflected in the weak financial performance of FDIC-insured
institutions. FDIC-insured institutions reported an aggregate net loss of $3.7 billion in second
quarter 2009. The loss was primarily due to increased expenses for bad loans, higher noninterest
expenses and a one-time loss related to revaluation of assets that were previously reported off
balance sheet. Commercial banks and savings institutions added $67 billion to their reserves
against loan losses during the quarter. As the industry has taken loss provisions at a rapid pace,
the industry's allowance for loan and lease losses has risen to 2.77 percent of total loans and
leases, the highest level for this ratio since at least 1984. However, noncurrent loans have been
growing at a faster rate than loan loss reserves, and the industry's coverage ratio (the allowance
for loan and lease losses divided by total noncurrent loans) has fallen to its lowest level since the
third quarter of 1991.3
Insured institutions saw some improvement in net interest margins in the quarter. Funding costs
fell more rapidly than asset yields in the current low interest rate environment, and margins
improved in the quarter for all size groups. Nevertheless, second quarter interest income was 2.3
percent lower than in the first quarter and 15.9 percent lower than a year ago, as the volume of
earning assets fell for the second consecutive quarter. Industry noninterest income fell by 1.8
percent compared to the first quarter.
Credit quality worsened in the second quarter by almost all measures. The share of loans and
leases that were noncurrent rose to 4.35 percent, the highest it has been since the data were first
reported. Increases in noncurrent loans were led by 1-to-4 family residential mortgages, real
estate construction and development loans, and loans secured by nonfarm nonresidential real
estate loans. However, the rate of increase in noncurrent loans may be slowing, as the second-
quarter increase in noncurrent loans was about one-third smaller than the volume of noncurrent
loans added in first quarter. The amount of loans past-due 30-89 days was also smaller at the
end of the second quarter than in the first quarter. Net charge-off rates rose to record highs in the
second quarter, as FDIC-insured institutions continued to recognize losses in the loan portfolios.
Other real estate owned (ORE) increased 79.7 percent from a year ago.
Many insured institutions have responded to stresses in the economy by raising and conserving
capital, some as a result of regulatory reviews. Equity capital increased by $32.5 billion (2.4
percent) in the quarter. Treasury invested a total of $4.4 billion in 117 independent banks and
bank and thrift holding companies during the second quarter, and nearly all of these were
community banks. This compares to a total of more than $200 billion invested since the program
began. Average regulatory capital ratios increased in the quarter as well. The leverage capital
ratio increased to 8.25 percent, while the average total risk-based capital ratio rose to 13.76
percent. However, while the average ratios increased, fewer than half of all institutions reported
increases in their regulatory capital ratios.
The nation's nearly 7,500 community banks -- those with less than $1 billion in total assets -- hold
approximately 11 percent of total industry assets. They posted an average return on assets of
negative 0.06 percent, which was slightly better than the industry as a whole. As larger banks
often have more diverse sources of noninterest income, community banks typically get a much
greater share of their operating income from net interest income. In general, community banks
have higher capital ratios than their larger competitors and are much more reliant on deposits as
a source of funding.
Average ratios of noncurrent loans and charge-offs are lower for community banks than the
industry averages. In part, this illustrates the differing loan mix between the two groups. The
larger banks' loan performance reflects record high loss rates on credit card loans and record
delinquencies on mortgage loans. Community banks are important sources of credit for the
nation's small businesses and small farmers. As of June 30, community banks held 38 percent of
the industry's small business and small farm loans.4 However, the greatest exposures faced by
community banks may relate to construction loans and other CRE loans. These loans made up
over 43 percent of community bank portfolios, and the average ratio of CRE loans to total capital
was above 280 percent.
As insured institutions work through their troubled assets, the list of "problem institutions" -- those
rated CAMELS 4 or 5 -- will grow. Over a hundred institutions were added to the FDIC's "problem
list" in the second quarter. The combined assets of the 416 banks and thrifts on the problem list
now total almost $300 billion. However, the number of problem institutions is still well below the
more than 1,400 identified in 1991, during the last banking crisis on both a nominal and a
percentage basis. Institutions on the problem list are monitored closely, and most do not fail. Still,
the rising number of problem institutions and the high number of failures reflect the challenges
that FDIC-insured institutions continue to face.
Risks to FDIC-Insured Institutions
Troubled loans at FDIC-insured institutions have been concentrated thus far in three main areas -
- residential mortgage loans, construction loans, and credit cards. The credit quality problems in
1-to-4 family mortgage loans and the coincident declines in U.S. home prices are well known to
this Committee. Net chargeoffs of 1- to 4-famly mortgages and home equity lines of credit by
FDIC-insured institutions over the past two years have totaled more than $65 billion. Declining
home prices have also impacted construction loan portfolios, on which many small and mid-sized
banks heavily depend. There has been a ten-fold increase in the ratio of noncurrent construction
loans since mid-year 2007, and this ratio now stands at a near-record 13.5 percent. Net charge-
offs for construction loans over the past two years have totaled about $32 billion, and almost 40
percent of these were for one-to-four family construction.
With the longest and deepest recession since the 1930s has come a new round of credit
problems in consumer and commercial loans. The net charge-off rate for credit card loans on
bank portfolios rose to record-high 9.95 percent in the second quarter. While stronger
underwriting standards and deleveraging by households should eventually help bring loss rates
down, ongoing labor market distress threatens to keep loss rates elevated for an extended
period. By contrast, loans to businesses, i.e., commercial and industrial (C&I) loans, have
performed reasonably well given the severity of the recession in part because corporate balance
sheets were comparatively strong coming into the recession. The noncurrent loan ratio of 2.79
percent for C&I loans stands more than four times higher than the record low seen in 2007, but
remains still well below the record high of 5.14 percent in 1987.
The most prominent area of risk for rising credit losses at FDIC-insured institutions during the
next several quarters is in CRE lending. While financing vehicles such as commercial mortgage-
backed securities (CMBS) have emerged as significant CRE funding sources in recent years,
FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding,
and their exposure to CRE loans stands at an historic high. As of June, CRE loans backed by
nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2 percent of total loans and