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Creative Destruction: US Bancorp Buys Failed Institution in TN

rcwhalen's picture




 

 “I want to be a Consumer
And do my duty well;
For that is the thing that’s needed most,
I’ve heard Economists tell.
I’ve made up my mind,” the lad was heard,
As he lit a cigar, to say;
“I want to be a Consumer, Sir,
And I want to begin today.”

Patrick Barrington
Quoted from The Failure of the New Economics, Henry Hazlitt (1959)

On Friday the FDIC reminded us that the banking crisis continues, closing and selling several institutions in arranged transactions.   This may seem gloomy news, but please note that the shareholders of the acquiring institutions just made a lot of money.   Quietly, deliberately and without the aid of investment banks, several dead banks got sold by the FDIC’s receivership for pennies on the dollar of assets.

BankEast, Knoxville, Tennessee, was closed by the Tennessee Department of Financial Institutions, which appointed the FDIC as receiver.  To protect the depositors, the FDIC entered into a purchase and assumption agreement with U.S. Bank National Association, Cincinnati, Ohio, to assume all of the deposits of BankEast. 

When the FDIC becomes receiver of a bank, the previous owner loses control.  The parent bank holding company of BankEast may be forced into a restructuring and/or liquidation since it has lost the investment in the subsidiary bank as a result of the closure.   The results of the estate of the dead BankEast will be visible on the FDIC web site at the link below: 

<http://www.fdic.gov/bank/individual/failed/bankeast.html>

BankEast Corporation was rated “F” by The IRA Bank Monitor as of Q3 2011, with a Bank Stress Index (“BSI”) score of 22.7 vs. the industry average of 1.7.    Current period scores for Capital and Efficiency showed elevated stress, but defaults were below industry average levels. 

Even today, with the US banking sector recovering, loss rates as measured using data from the FDIC are running 3x the levels of 1995, the benchmark year of the BSI.   The peak  BSI score for the industry as a whole during the crisis was over 20 in Q4 2009.    That is one reason why IRA still rates more than 1,100 banks “F” as of Q3 2011:

<http://us1.institutionalriskanalytics.com/pub/IRAFactSheet.asp>

As of September 30, 2011, BankEast had approximately $272.6 million in total assets and $268.8 million in total deposits. In addition to assuming all of the deposits of the failed bank, U.S. Bank National Association agreed to purchase essentially all of the assets, according to the FDIC.  US Bank is the lead unit of US Bancorp (USB), which was rated “A” by The IRA Bank Monitor as of Q3 2011.

The estimated loss to the FDIC on this resolution and sale is $75 million or about 30% of total assets, a rate which tracks the results seen so far in the crisis.  Compared with the 11% loss rate on insured banks seen during the S&L crisis in the 1980s, the loss rates to the FDIC Deposit Insurance Fund on bank failures since 2007 are running about 3x that rate, a measure of the poor asset quality of many troubled banks.

BankEast was rated “F” going back to the start of 2009, when default rates were running well above peer.   In June 2010, for example, BankEast reported 720bp of default on an annualized basis, nose bleed levels of charge-offs above the 550bp peak losses of Citigroup (“C”), which was most recently rated “C” by The IRA Bank Monitor.    You can read the ratings history of BankEast and other failed banks on IRA’s Casuality List page of IRA Forensic Reports on Failed Banks Since January-2008:

< http://us1.irabankratings.com/pub/Forensic.asp>

At the time of closure by TN regulators, the estimated loss caculated by the Economic Capital model of The IRA Bank Monitor for BankEast was 160bp.  The maximum probable loss was 1,395bp, a measure of the instability of the bank’s past loan loss results. By comparison, the MPL for Citigroup in that same period was just 890bp.

In 2009, BankEast still had adequate capital, but by the time the bank reached the closure by the TN banking authorities last week reported capital levels were almost exhausted.  The bank was essentially kept on ice until the FDIC was ready to close it and sell the assets and deposits in a brand new corporate vehicle to US Bank, which paid pennies on the dollar for the assets. 

US Bank states: “The acquisition of the banking operations of BankEast is structured as a whole bank purchase and assumption transaction without a loss share agreement. U.S. Bank conducted extensive credit due diligence, and purchased BankEast for an asset discount of approximately $67.5 million. The transaction is expected to exceed all internal hurdles for financial returns with conservative loan loss assumptions.”

< http://phx.corporate-ir.net/phoenix.zhtml?c=117565&p=irol-newsArticle&ID...

Sweet.  Yet another accretive failed bank transaction for USB shareholders.   Just remember while everyone is wringing their hands and running hither and yon, there are investors making big returns by purchasing the assets of failed banks. 

 

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Sun, 03/11/2012 - 08:04 | 2244568 Gelir
Gelir's picture

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Mon, 01/30/2012 - 01:48 | 2108738 nahshal
nahshal's picture

On Friday the FDIC reminded us that the cyberbanking crisis continues, closing and affairs several institutions in abiding transactions. This may assume black news, but amuse agenda that the shareholders of the accepting institutions just fabricated a lot of money. Quietly, advisedly and after the aid of investment banks, several asleep banks got awash for pennies on the dollar of assets by the FDIC’s receivership.

jogos vestir

Sun, 01/29/2012 - 23:40 | 2108535 GNWT
GNWT's picture

 Just remember while everyone is wringing their hands and running hither and yon, there are investors making big returns by purchasing the assets of failed banks. 

 

Um, okay, do you think I could get a few folks together and snatch it up from USB?

Actually, no, the reason that these are bargains is the same reason Goldman runs the world, namely governement giving assets away to oligarchs at "pennies on the dollar".

Greed knows no bounds, even "commnetators" commenting on great bargain investments.

G

Fri, 02/10/2012 - 05:47 | 2145016 nahshal
nahshal's picture

If the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.mensagens de amizade

Sun, 01/29/2012 - 23:08 | 2108486 HungrySeagull
HungrySeagull's picture

At some point FDIC must itself fail.

It is no other way, not with thousands of banks.

 

It amazes me how specific banks continue to operate when they are REALLY out on a thin limb hanging in the wind.

Mon, 01/30/2012 - 02:29 | 2108794 eatthebanksters
eatthebanksters's picture

Sheila Bair wanted to take down Citi and then found out how much it would cost the FDIC...she balked.

Sun, 01/29/2012 - 23:55 | 2108573 The Monkey
The Monkey's picture

You're right. At some point the FDIC will fail or be unwound. That may be 5 years from now or 500.

The real story here is how the Federal Government is covertly passing dollars to parties of their choosing. This apparenty has been modis operandi throughout our lives but was only brought to light by the financial crisis, much like Bernie Madoff.

Sun, 01/29/2012 - 22:32 | 2108420 ebworthen
ebworthen's picture

So, this cost the taxpayers (FDIC) $75 million and banker investors are "wringing their hands over making money".

Why is this anything other than yet another thing to be pissed off about?

A small bank swallowed up by a big one.

Where is the good in this?

Mon, 01/30/2012 - 00:10 | 2108602 sun tzu
sun tzu's picture

not defending the bankers, but the small bank failed. what else do you want to do?

Mon, 01/30/2012 - 02:30 | 2108796 eatthebanksters
eatthebanksters's picture

Put it out to bid and allow price discovery!

Mon, 01/30/2012 - 00:44 | 2108653 ebworthen
ebworthen's picture

I hear you.

My problem is that if we keep shoveling failure off onto the public dole, no one will ever lose enough, or be pissed off enough, to change things.

"Oh it's FDIC insured, everything is O.K."  Um...not really.

This is a macrocosm of the larger problem; no skin in the game other than socialized losses.  Whoever was running that bank should lose their house, cars, vacation homes, and have their possessions auctioned off.

Don't get me wrong, I think Blankfein, Dimon, Thain, Moynihan, Hank Paulson and every CONgressional representative that voted "Yes" on the bailouts should be first in line.

As long as the "guarantees" keep getting shoveled onto the backs of the populace in a nebulous spider web of obfuscation and that funny number people don't seem to comprehend called the "national debt" keeps getting  relegated to the "How many hamburgers has McDonald's sold" mental zone we are on the road to HELL without comprehending it.

Mon, 01/30/2012 - 00:57 | 2108669 Augustus
Augustus's picture

The FDIC is Insurance for Depositors and funded by a fee from BANKS.  The cost of this failure will be paid by all banks, not the public through the Federal Government.

Mon, 01/30/2012 - 02:32 | 2108800 eatthebanksters
eatthebanksters's picture

Ultimately those fees come out of the consumers pockets...

Mon, 01/30/2012 - 04:41 | 2108866 ebworthen
ebworthen's picture

eatthebanksters is correct.

Banks get money from the FED backdoor at 0.5% to lend out at 3.75% to 29%

Not to mention the bailouts, Fannie/Freddie, IMF, etc, etc.

Cry me a river.

Connect the dots.

Mon, 01/30/2012 - 12:16 | 2109767 Augustus
Augustus's picture

I suspect you have much experience with the 29% rate. 

Fannie and Freddie bailouts hurt the banks as the preferred stock they owned became worthless.  Those bailouts helped the consumer as home loans continued to be available at reasonable rates.

The money lent to the banks under the bailout has almost all been repaid.

Connect the dots.

Mon, 01/30/2012 - 01:46 | 2108735 Schmuck Raker
Schmuck Raker's picture

Correct, though currently underfunded by those same banks, IIRC. Bit like pension funds...

Sun, 01/29/2012 - 22:23 | 2108410 rocker
rocker's picture

Simply said, "Another One Bites the Dust"

Sun, 01/29/2012 - 21:09 | 2108323 El Gordo
El Gordo's picture

I worked on a number of these P&A deals in the 1980's, and it's not always gravy.  Typically there are competing bids for the failed bank assets, and since there is no loss sharing agreement or "put back" arrangement between the acquiring bank and the FDIC, the acquiring bank must be certain that the losses in the portfolio(s), as well as the interest rates, maturities, etc all match up so that the ultimate loss does not exceed the premium paid by FDIC.  I saw one case where the acquiring bank eventually failed due to inadequate due diligence and excessive losses in the acquired institution.  You win some, you lose some.  Overall however, it is probably the biggest government giveaway since the days of building the intercontentinal railroad and all it's spurs.

Sun, 01/29/2012 - 23:43 | 2108543 GNWT
GNWT's picture

Typically there are competing bids for the failed bank assets

 

That was in the 80's when people like William Black were around to stop funny business.

Funny what Charels Keating's perp walk did for bankers honesty.

If his employees like Senator Mc L had followed, probably would not be in the mess we are in today, but...

Any similarity between th e80's and the ongoing banker's rape of america is purely coincidental.

 

G

Mon, 01/30/2012 - 00:02 | 2108588 The Monkey
The Monkey's picture

You would think the Fed, in it's efforts be transparent, would have had a lot more to say about it's recent Maiden Lane transaction. Nope (:

We dig our own graves.

Sun, 01/29/2012 - 19:17 | 2108168 disabledvet
disabledvet's picture

Hahahaha. Sure...go for it. Can banks make money organically anymore or are they all forever trapped in a Dimonesque "we're so rich we're poor" tack? Obviously no one is arguing everyone is still stuck in this Depression. Some (obviously the non bailout New York set comes to mind) never felt it to begin with.

Mon, 01/30/2012 - 02:39 | 2108805 eatthebanksters
eatthebanksters's picture

The TBTF banks are too big to make money the old fashioned way, on the spreads between their leveraged borrowing cost and lending rates.  They have t generate fees based on moving incredible volumes of money to survive, so every time one of their scams runs out of juice, they have a new one ready to go.  The problem is the scams keep getting more complicated and risky, how else can they contiually fool and rip of the public.  Just ask Corzine and MFG...3 months and they still don't know where the money went...black hole to the nth dimension.  Time to shut these TBTF banks down and replace them will many many smaller banks that can make a living doing portfolio loans because their execs make money the way bankers did 3 years ago...that way we will get money flowing to main street again.  

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