“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> [8]
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> [9]
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> [10]
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... [11]
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.
