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Pritzger: Where Did You Hear That Name? 

President Obama has nominated long-time supporter, prominent fundraiser, and friend, Penny Pritzger, to be Secretary of Commerce, a position that has been vacant for almost a year. If her name sounds familiar, don’t be surprised.

The Pritzger family is well known in Chicago business circles as the owners of Hyatt Hotels Corp. According to Forbes magazine, ten members of the family are individually wealthy enough to be on the Forbes 400 list. Penny’s net worth is estimated at $1.85 billion. She has not rested on the laurels of her predecessors, though. Ms Pritzger holds both an MBA and a Law Degree from Stanford.

If you don’t recognize her from her fortune, you may recall that she was considered for this same position in 2008. She withdrew from the running that time amid public outcry. According to the The New York Times, the position has remained vacant so long because the vetting of all her assets took that long.

It’s no secret that the family has tax-free investments in offshore trusts. The overseas tax shelters were set-up long before Penny  took the reigns (some when she only 4 years old). While these tax shelters are illegal now, the Pritzger’s were able to take advantage of an old loophole in the tax laws that has since been closed. They would be illegal today but were grandfathered in.

There’s one more place that you may have heard the Pritzger name: right here in the pages of JRN. The Pritzger family owned 50% of Superior Bank FSB, Chicago, which failed in July 2001. Penny Pritzger had stepped down as chairman in 1994, but her influence still permeated the bank.

As we reported in 2001, “What got Superior into trouble was a combination of making high-interest consumer loans to applicants who would have been denied elsewhere, excessive residual assets and brokered deposits” (JRN 18:30). Superior Bank could have (should have) been saved, though. Under  Penny’s guidance, the Pritzger family and the other 50% owner, Alvin Dworman, had a deal with the Office of Thrift Supervision (OTS) to recapitalize the bank. No one outside of those walls can know for certain what transpired after that. What we do know is that the OTS forced Superior to write down many assets that had been overvalued on its books. This rendered the bank “Significantly Undercapitalized”, but still salvageable. Shortly thereafter, the Pritzgers called off the recapitalization. That was the end of Superior.

At the time of its failure, Superior Bank had $42.9 million in uninsured deposits including one depositor who reportedly had $1 million in an IRA. Most was lost. Some customers reported they were lulled into a false sense of security because of the “pristine” Pritzger name.

The FDIC ended up going after Pritzger, Dworman, and Ernst and Young for the failure. Without admitting any culpability, Penny Pritzger settled for $460 million, far more than the $255.5 million she had initially pledged to recapitalize the $2.1 billion asset thrift.

This was the second bank failure bearing the Pritzger and Dworman names. They  were part of a partnership that controlled River Bank America, a $1.5 billion bank liquidated in the 1990’s. Ms Pritzger may not have had day to day dealings at River Bank; she did at Superior.

Penny Pritzger has some high profile support. Jay Timmons, president/CEO of the National Association of Manufacturers, says of Pritzger:  “an extensive business back-ground ...understands what it takes for businesses to create jobs. ...comes from a family with a rich history in manufacturing ...partnered with manufacturers on important initiatives to address our nation’s critical need for skilled workers ...understands skills gap.” 

Roger Dow, president/CEO of the U.S. Travel Association, adds “Pritzger is a proven professional who is more than qualified to lead the U.S. Commerce Department.”

Although the responsibilities of Secretary of Commerce to promote growth and development of U.S. business interests should match her skill set well, we will  be keenly interested to see if she acknowledges her role in the Superior failure at her confirmation hearing.

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From: Jumbo Rate News 30:17 - May 6, 2013

Loan Concentrations: The Good, The Bad and the Ugly

As April came to an end, regulators closed two more banks, bringing the total bank closures for the first four months of 2013 up to ten. In each case, the banks reported a leverage capital ratio of less than 2% making them “Critically Undercapitalized”. Regulators don’t have much leeway. When a bank gets this bad, it has to be shut down. In fact there are currently three others that are “Critically Undercapitalized” and will probably have their lights extinguished soon. But one of the ten that was closed this year, Zero-Star Heritage Bank of North Florida, Orange Park (closed April 19th), was a dead bank walking for over two years.

In August 2009, after being on Bauer’s Troubled and Under-capitalized Bank Report for three quarters, Heritage Bank  consented to a Cease and Desist Order with the FDIC. The agreement covered several items, one of which was its loan concentration risk. Upon further investigation, we found that nearly 70% of Heritage Bank’s loans were invested in Commercial Real Estate (CRE).

Not only that, but the percentage was increasing. As long as a bank has proper underwriting standards and the risk-characteristics of its CRE portfolio are manageable, having a large concentration of CRE loans is a perfectly good way for a bank to make money. If not, however, the bank could become very vulnerable to cyclical CRE markets.

Such was the case with Heritage Bank of North Florida. In addition to being “Critically Undercapitalized”, at year-end 2012, Heritage Bank of North Florida had a non-performing asset ratio of 22.26% and reserves to delinquencies of just 19.77%. With numbers like these, it was really just a matter of time before a buyer was sought out.

In this case it was ****First Atlantic Bank of Jacksonville, FL that came to the rescue, acquiring all deposits and essentially all of the failed bank’s assets. The estimated cost to the deposit insurance fund is $30.2 million.

Our enquiring minds wanted to know what other banks might be in similar situation. Based on December 31, 2012 financial data, 932 banks have at least 50% of total loans invested in CRE. If you happen to be looking for a CRE loan, it would perfectly reasonable to begin your search with them. You can find many of them easily in Bauer’s Top 100 Banks in Over 100 Categories, 4th Edition, published last month (JRN 30:13).

But don’t stop there. Of these 932 high percentage CRE lenders, 230 have a nonperforming asset ratio greater than 5%, and 152 of those have loan loss reserves covering less than 50% of delinquent loans.

You can do the same thing if you are looking for a home loan. Search Bauer’s Top 100 Banks in Over 100 Categories, 4th Edition to get your starting point. There are currently 1,210 banks have at least 50% of total loans invested in residential real estate. Of those, 106 have a nonperforming asset ratio greater than 5%, and 89 of those have loan loss reserves covering less than 50% of delinquent loans. You may want avoid the banks located on our Troubled and Undercapitalized Bank Report (rated 2-Stars or below) but you still have a large pool to select from. Other data of interest that can be found in Bauer’s Top 100 Banks in Over 100 Categories:

¨ Banks and Thrifts with the longest consecutive number of 5-Star Ratings; 

¨ Those with the highest Leverage Capital Ratio; 

¨ With the Lowest Texas Ratio; 

¨ Most Bank-Owned Real Estate (generally foreclosed property); 

¨ Highest 2012 Income; 

¨ In addition to concentrations of different types of loans (construction, farm, residential, CRE, C&I) the book also lists the banks with the highest dollar volume of both consumer and C&I loans; 

¨ All lists are also provided on a CD with hyperlinks to the banks. 

Most of the lists in this book are divided by geographic region. For example: most consumer loans in the Northeast. But for others, it was more appropriate to compare by asset size. Then a few are stand alone lists—just the top 100 in the country. Star ratings are not listed in the Book but can be found free anytime at: www.bauerfinancial.com. For more information, call 1.800.388.6686. 

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From: Jumbo Rate News 30:16 - April 29, 2013

U.S. Currency, Then and Now

A newly redesigned $100 bill, originally scheduled to start circulating February 10, 2011, will finally make its debut on October 8th of this year. The new design features a number of enhanced security measures which  include a 3-D security ribbon with images of bells and 100s that change from one to the other as the bill is tilted. It also features a bell in the inkwell on the front of the note.

Challenges to banknote design are two-fold: A) they must be extremely difficult to counterfeit and B) they must be compatible with the millions of cash accepting and dispensing machines (ATMs) around the  world. This new $100 bill has the most advanced security features of any U.S. denomination. Its estimated life expectancy is 15 years, but rest assured, the old design will work perfectly well as long as you have it.

The last new bill added to circulation in the U.S. was a redesigned $5 bill on March 13, 2008. The first of these was spent at the gift shop of President Lincoln’s Cottage at the Soldiers’ Home in Washington, DC. The cottage had recently been restored and opened to the public. The estimated life expectancy of a $5 note is just 4.9 years.

The $5 and $100 notes finish the series of  “colorful” notes that came out beginning with the $20 bill in October 2003. This was the first to feature background colors other than standard black and green that we were so accustomed to. Touted as the most secure (to date) against counterfeiting, the $20 bill has  hints of green, peach and blue in the background. Life expectancy of a $20 bill is 7.7 years.

The colorful $50 note made its debut in September 2004 followed by the $10 note in March 2006. In addition to the new colors, these bills have color-shifting ink, security threads and watermarks that were not present in previous versions.

Paper currency in the U.S. dates back to 1861 when workers had to sign, cut and trim by hand. It wasn’t long before a mechanized process was set up in the basement of the Treasury building. However, the basic designs of all denominations we use today (except the $1 and $2 bills) were not adopted until 1928. The motto “In God We Trust”, which has come under some scrutiny lately, came much later. It first appeared on coins in 1864 but the inscription wasn’t mandated by law until 1955. Since then it has appeared on all paper and coin denominations.

George Washington will always be associated with the $1 bill, but his was not the first face to grace the note.  From 1861 to 1869, the portrait of Salmon P. Chase was featured on the $1 bill. Mr. Chase was Secretary of the Treasury from 1861–1864. President Washington’s portrait first appeared in the 1869 version. The $1 bill comprises roughly 45% of all currency production by the Bureau of Printing and Engraving. It has a life expectancy of 5.9 years.

Our nation’s first Treasury Secretary, Alexander Hamilton (1789—1795) was featured on the first $2 bills  - issued in 1862. Like the $1 note, that too was changed in 1869 when Hamilton was replaced by Thomas Jefferson. A newly designed $2 note was put into circulation in 1976 in celebration of the country’s bicentennial. Since it is not widely circulated, there is no life expectancy calculated for these bills.

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From: Jumbo Rate News 30:15 - April 22, 2013

 What’s In Bauer’s Star-Ratings? Why Should You Care?

Last week’s chart showed that a bank’s leverage capital ratio doesn’t always rise and fall proportionally with star-ratings. Often, regulatory capital ratios are not a leading indicator of a bank’s health but a lagging one.

Take GulfSouth Private Bank, Destin, FL, for example, which failed on October 19, 2012. By regulatory capital standards, it was “Well-Capitalized” just one year before it failed. If you look at the trends of the bank, however, you see it was losing money for its last three years and delinquent loans and  repossessed assets kept climbing. (Its nonperforming assets  ratio was 21.5% just before it failed.) GulfSouth earned Zero-Stars from  Bauer since the fourth quarter of 2010.

SmartBank, Pigeon Forge, TN acquired all deposits, including brokered accounts (which is unusual). If you already had deposits at SmartBank, they remained separately insured until last week.

A suitable acquirer was not found in the failure of New City Bank, Chicago, IL.  In this case, the FDIC mailed checks to depositors for the insured portions. In order to retrieve any deposits over the insurance limit, depositors had to file a claim as an unsecured creditor within 90 days of the bank’s closing.

New City Bank was considered “Well-Capitalized” less than 9 months before it was shut down, but the writing was on the wall. Like GulfSouth, New City had been posting repeated losses and its nonperforming assets ratio was 21% shortly before it was closed.

If your deposits are under the $250,000 insurance limit, you may not care what your bank’s rating is or even if it fails. There are still things you should be aware of. If you decide to keep deposits in a poorly rated institution, at least you will have made an informed choice.

To begin with, verify that all of your deposits really are fully insured. Simple, right? But there are things you may not have considered. Many consumers title their accounts in ways they can get more than the standard deposit insurance. Consider this: You and your spouse have a joint account at the bank on Main Street with $400,000 fully-insured. If you or your spouse die, the survivor is left with $150,000 uninsured after a 6-month grace period.  If the bank happens to fail before the surviving spouse has a chance to move it, the excess is at risk.

Let’s say you have nowhere near that amount in any bank, but you switch jobs and decide to move your retirement funds,  or maybe you sell your house. For convenience you park the money at the bank that knows you …just long enough to get it rolled-over into a new retirement account ...Get the point?

Okay, so you’re sure your deposits are fully insured and, you have no intention of selling your home or moving your retirement. In fact, maybe you are already retired and your pension check gets deposited into your account every month without a hitch. Except, if the bank was New City and was closed down without an acquirer, there is no place for that check to go.

The same goes for any bills that you have automatically set up to pay from your checking account. Anything set up on the internet will have to be changed, but it’s not just virtual; any paper checks outstanding could be returned as unpaid if the bank fails and is shuttered. This  can trigger fees or worse.

For CD holders, an acquiring bank can lower the interest rate you are receiving although you will have a grace period in which you can withdraw the CD without penalty. Borrowers can lose their line of credit or have to start from scratch if a loan application is still pending. These are all things to consider above and beyond federal deposit insurance.

Federal guarantees are great but they should not be an excuse for complacency. The bottom line is, you are responsible for your own bottom line.

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From: Jumbo Rate News 30:14 - April 15, 2013

Capital Alone is an Insufficient Barometer

In various attempts to avert another banking crisis down the road, national and international regulators and lawmakers are looking at several new requirements for banks. The first and foremost consideration is capital.

Capital is a very important indicator and an integral part of Bauer’s star-rating system, but it isn’t a great predictor of future performance. It is possible to have abundant capital and still face difficulties in other areas. 

In fact, nearly half of all U.S. banks had a leverage capital ratio of 10% or greater  at year-end 2007 (much higher than any current requirements). Essentially the same percentage do today as well. Of the 19 U.S. banks with total assets exceeding $100 billion, six have a leverage CR greater than 10%.

Another aspect of the new proposals  (particularly Basel III) is liquidity. Liquidity needs vary depending on the bank as well as on timing. As a gross generality, a bank should be able to meet short term funding needs with core deposits. In order to meet somewhat longer term funding needs, the bank should be able to unburden itself of certain assets at little or no loss.

Not only is this more difficult to measure, future funding needs are also more difficult to predict. U.S. banking regulators use noncore funding dependence as a measure of a bank’s liquidity. (Basel III proposes using a liquidity coverage ratio.) When using noncore funding dependence, lower is better.

Of the six Big Banks we referred to in the previous column that have a 10% or greater leverage capital ratio, only four have a noncore funding dependence ratio less than 5%. Three of those are rated 5-Stars (two) or 4-Stars (one) by Bauer.

Bauer’s rating system is proprietary, but we’ll tell you  this: there are 826 banks that have a 10% (or greater) leverage ratio but fail to qualify for Bauer’s recommended rating of 5-Stars or 4-Stars; 537 of those also have a noncore funding dependence ratio less than or equal to 5%. We have said it for years: capital classifications alone are inadequate barometers to measure performance or stability. Adding a liquidity measure is good, but still not good enough.

Every bank needs sufficient capital to cushion it from losses and enough liquidity to cover unexpected deposit withdrawals. But what seems to be escaping the spotlight is loan quality. Poor underwriting was a major contributor to the last crisis. Instead of trying to improve loan quality, the focus of these proposals has been put on having enough capital to cover the losses that result from the bad loans.

It is akin to building a ship that you fear may sink, and instead of trying to make it more seaworthy, you just put extra buckets on board. We don’t want to bail out more sinking ships.

That’s why Bauer’s adjusted capital ratio  was invented 30 years ago. Bauer’s adjusted capital ratio subtracts delinquent loans and repossessed assets from both the numerator and denominator thereby predicting the outcome were all nonperforming assets  written off. Like the Texas Ratio, over the years, this has come to be a very reliable indicator of the future health of the bank.

In fact, a quick glance at the chart and it is clear which is a better indicator: leverage capital ratio or delinquencies.

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From: Jumbo Rate News 30:13 - April 8, 2013

Top 100 Banks in Over 100 Categories

BauerFinancial has been working diligently on its newest book, Top 100 Banks in Over 100 Categories. Now in its fourth year, the new book is scheduled to be released on April 12th. Here are some of the trends that have emerged.

Big Banks are getting bigger, at least in terms of asset size. The largest bank by total assets has not changed, but JPMorgan Chase Bank, NA, Columbus, OH has grown by more than 13% since publication of the first edition—from $1.674 trillion March 31, 2010 to $1.897 trillion now.

Branches, however, are decreasing. The largest bank in terms of number of branches, Wells Fargo Bank N.A., Sioux Falls, SD, decreased its physical locations by over 450 branches (6.6%) as it went from 6,829 at 3/31/2010 to 6,377 at the close of 2012.

At March 31, 2010, seven banks reported OREO (other real estate owned, generally as a result of repossession) in excess of $1 billion. Today, only four banks have OREO greater than $1 billion. Even more impressive: total OREO reported by all FDIC-insured banks has decreased from $46.4 billion to $38.5 billion in that time-frame.

Commercial Real Estate (CRE) is generally considered to be the next problem area and if you look at the numbers, concentrations are creeping up. Twenty-one banks currently have over 90% of total loans booked as Commercial Real Estate: two have 100% (Capmark Bank, Midvale, UT and Evergreen International Bank, Los Angeles, CA). There were none at 100% in our 1st Edition.

In fact, our 1st Edition showed that 19 had 90% or more of total loans in CRE. The 100th on our list had 74.2%; the 100th now has 75.6%.

Conversely, commercial and industrial loans (C&I) are inching down as a percent of total loans. Only three are above the 90% mark and number 100 is at 45.6%. Compare that to March 31, 2010 which had three at 100%; 11 over 90% and number 100 at 46.5%.

Residential real estate, the main culprit in the latest recession, has tempered slightly as well. At March 31, 2010, seven banks had 100% of their loans in residential real estate; 90 banks had more than 95%. Fast forward to year-end 2012: five have 100% while 75 have over 95%.

Wells Fargo was and still is the largest bank employer. It reported 193,434 full-time equivalent  (FTE) employees at March 31, 2010 and by year-end 2012 that number was up to 227,759. Bank of America, Charlotte, NC used to come in at number 2 with 181,131 but after extensive layoffs, it has been replaced by the former number 3, JPMorgan Chase. JPM Chase had 167,900 FTE employees at 3/31/2010 and now employees 203,881. Citibank NA also snuck in front of BofA this time with 192,244. (BofA is now at #4 with 174,892.)

For those on the hunt for a job in banking, they are out there. In spite of BofA, the number of FTE workers employed by the banking industry increased by over 80,000 since our first edition was published—from  2,025,681 at March 31, 2010 to 2,106,115 at year-end 2012.

Only 40 banks in the nation still have reverse mortgages on their books and most of those look to be exiting that market as well. The banks still offering these mortgages may surprise you. 

These are just some of the topics covered by the new 4th Edition of Bauer’s Top 100 Banks in Over 100 Categories. Want to know more? A wealth of information can be at your fingertips for just $49.95 + shipping and handling.

To place your order call 800.388.6686, email top100@bauerfinancial.com or visit  our website at www.bauerfinancial.com to order online.

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From: Jumbo Rate News 30:12 - March 25, 2013

Taxpayers Should be Outraged...

Background: Bank Holding Companies  with $50 billion or more in total consolidated assets are required by Dodd-Frank to submit annual capital plans to the Federal Reserve. The plan is to include all actions expected to impact capital over the next nine quarters. Based on these plans, the Federal Reserve projects what would happen to  each in a “severely adverse scenario”.

Ally Financial, Inc. (formerly GMAC) is one of the 18 bank holding companies that must submit to this stress testing. It did not do well on the latest one.

Further, seven of the more than 700 companies that received TARP money in 2008 were designated as “Exceptional Assistance Recipients” due to the amount and nature of their bailouts. Three are left: AIG, General Motors & Ally (GMAC).

Ally, a bank holding company, received TARP funds, not as part of the Capital Purchase Program (CPP) for banks (which  made money; JRN 30:07), but as part of the Automotive Industry Financial Program (AIFP). It received over $16 billion from the Treasury, which still owns about 80% of the company.

Now: On January 28, 2013, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) sent a scathing memo to then Treasury Secretary, Tim Geithner, regarding the executive compensation decisions of these three exceptional assistance recipients: AIG, GM and Ally. Even though the guidelines for executive compensation put a $500,000/year cap on cash payments, the Office of the Special Master,  aka Pay Czar, has approved at least that amount for 70% of the executives in question. The pay czar’s job is to look out for the interest of the taxpayers. Instead, according to the memo, “decisions were largely driven by the proposals of the same companies that historically, and again in  2012, proposed excessive pay”.

The Outrage: We got a hold of the actual 2012 salary structure that the Treasury approved for Ally Financial’s senior executives. Of the 20 “Most highly compensated employees”, total direct compensation (cash salary + stock salary + long term restricted stock) ranged from $1.9 million to $9.5 million. The cash portion increased 2.6% from 2011 for the 19 that remained on the list from 2011. Only eight were below the $500,000 guideline and five of those were just below, at $491,000.

Granted, much of this is in stock and may not be  transferable until TARP is repaid, but this “skin in the game” approach would probably be more effective if the guaranteed portion was lower. Their argument: they need high salaries to retain personnel qualified to implement an effective turnaround. Hmm.

The biggest U.S. bank holding company, JPMorgan Chase recently docked its CEO Jamie Dimon’s pay. What had been a $23 million annual cash + stock was cut to just $11.5 million after a $6 billion trading loss in London. Dimon heads the biggest bank, but he isn’t exactly a bellwether.

Forbes (6/20/2012) named Aurelio Aleman, president of First BanCorp (parent of **FirstBank of Puerto Rico) as the bank CEO with the lowest salary (at    banks between $10 and $500 billion in assets) at $855,000. The second lowest was Dennis Nixon of International Bancshares (parent of four 5-Star banks in Texas) at $1.242 million. 

Ally’s CEO, Michael Carpenter was not only allowed to earn $9.5 million in 2012, he’s asking for a raise. The company has requested approval to pay Carpenter $9.6 million in 2013 and Thomas Marano $8 million. (Marano is CEO of its Rescap subsidiary, which is currently in bankruptcy.) To date, Ally has only paid back one-third of its nearly $17 billion bailout. As taxpayers, we should be outraged.

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From: Jumbo Rate News 30:11 - March 18, 2013

The Future of Community Banking in the U.S. 

In order to have a meaningful discussion on the future of community banking, we must first define the term: community bank. A community bank focuses on the needs of local residents and local businesses. As a small business themselves, community banks face many of the same financial challenges as their neighbors. As a bank becomes larger and more spread out, this local focus tends to wane. The actual size of a community bank varies depending who you ask.

William Loving, Jr., president and CEO of ****Pendleton Community Bank, Franklin, WV, a $262 million bank with five branches, is the new chairman of the Independent Community Bankers of America (ICBA). According to ICBA, all except for the largest banks ($10 billion or more in assets) may be considered community banks.

For us, that’s too broad, but it does explain why Mr. Loving was quoted in the American Banker (3/8/13) stating that consolidation among community banks will not be as severe as many predict. While we would “love” to agree with Loving, evidence from the past decade suggests otherwise. (Please see graphs.)

From the end of 2002 to the end  of 2012, banks with less than $100 million in total assets decreased in number by over 50%. Those from $100 million to $1 billion in assets, also undeniably community banks, gained about 2.5%. The next group, those with  $1 billion to $10 billion in assets, which the ICBA considers community banks but many consider Regionals, gained 23%.

Community banks are a critical resource for small businesses. Loan decisions at community banks are made locally and take into consideration much more than what a remote, mega-bank loan committee could possibly consider.

What’s more, deposits are taken and loans are made in the same area when dealing with a community bank. There is no taking cheap deposits from one state to lend in a more lucrative state. In this way, community deposits are working for the good of the community.

If a community bank takes a gamble, it’s because they know something about the character of the person on whom they are placing their bet. Conversely, a megabank may also take a gamble, but it is generally going to be numbers-based, not people-based.

We at BauerFinancial are unabashedly long-time advocates for community banks. They have always been, and continue to be, vital to the American way of life and the attainment of the American dream. Extreme? Maybe. But it is true for millions of small business owners across the country.

Mr. Loving will make it his focus to reduce regulatory burden and champion community banks and we wish him all the best. He has his hands full. 

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From: Jumbo Rate News 30:10 - March 11, 2013

All Star-Ratings Now as of December 31, 2012 Data

Newly released bank and credit union star-ratings from BauerFinancial, Inc., the nation’s bank rating firm, indicate the banking industry is fighting its way back. The percent of banks recommended by the firm (i.e. rated 5-Stars or 4-Stars) is approaching 69.5%, a number we have not seen since the fourth quarter of 2007.

On the other end of the spectrum, eight banks failed during the fourth quarter of 2012 while 43 improved enough to be removed from Bauer’s Troubled and Problematic Report the old-fashioned way—hard work. Excluding the three banks that have failed so far this year, T&P Banks now stand at 663, a number not seen in over four years (Q3’08).

Since Bauer’s ratings project negative trends forward, its T&P list will generally contain more banks than the FDIC’s “Problem List”. This quarter Bauer’s contains twelve more than the FDIC list. To order Bauer’s T&P Report simply call 800.388.6686, visit bauerfinancial.com or email customerservice@bauerfinancial.com. The report is just $99 or $225 for an excel spreadsheet.

While 2012 failures were at a 4½ year low, it also marked the second consecutive year that no start-up de novo banks were chartered and the first year in the history of the FDIC that no new reporting institutions were added at all. As a result, the number of banks reported at year-end 2012 was just 7,083.

Credit Union earnings hit an all-time high at year-end 2012, and it shows. The percent of credit unions earning Bauer’s recommended status with fourth quarter data inched up slightly from the third quarter (½ a percent) to 76.1%. This is the third consecutive quarter that recommended credit unions exceeded the 75% mark. Only 3% of federally-insured credit unions are rated 2-Stars or below.

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From: Jumbo Rate News 30:09 - March 4, 2013

Earnings Up, Margins Down, Forecast Bleak

Profitability at the nation’s banks has come back with a vengeance even as the industry continues to contract. Bolstered by a fourth quarter $34.7 billion net income, full-year 2012 earnings of $141.3 billion were the second highest ever reported by the industry. Return on average assets (ROA), which had plummeted all the way to negative 0.08% in calendar 2009 made it back to the benchmark 1% for the full-year 2012 (0.97% for the fourth quarter). This marks the 14th quarter in a row that banks have posted year-over-year increases in earnings.

The increase in earnings was partially attributable to lower loan loss provisioning expenses. The lower loss provisions are not a concern because asset quality continues to improve. Loan losses declined in all major categories during the quarter. The leader in those declines was residential real estate mortgages where net chargeoffs declined by 62.6% ($1.3 billion). Noncurrent loan rates are now at a four-year low. That being the case, the coverage of noncurrent loans by loan loss reserves has improved.

The remainder of the earnings increase was due to higher noninterest income. Net interest margins (NIM) continue to be a problem for the industry though. At 3.32% in the fourth quarter 2012, NIM is at its lowest since fourth quarter 2007. More than two-thirds of all banks reported year-over-year declines. Historically, the best way to counteract low interest margins has been to increase loan volume. In that department, banks have been improving. They have posted increased loan balances for six of the latest seven quarters.

In the current environment, however, that may not be enough (see graphs). As regulatory and other expenses keep piling up, all sources of revenue need to be maximized.

Chart 1 shows how interest margins have been squeezed over the past decade. More worrisome, however, is chart 2 which shows the efficiency ratio over that timeframe, depicting how, even with record earnings, banks are struggling with revenue.

In 2002, it cost 56 cents for a bank to generate $1 in revenue. By 2012, the cost had gone up to 61.6 cents. (All things being equal, an optimal Efficiency Ratio is generally considered to be 50%.) The higher this ratio gets, the more banks have to strive to find new ways to boost income. That void has been filled by reductions in loan loss reserves of late. But that can only last so long. The forecast, therefore, looks like lower earnings, higher fees or  both. Probably both.

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From: Jumbo Rate News 30:08 - February 25, 2013

Fed Officials Contemplate Exit Strategy

The president of the Cleveland Fed, Sandra Pianalto, speaking in Bonita Springs, Florida last Friday, had some interesting comments. A synopsis:

Consumer Sentiment Rising

Consumers account for 2/3rds of spending in the U.S. However, uncertainties about the future have made consumers reluctant to spend. And rightly so. In the late 90s, average household debt (including mortgages) was about 90% of disposable income. By 2007, that ratio had gone up to 130%. In other words, if your income after taxes was $100,000 you were in debt $130,000, on average. It’s now about 110% as consumers reign in spending and bring down their debt.

As this ratio goes down and the overall economy continues to improve, consumer sentiment is also getting better. The monthly University of Michigan Index of Consumer Sentiment was reported at 72.3 on a scale of 1 (lowest) to 100 (ideal) at July 1, 2012. That’s quite an improvement over the 55.3 reported at November 1, 2008 but much lower than a 91.3 average from 1990 to the beginning of the crisis. The climb has had its peaks and valleys but has generally been heading in the right direction. (The last time the index reached 100 was in January 2004.)

Consumers Spur Business

That reluctance by consumers combined with regulatory concerns and uncertainty about the global economic picture have put a damper or business hiring and investment. Business accounts for about 15% of spending. All things being equal, as consumer sentiment goes up, businesses should feel more comfortable hiring new employees.

Fed Policies Effective... But

Here’s the nuts and bolts of it. Ms Pianalto goes on to say that while the Fed’s extraordinary  actions (i.e. bond buying) have been successful, the positive returns are  likely diminishing and associated risks are apt to start rising. We’ve actually already seen one of those risks rear its ugly head as deposits leave the safety of federally-insured accounts in search of higher yields. Another, that has yet to come to fruition, is interest rate risk. In this scenario, an institution, company or individual could find themselves unprepared if rates start to rise and they are tied up in all long-term, fixed-rate vehicles (JRN 30:05).

There are two other risks that she talked about that apply solely to the Fed. One is the risk the Fed poses to a free-market economy by being so involved in the mortgage backed securities (MBS) market. The other is the size and composition of the Fed’s balance sheet could hinder its ability to respond when inflationary pressures begin to appear.

The obvious way to mitigate these last two is to reduce the Fed’s presence in the MBS market and reduce its balance sheet. In other words, stop the bond buying.

Ms Pianalto is only one of the members of the Fed’s Open Market Committee and these comments may not reflect other members’ opinions. Historically speaking, though, she has a pretty good track record of being in the consensus. In fact, she is not the only Fed member speaking in these terms.

St. Louis Fed president James Bullard voiced some of the same concerns to a group in Mississippi last week. He suggests that the committee consider the unemployment rate as well as other indicators to judge when and how much to alter the pace of its bond-buying. Like Pianalto, Bullard realizes that the Fed’s balance sheet has become big enough that it could “inhibit the Committee’s ability to exit appropriately from the current very expansive monetary policy”.

So, there you have it. Two well-respected Fed presidents both discussing an end, albeit gradual, to the Fed’s bond buying spree. While this won’t translate directly to a rise in the target Fed Funds rate, eventually, that too will come to pass. We’ll keep you posted.

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From: Jumbo Rate News 30:07 - February 19, 2013

Taxpayers Profit From Bank Investments

February’s monthly TARP report to Congress reflects the wind-down of the various bailout programs enabling us to get a better look at the results of the programs.

As of January 31st, taxpayers had recovered $389 billion, or 93% of the total $418 billion that was disbursed. The AIG Rescue, Making Home More Affordable, and Automotive programs all lost taxpayer money. The bank programs are in the black and are still bringing in money. Of $245.1 billion initially invested in the bank programs, banks have repaid $268.2 billion for a $23.1 billion gain.

The largest bank program by far, was the Capital Purchase Plan (CPP). As you can see by the chart, the number of institutions remaining in the CPP has dwindled greatly from the original 707.

At January 31st, 210 institutions remained in the program, of which 2/3rds have missed at least one dividend payment. Institutions missing payments account for 157 banks; 109 (almost 70%) are on Bauer’s Troubled and Problematic Bank Report—34 with our lowest rating (zero-stars). One hundred and one are currently operating under supervisory agreements.

While Treasury is in the process of auctioning off its stake in the remaining banks, and has   recently stepped up the pace, these  these institutions are likely not to attract big bids. In fact, some may not even make it to auction at all.

Ten recent settlements occurred early in February attracting approximately $190 million. Those proceeds are not yet figured in the gains. Two institutions were conspicuously missing from that auction:

1) The auction of Coastal Banking Company, Beaufort, SC’s TARP shares was cancelled after the Federal Reserve gave it permission to make dividend payments. Both Coastal Banking Company and its affiliate, **CBC National Bank, Fernandina Beach, FL, have been operating under enforcement actions since 2009 preventing the company from paying any dividends without permission. Presumably, a dividend-paying bank will be worth more at auction than one that has missed eight scheduled payments.

2) One of the largest banks still in the CPP, Flagstar Bancorp, parent of ***Flagstar Bank, FSB, Troy, MI, a $14.9 billion bank, reportedly requested that Treasury delay the sale of its stake in the company. The $14 billion bank was recently ordered to pay over $90 million in relation to mortgage backed securities that were not properly underwritten. Flagstar shares plummeted as a result and Treasury agreed it would be advantageous to put the sale on hold.

The 137 institutions that repaid CPP with SBA funds (see chart) account for $2.2 billion of the net proceeds attributed to the CPP. That creative accounting notwithstanding, the CPP has been profitable.

So far, net income for this program is $220.85 billion on an initial investment of $204.9 billion.

We are obviously pleased that the bank programs yielded a profit to taxpayers. But replacement of public support in these banks with private capital is an even greater victory. We will be truly happy when the 210 goes all the way down to zero. 

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From: Jumbo Rate News 30:06 - February 11, 2013

A Bank or Not a Bank? That is the Question.

We often write about bank holding companies and banks assuming that our readers know the difference. While many do, recent phone calls to our office on the subject suggest that a primer is in order. It isn’t surprising since most of the mainstream media refer to both groups simply as banks. As you will see, they are not the same.

The Bank Holding Company Act of 1956 established certain conditions by which a corporation could own one or more U.S. banks. These new Bank Holding Companies were to be regulated by the Federal Reserve. In an effort to limit the comingling of bank and commerce and limit risk-taking that might adversely affect the federally-insured banks, the original legislation restricted the extent to which a bank holding company or its affiliates could conduct nonfinancial business.

Over the years, the reigns on these nonfinancial activities have been greatly loosened. The greatest single impetus to the loosening was the Gramm-Leach-Bliley Act of 1999 (GLBA). Bank Holding Companies could now register as Financial Holding Companies (FHC), which is not simply semantics. This change enabled the new FHCs to get involved in securities under-writing, insurance underwriting and merchant banking activities. Today, almost all of the largest holding companies are financial holding companies and while the Federal Reserve is still the regulator of the umbrella company and bank subsidiaries, there may be other regulators involved. For example, if a FHC owns a broker-dealer, the broker-dealer is regulated by the SEC; insurance subsidiaries are generally regulated by the state.

Over the past 14 years, these FHCs have become increasingly complex, both in the number of entities under the umbrellas and in the geographic reach of those entities. 

We have listed the three largest U.S. FHCs below along with their total assets. Below each are their corresponding bank subsidiaries, the total assets of each bank and the percentage of the FHC assets that the bank represents. As you can see, the percentage of business that lays outside of the federally-insured U.S. banking system is substantial (15%-30%).

While mainstream media generally refers to them all as “banks”, this is misleading. As a depositor, you should be more concerned with the star-rating of the institution in which you have your deposits. Rest assured that when Bauer assigns those ratings,adverse conditions at the Holding Company level  are part of the equation. 

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From: Jumbo Rate News 30:05 - February 4, 2013

To Bond or Not to Bond?

The (FOMC) Fed’s Open Market Committee emerged from its two day meeting on Wednesday with the following:

“Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, ...

“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities…  until such improvement is achieved.”

That being the case, there is no change in sight for the target Fed Funds rate nor is there any clear indication of how long quantitative easing will last. The FOMC continues to have a lone dissenter in this vote. No longer Jeffrey Lacker (JRN 29:18), as his term expired at year-end. The  resident Hawk of 2013 is Esther L George. She fears, as did Mr. Lacker, that continued monetary accommodation could increase long-term inflation expectations.

Normally, that would be our story. Today, however, we are focusing on references  that have surfaced recently about 1994 and whether we will see a repeat  of a bond market bubble when all this easing comes to an end. To answer that, we need to take a look back 19 years.

In 1994, Alan Greenspan et al, surprised investors by raising the Fed Funds target rate 2.5% during the year. It had been at 3% for almost a year and half before that when inflationary pressures began to rise. Rapidly.

Markets were unprepared for such an about-face and things began to go south. The most high-profile debacle was that of Orange County, California. Let’s take a look a what went wrong on a grand scale there because it happened on a smaller scale all over the country.

Bob Citron was the Treasurer of Orange County for 24 years. As treasurer, he was in charge of an investment pool that, by 1994, had over $7.5 billion in deposits from the county government as well as hundreds of local agencies. It was well-known that Mr. Citron’s investment strategy yielded high returns and somehow people forgot that the higher the return, the higher the risk.

Mr. Citron used the $7.5 billion to borrow money upon which he borrowed even more money—up to a reported $20.6 billion. Citron invested that borrowed money into derivatives and other vehicles that a) he didn’t understand and b) reacted inversely to changes in interest rates. Borrowing short and investing long... as interest rates rose, his investments dropped.

Even as the Fed continued to raise rates (six times that year) Citron continued buying, betting on lower interest rates. By  the time it was all said and done, the investment pool was down to about $5.5 billion. The county had to significantly cut services and employment as a result. As for Mr. Citron? He was imprisoned for his part in the debacle. Interesting? Yes. Could it happen again? Absolutely. It happens all the time. Ineffective management and oversight plus involvement with complicated investment strategies. Sound familiar?

Everyone (outside the beltway) knows that expenditures must be less than revenues. If you know what rates are going to do down the road, it makes it easier to plan. If you expect a cut in revenues, you plan a corresponding cut in expenditures. Bonds, including munis, tend to go in the opposite direction of interest rates. Therefore, when the Fed begins raising rates, bonds will take a hit.

The idea is to plan accordingly. The Fed has already given us a target unemployment rate of 6% and a target inflation rate of 2.5% before it starts tightening. It has not yet indicated when it will stop its bond-buying spree. That’s the unknown factor making investors nervous right now. But they do know it’s coming. The fact that they’re nervous actually bodes well. Now they can plan.

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From: Jumbo Rate News 30:04 - January 28, 2013

Fish...ing for Another Way to Handle TBTF

The president and CEO of the Federal Reserve Bank of Dallas, Richard W. Fisher, is careful to articulate that his views, and those of his staff, may differ significantly from other Federal Reserve Bank offices elsewhere in the country. That being said, since 2009, Fisher has been a vocal advocate for reigning in Too-Big-To-Fail banks (TBTF). The following are excerpts from remarks he gave before the Committee for the Republic in Washington, DC on January 16th.

Previously thought of as islands of safety in a sea of risk, they (TBTF Banks) became the enablers of a financial tsunami. Now that the storm has subsided, we submit that they are a key reason accommodative monetary policy and government policies have failed to adequately affect the economic recovery.

The Dallas Fed’s definition is financial firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction. Such firms capture the financial upside of their actions but largely avoid payment—bankruptcy and closure—for actions gone wrong, in violation of one of the basic tenets of market capitalism (at least as it is supposed to be practiced in the United States). Such firms enjoy subsidies relative to their non-TBTF competitors. They are thus more likely to take greater risks in search of profits, protected by the presumption that bankruptcy is a highly unlikely outcome.

Dodd–Frank does not do enough to constrain the behemoth banks’ advantages. Indeed, given its complexity, it unwittingly exacerbates them.  

In a nutshell, we recommend that TBTF financial institutions be restructured into multiple business entities. Only the resulting downsized commercial banking operations—and not shadow banking affiliates or the parent company—would benefit from the safety net of federal deposit insurance and access to the Federal Reserve’s discount window.

The time has come to change the decision-making paradigm. There should be more than the present two solutions: bailout or the end-of-the-economic-world-as-we-have-known-it. Both choices are unacceptable. The next financial crisis could cost more than two years of economic output, borne by millions of U.S. taxpayers. That horrendous cost must be weighed against the supposed benefits of maintaining the TBTF status quo. To us, the remedy is obvious: end TBTF now. End TBTF by reintroducing market forces instead of complex rules, and in so doing, level the playing field for all banking institutions.

Perhaps more interesting even than his take on TBTF, is Mr. Fisher’s championing of Community Banks, which is something Bauer has done since 1983. In a report released the day after this speech (Report) Fisher illustrates how community banks made it through the latest recession with fewer problem loans than the large banks, even though  those smaller institutions were more willing to extend credit to small businesses.

He also  depicts how these smaller institutions are being squeezed by increased regulatory burdens and supervision which are only getting tougher with Dodd-Frank.

His solution: level the playing field. Don’t treat the 5,500 community banks the same as you treat the 12 Mega-banks or even the same way you treat the 70 regional banks. Simplistic? Perhaps, but crazy enough that it might just work.

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From: Jumbo Rate News 30:03 - January 22, 2013

Good Intentions Gone Awry 

The state of Georgia has the second largest percentage of banks rated 2-stars or below representing 11% of the banks on Bauer’s Troubled and Problematic Report. That is even more meaningful when you realize that it has also been home of the most bank failures in the past five years. Eighty-four Georgia banks have failed from 2008—2012. Here’s the story of one of those banks, but in reality, it could happen anywhere.

Zero-Star First National Bank, Savannah, GA failed on June 25, 2010. It was a small, community bank with total  assets in the $250 to $300 million range. It was established on April Fool’s Day—April 1, 1996. Surely when CEO Heys McMath founded the bank, his intentions for the bank and his community were good.

And, for the first ten years things went pretty well. But when officers discovered the lucrative business of construction lending, things began to go awry. As with everything else, when the economy was doing well, there was a high demand and return on construction lending. Then the economy turned. All bets were off. Too many eggs in one basket and panic set in.

The deterioration in construction loans became apparent to us with First NB’s 1st quarter 2009 financial filings. From there the bank’s star-rating dropped precipitously—from 3-Stars to Zero-stars in three quarters

By November it was clear to everyone. The Savannah Business Journal reported:

   More than 94 percent of First   

   National’s loans involve real  

   estate, and a large percentage

   of that money is in heavy

   construction.

   More than 11 percent of those

   assets are considered "non-

   performing" – at least 90 days

   delinquent – and 9 percent are

   in repossession.—11/24/2009 

Four days after that article was printed, the OCC issued a cease and desist order against the First National Bank. Mr. McMath was removed from his duties as CEO from the bank he founded.

With a new CEO at the helm, previously masked problems also began to surface. At some point, Mr. McMath and other bank officials reportedly crossed the line by giving, Mr. Richard D. Guerard, a Savannah Real Estate developer, as much as $2 million worth of “Nominee Loans” to buy themselves some time.

A Nominee Loan is a third-party loan—put in the name of one party but actually intended for use by another party. As the story goes, these particular nominee loans were devised in such a way that they would “appear” to reduce bad loan amounts with the intent of hiding the bad loans from regulators. Nominee Loans, in case there is any doubt, are a form of fraud and thusly, are illegal.

The bank’s closure cost the Deposit Insurance Fund as much as $90 million, But that wasn’t the end.

On August 22, 2011, Mr. Guerard received a reduced sentence for his part in the scheme by offering up evidence against the bank officials involved. A 35-count indictment was issued last week against six. They are:

Heys Edward McMath III, 58, President and CEO; conspiracy, bank fraud, misapplication of bank funds & false statements to influence a bank.

Stephen Michael Little, 65, EVP and CFO; conspiracy & bank fraud.

Robert Wilson Daily, 51, City President and Senior Lending  Officer; conspiracy, bank fraud & false entries into bank records.

Jay Patrick Gardner, 62, VP and CCO; conspiracy & bank fraud.

Isaac Jefferson Mulling, 53, Sr. VP and commercial loan officer; conspiracy, bank fraud & false entries into bank records.

Alan Robert Fleming, 36, City Pres., Tybee Island branch, and commercial loan officer; conspiracy, bank fraud & false entries into bank records.

 The bank failed and these men will likely go to prison. Not exactly the intention.

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From: Jumbo Rate News 30:02 - January 14, 2013

“New” Lending Rule: Borrowers Must be Able to Repay 

Our new agency, the Consumer Financial Protection Bureau (CFPB), issued a rule this week telling mortgage lenders not to lend to people who can’t pay them back. Gotta love it. Our tax dollars at work.

The new “Ability to Repay” rule, will go into effect next January and requires that lenders must:

¨ look at a consumers financial information;

¨ Document employment status, income and assets;

¨ Look at current debt obligations and credit history;

¨ Confirm any mortgage payments due on the same or another property;

¨ Ensure the borrower has sufficient income or assets to repay the loan.

While the entirety of this rule  could be chocked up to good old-fashioned common sense, there is one part we are especially pleased to see: lenders may no longer use teaser rates to mask the true cost of a loan.

As we all know, common sense was desperately lacking in 2008 when robo-signing and other unscrupulous practices led to the bubble that ignited the Great Recession. So, kuddos to the CFPB for bringing it back.

Since April 2011, 14 banks have been operating under OCC enforcement actions trying to mitigate some of the damage they did in those years, but results have been elusive. After spending over $1.5 billion  since  on outside consultants to conduct foreclosure reviews, consumers who were harmed have yet to receive any compensation.

Details are short but a new agreement has been made.  Ten of the fourteen banks that were operating under orders to perform the mortgage reviews have agreed to an $8.5 billion settlement. $3.3 billion is slated to go directly to the 3.8 million borrowers who faced foreclosure.

If your home was in any stage of foreclosure in 2009 or 2010 and was serviced by any of the first ten banks listed below, you may be eligible for compensation due to a servicing error. Your instructions are simple, “Don’t call us, we’ll contact you.” Supposedly by the end of March, eligible borrowers will be contacted with payment details. (Presumably, they will know where and how to contact you.)

Under the settlement agreement, the $3.3 billion will be spread among 3.8 million borrowers averaging $842 a piece. The smallest payment will be $250 with a maximum of $125,000. We’re sorry you lost your home… but here’s $250.

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From: Jumbo Rate News 30:01 - January 7, 2013

Changes to Deposit Insurance Coverage Jan. 1st, 2013

Since 2010, the Transaction Account Guaranty Program (TAG)  provided unlimited deposit insurance coverage on noninterest-bearing transaction accounts. No more. It expired as scheduled on December 31, 2012 (JRN 29:41 & 48).

A breakdown of exactly how much is now insured based on account ownership, can be found on page 2. At September 30th, there was $1.5 trillion in excess of the $250,000 insurance limit deposited into these noninterest-bearing transaction accounts. If still there, these deposits are now uninsured. While much focus has been put on the size of the banks that would likely see deposit outflows as a result of the insurance change, our focus now is on the strength of those institutions.

Only you know if you have deposits that are now uninsured because they fall into this category. If you do, we would suggest you double-check the rating of the bank(s) in which they are placed. Over 90% of the banks currently on Bauer’s Troubled and Problematic Bank Report (i.e. rated 2-Stars or below) reported having such deposits on their books as of September 30, 2012.

Here’s the breakdown: 180 Zero-Star banks reported over $2.7 billion of deposits in noninterest bearing transaction accounts; 111 1-Star banks reported over $1.8 billion; and 373 2-Star banks reported over $9.3 billion.

What’s more, seven of the eight banks that failed in the fourth quarter 2012 reported having these deposits on their books at 9/30/12. That’s 110 depositors that could have lost up to $90 million collectively had those banks failed after January 1, 2013. Protect yourself. Don’t take any chances. Check the rating of any institution(s) in which you have uninsured deposits. It’s easy at bauerfinancial.com. 

For more information and a breakdown of exactly how much is now insured based on account ownership, visit the FDIC at http://fdic.gov/deposit/deposits/dis/index.html.

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