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U.S. Offers Discounts to Lure Buyers of Failed Banks (Update1)

By David Mildenberg and Ari Levy

Feb. 19 (Bloomberg) -- U.S. regulators are being forced to sell real-estate loans of failed banks at a discount to lure buyers spooked by the likelihood of increased loan losses amid a deepening recession.

The assets of four community banks have been sold to healthier rivals at a combined discount of $107 million this year, the Federal Deposit Insurance Corp. said. The FDIC had to offer a discount just once in 2008, when it engineered 25 bank takeovers. The Washington-based agency has overseen 13 bank failures this year.

Buyers for banks are in short supply after last year, when regulators closed the most lenders since 50 were shuttered in 1993. RBC Capital Markets analyst Gerard Cassidy predicts as many as 1,000 more will collapse within five years. The result may be a buyer’s market in which the FDIC will lay out even bigger sums to get rid of seized banks.

“There are situations where the government will write you a check to complete a deal,” said Peter Stanton, president of closely held Washington Trust Bank. “There is always value in there if you are willing to go in and work for it.”

Stanton’s bank, based in Spokane, received a discount of $7.6 million from the FDIC on Feb. 13 as it took over Pinnacle Bank of Beaverton, Oregon. Washington Trust, seeking to expand in Oregon, submitted an offer after five days of studying Pinnacle’s loans, Stanton said in a telephone interview. His bank is assuming $72 million in assets, including about $40 million in real-estate-related loans, and $64 million in deposits.

Compensated for Risk

Last year, the biggest bank failures didn’t include discounts. JPMorgan Chase & Co. paid $1.9 billion in September for the assets of Washington Mutual Bank, the largest U.S. savings and loan.

“The assuming institution isn’t always willing to take on all of the troubled assets of the failed bank, so a discount means they want to be compensated for that risk,” FDIC spokesman David Barr said in an interview.

The largest discount this year was $45 million to Bank of Essex of Tappahannock, Virginia, which on Jan. 30 took over seven offices of Suburban Federal Savings Bank of Crofton, Maryland. Bank of Essex agreed to assume $348 million of assets and $302 million in deposits.

“People want to pick the good assets and take the deposits and leave the junky assets behind,” said Walter Mix, a former commissioner of the California Department of Financial Institutions. “That’s causing a lot of challenges in getting these deals done.” Mix is currently a managing director at Secura Group of LECG, a consulting firm in Los Angeles.

Sharing Losses

In the Washington Trust deal, the FDIC agreed to share any losses from the acquired loans. That’s the fifth loss-sharing arrangement approved by the FDIC since November, according to Chip McDonald, a lawyer with Jones Day in Atlanta. The FDIC’s Barr said more loss-sharing deals may be coming.

“Providing a small amount of cash up front, and then taking some loss sharing, may make it as cheap as possible for the government, versus just taking over banks that have loss rates of 35 percent or 40 percent,” said Chris Marinac, an analyst at FIG Partners LLC in Atlanta.

The FDIC invites banks to submit bids for a failed bank’s deposits only, or for the “whole bank” which also includes assets such as loans and securities. The agency is required to choose the bid that is the least costly to its deposit insurance fund.

‘Plenty of Resources’

The fund contains $36 billion, and the agency has more than $30 billion in borrowing authority from the U.S. Treasury that it hasn’t tapped since 1991, according to Barr. “We feel we have plenty of resources and can handle the failures we see coming down the pike,” he said.

The FDIC insures $4.5 trillion in deposits at 8,394 institutions with $13.6 trillion in assets, according to third- quarter data. It held assets for liquidation totaling $9.5 billion on Sept. 30, quadruple the level of a year earlier.

The FDIC agreed to one discount last year: the receivership of Douglass National Bank of Kansas City, Missouri. Liberty Bank and Trust Co. of New Orleans received a $6.1 million discount in buying $55.7 million of assets. It was the first discounted transaction since May 2001, according to FDIC’s press releases. Barr said he didn’t recall any deals involving discounts between 2001 and 2008.

U.S. Bancorp in November agreed to take over Downey Savings & Loan Association and PFF Bank & Trust Co., two California banks with a combined 213 branches, deposits of $12.1 billion and total assets of $16.5 billion. U.S. Bancorp agreed to take the first $1.6 billion of losses with the FDIC sharing any further losses.

Don’t Talk

Regulators told U.S. Bancorp not to talk about the transaction or the uses for the $6.6 billion received through the federal bank-rescue program, Chief Executive Officer Richard Davis said in a Feb. 17 speech in Minneapolis. The Troubled Asset Relief Program was designed to give well-capitalized banks like U.S. Bancorp cash to buy weaker banks, he said.

Florida’s largest bank, BankUnited Financial Corp., said on Jan. 27 that it may face receivership because efforts to raise $400 million in new capital to meet regulatory requirements have failed. Most of its $14 billion in assets and 86 offices are in Broward, Dade and Palm Beach counties.

“Everyone is looking to see how BankUnited is going to be handled because it has one of the most attractive franchises in the country,” Miami banking consultant Kenneth Thomas said. “Buyers want some kind of guarantee that the government will share in the losses, else they aren’t going to get involved.”

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.
Last Updated: February 19, 2009 11:46 EST

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