Volcker Says - Keep Rates Low And Spending High - Bloomberg

Local Governments Seek To Renege On Bank Interest Rate Swaps - BI

Hard Times To Follow Reckless Fed Policies And Easy Bank Lending - Telegraph

Banks Facing Huge Losses On Mortgage Buybacks - Bloomberg

The EURO Will Survive Greece - It’s What Comes Next That’s Scary - Bloomberg

Second Mortgage Losses - The Next Big Bank Writedowns Nobody Wants To Talk About - HP

Government Taxes Prudent To Help Foolish With Subsidized Housing/Mortgage Rescue Plans - NYT

The weekly banking failures continue as regulators closed four more failed banks.   The four failed banks for March 5, 2010 had total assets of $1.1 billion and total deposits of $1.0 billion.  The cost to the FDIC Deposit Insurance Fund (DIF) for this week’s banking failures  is estimated at $305 million.   The cost to the FDIC DIF for the 26 banking failures to date in 2010 now totals $4.7. billion.

The FDIC found no buyers for two of the failed banks, Waterfield Bank of  Germantown, MD and Centennial Bank in Ogden, Utah with combined deposits of $361.5 million.  The assets and deposits of the two other failed banks were taken over by other institutions under purchase and assumption agreements with the FDIC.   As has been the case with almost all recent banking failures, the FDIC agreed to absorb a portion of the  losses on purchased failed bank assets through a loss-share agreement with the acquiring banks.

Depositors Lose Millions

Some very unlucky or careless depositors at Waterfield Bank and Centennial Bank face losses of $2.2 million on deposits that were in excess of FDIC insurance limits.  These uninsured depositors will not be reimbursed by the FDIC and may potentially wind up with a zero recovery.   Any future reimbursement will be based on the ultimate recovery value of the failed banks’ assets.   Under Federal Law, depositor claims have first priority at final settlement, followed by general unsecured creditors, subordinated debt and stockholders.  Under the recently expanded FDIC deposit insurance limits, most depositors should be able to obtain full FDIC insurance protection on their savings - (see Are My Savings FDIC Insured?)

Banking analysts are predicting that banking failures in 2010 will greatly exceed last year’s total of  140.   Banking institutions continue to collapse as loan defaults soar and residential and commercial property values continue to erode.   As of December 31, 2009, the latest FDIC Quarterly Banking Profile revealed that there are 702 Problem Banks, up from 252 at the end of 2008, a 178% increase.

Sun American Bank, Boca Raton, Florida - Banking Failure Number 23

The FDIC, as receiver, entered into a purchase and assumption agreement with First-Citizens Bank & Trust Co, Raleigh, NC, to assume all of the deposits and to purchase all of the assets of Sun American Bank.  At the time of closing, Sun American had $536  million in assets and $444 million in deposits.  Sun American is the second failed bank to be acquired by First-Citizens this year.

The FDIC entered into a loss-share transaction on $433 million of the acquired assets to limit future potential losses to First-Citizens.  The loss to the FDIC on closing Sun American Bank is estimated at $104 million.  Sun American is the fourth bank to fail in Florida this year.

Bank of Illinois, Normal, Illinois - Banking Failure Number 24

Heartland Bank and Trust Co, Bloomington, IL acquired the assets and deposits of failed Bank of Illinois under a purchase and assumption agreement with the FDIC.  Heartland will be protected from certain losses on its purchase of the failed bank’s assets under a loss- share agreement with the FDIC.  At the time of closing, Bank of Illinois had $212 in assets and $198 in deposits.

Heartland Bank paid an unusually high premium of 3.6% on the purchase of the failed bank’s deposits, for which no explanation was provided.   Most failed bank deposits are purchased without a premium.  The loss to the FDIC is estimated at $53.7 million - Bank of Illinois is the third banking failure in Illinois this year.

Waterfield Bank, Germantown, Maryland - Banking Failure Number 25

The FDIC, unable to find a buyer for Waterfield Bank, created Waterfield Bank, FA, a new depository institution to take over Waterfield Bank.  The creation of the new bank allows depositors to access their funds and provide time to move deposits to other institutions.   Checks will be mailed to depositors on Monday for IRA and CD deposits.   Waterfield FA will close on April 5, 2010 and any customers with unclosed accounts will have checks mailed to them by the FDIC.

Waterfield had assets of $156 million and deposits of $156 million at closing.  At the time of closing, deposits of $407,000 exceeded FDIC insurance coverage.  Depositors with uninsured funds will need to contact the FDIC about possible future recovery.  The loss to the FDIC on closing Waterfield is estimated at $51 million.  Waterfield Bank is the first banking failure in Maryland this year.

Centennial Bank, Ogden, Utah - Banking Failure Number 26

The FDIC, as receiver, was unable to find a buyer for Centennial Bank and insured depositors will be mailed checks on Monday.  At the time of closing, Centennial had $215 million in assets and $205 million in deposits, of which $1.8 million was not covered by FDIC insurance.

Centennial Bank is the second banking failure in Utah this year and the loss to the FDIC is estimated at $96.3 million.

Buffett On Housing - Why The Bad News Is Good News -Forbes

Buffett - Failed Bankers Still Live In Grand Style - TOL

The Abrupt Collapse of Empires - LAT

Many Banks Still On The Critical List - NYT

Bank of America’s $30 Million Dollar Man - Bloomberg

Banks Hire Home Builders - WSJ

Japan’s Final Option - Finance Minister Pressures BOJ To Print Money - BW

Why Interest Rates Should Rise In 2010 - VOX

The weekly banking failures continue as regulators closed two more failed banks in Nevada and Washington.   The two failed banks had total assets of $769 million and total deposits of $496 million.  The cost to the FDIC Deposit Insurance Fund (DIF) for this week’s bank failures  is estimated at $103 million.   The cost to the FDIC Deposit Insurance Fund (DIF) for the 22 banking failures to date in 2010 now totals $4.4 billion.

Both failed banks were taken over by other institutions under purchase and assumption agreements with the FDIC, whereby the deposits and most of the assets of the failed bank are taken over by the acquiring bank.  As has been the case with almost all failed banks, the FDIC agrees to share in losses on purchased failed bank assets through a loss-share agreement with the acquiring bank.

One of this week’s banking failures, Carson River Community Bank, was a tiny, one branch bank with assets of only $51 million.  The loss to the FDIC on the Carson River failure was only $7.9 million.  The larger banking failure of the week was Rainier Pacific Bank with $718 million in assets and the loss to the FDIC is estimated at $95.2 million.

While most banking failures of the past few years have been the result of poor lending decisions, Rainier Bank’s failure was mainly due to poor investment decisions.  Rainier Bank’s large investment of $109 million in trust preferred collateralized debt obligations resulted in catastrophic losses that ultimately lead to the bank’s collapse.  As of the end of last year, Rainier’s $109 million investment had declined to only $23 million, causing the bank to become critically undercapitalized, prompting regulators to close Rainier.

Carson River Community Bank, Carson City, Nevada - Banking Failure Number 21

The FDIC, as receiver, entered into a purchase and assumption agreement with Heritage Bank of Nevada, Reno, Nevada to assume all of the deposits and to purchase $38 million of assets of Carson River Bank.  At the time of closing, Carson River had $51 million in assets and $50 million in deposits.   The FDIC entered into a loss-share transaction on $28.5  million of the acquired assets to limit future potential losses to Heritage Bank. The FDIC is retaining $23 million of the failed bank’s assets for later disposition.

The loss to the FDIC on closing Carson River Bank is estimated at $7.9 million.  Carson River Bank is the first bank to fail in Nevada this year.

Rainier Pacific Bank, Tacoma, Washington - Banking Failure Number 22

Rainier Bank’s closure followed months of unsuccessful efforts to raise additional capital.  Rainier Bank was classified as undercapitalized by the FDIC when they issued a “Supervisory Prompt Corrective Action Directive” on September 8, 2009.  After the Bank was issued a cease and desist order in October, 2009, Rainier’s management made it clear that they did not expect to be successful in raising additional capital and issued the following statement:

“Given the generally soft current market conditions for bank mergers and acquisitions, and the desire for FDIC-assisted transactions by many acquirers, it is unlikely that the company’s efforts to meet the recapitalization requirements will be successful prior to any further or more severe actions that the company’s and the bank’s regulators may take, including the assumption of control of the bank to protect the interests of the depositors insured by the FDIC.”

Trust preferred securities are debt securities issued by banks.  During the past decade, regional and small banks issued about $50 billion in trust preferred securities.   Prior to the banking crisis, the trust preferred securities appeared to be safe investments since the securities had senior claim positions if the issuing bank failed.   These bank issued securities were bundled together and sold as trust preferred collateralized debt obligations (CDO).   Rainier Bank bought these CDOs for their investment portfolio.

The meltdown in the value of these CDOs occurred when earnings of the issuing banks collapsed and the probability of default on the trust preferred securities became likely.  Debt rating downgrades on the CDO’s further contributed to a plunge in values.  What Rainier Bank perceived to be a “safe investment” quickly became the major contributing factor in the failure of the bank.  Rainier shares (RPFG) have declined from above $22 per share in 2007 to close at 18 cents on Friday - investors now face a complete loss.

Yahoo Finance

The FDIC, as receiver, entered into a purchase and assumption agreement with Umpqua Bank of Roseburg, Oregon to assume all of the deposits and to purchase $670 million of assets of Rainier Bank.  At the end of last year, Rainier had $717.8 million in assets and $446.2 million in deposits.  The FDIC entered into a loss-share transaction on $578.1  million of the acquired assets to limit future potential losses to Umpqua Bank. The FDIC is retaining $48 million of the failed bank’s assets for later disposition.

The loss to the FDIC on closing Rainier Bank is estimated at $95.2 million.  Rainier Bank is the fourth bank to fail in Washington this year.

Banking Links - February 26, 2010

Banks In Crosshairs Again - Blamed For Greek Debt Crisis - WP

Fannie Mae Losses Top $120 Billion - No End In Sight For Taxpayer Bailout - Bloomberg

Should The Fed Be Supervising Banks? - WP

Banks, Like Everyone Else, Face Massive Tax Hikes - Bloomberg

‘Nascent’ Recovery Requires Low Rates - Bloomberg

Banks Bet On Greece Default - NYT

Credit Card Borrowing Becomes Road To Impoverishment - NYT

Bernanke Seeks To Preserve Fed’s Powers - WP

Citigroup To Sell Hedge Fund Business - WSJ

Banks Ease Terms On Jumbo Mortgage Lending -LAT

No Easy Way Out For World Economy - FT

Greek Government Bonds Face Credit Downgrade - WSJ

The FDIC Quarterly Banking Profile for the latest quarter ending December 31, 2009 continues to show a banking industry struggling with record levels of charge-offs and noncurrent loans.

Net Charge-offs And Noncurrent Loans At Record Levels

Net charge-offs for the fourth quarter of $53 billion increased by $14.4 billion over the same period in 2008.   Net charge-offs were at the highest quarterly level in 26 years for which data is available.   Noncurrent loans and leases increased by $24.3 billion or 6.6% to $391.3 billion, or 5.4% of all loans and leases.  The level of noncurrent loans and leases is the highest level in the past 26 years for which such data has been reported.   Selected graphs shown below highlight the continuing problems of the banking industry.

Problem Bank List Increases By 27% To 702 Institutions

During the fourth quarter, the number of insured institutions declined by 87, primarily the result of bank failures and mergers.  The number of insured institutions declined by 293 for the full year, from 8,305 to 8,012.   The number of new banking charters during 2009 totaled 31, the smallest number since 1942.  The number of institutions on the FDIC Problem Bank List rose to 702 at December 31, 2009, up from 552 at September 30, 2009 and up from 252 at the end of 2008.  Total assets of Problem Banks totaled $402.8 billion at December 31, 2009 compared to $159.0 billion at the end of 2008.  The number of Problem Banks and the amount of Problem Bank assets are at the highest level since the quarter ending June 30, 1993.

Ratio Of Reserves To Noncurrent Loans Falls

The coverage ratio of reserves to noncurrent loans and leases fell to 58%, the lowest level since 1991.   There was only a $7.0 billion (3%) increase in reserves for loan and lease losses as loss provisions increased by $8 billion more than net charge-offs.    The ratio of reserves to total loans and leases is at the highest level in history at 3.12%.

Bank Lending Plunges

For the fourth consecutive quarter, banking assets declined.  For all of 2009, total banking assets declined by a stunning $731 billion (5.3%), the largest decline in the history of the FDIC.   Balances in all major loan categories declined, except for credit cards which increased by $29 billion.

FDIC Insurance Fund At Lowest Level On Record

The FDIC Deposit Insurance Fund (DIF) declined during the fourth quarter to negative $20.9 billion due to provisions for bank failures totaling $17.8 billion.  The DIF reserve ratio at December 31, 2009 was a negative .39%, the lowest reserve ratio on record.   The negative DIF fund balance reflects $44 billion for contingent loss reserves set aside to cover estimated losses for failed banks.  The combined DIF fund balance and contingent loss reserves result in total DIF reserves of $23.1 billion.  Reflecting the $46 billion prepaid assessment collected from the banking industry during the fourth quarter of 2009, the FDIC has liquid resources of $66 billion at December 31, 2009, up from $23 billion at September 30, 2009.

Banking Industry Struggling As One Third Of All Banks Report Losses

Although the banking industry’s fourth quarter net income was $914 million compared to a loss of $37.8 billion a year earlier, the industry clearly has a long ways to go in restoring its financial health.  The bulk of the earnings improvement was at the largest banks, as 32.7% of all institutions reported net losses for the quarter.  FDIC Chairman Sheila Bair gave a positive spin on the latest results, noting that “as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets.”   Based on the large increase in Problem Banks, record levels of defaults and an economic recovery judged to be tentative by many,  a real recovery in the banking industry may be many years away.

Sovereign Defaults - When The Impossible Becomes Inevitable - Bloomberg

Treasury To Borrow $200 Billion For The Fed - WSJ

Banks Expand Consumer Lending At 120% Interest Rates - Bloomberg

Banks Spurn Small Business Loans - Baseline Scenario

Banks Cash In On Overdraft Fees - NYT

How The Government Encourages Strategic Mortgage Defaults - FT

Excess Leverage Always Has A Bad Ending - Atlantic

Japan, Like Greece, Is Beyond Redemption - Bloomberg

Loan Mods Nothing More Than An Expensive Delay - Guess Who Pays? -Calculated Risk

Why Every Welfare State Will Follow Greece Into The Abyss - WP

US Banking Lending Drops At Fastest Rate In History - Telegraph

The “Too Big To Fail” Lie - Safe Haven

Regulatory Financial Reform - All Talk, No Action - FS

Without Borrowers Or Lenders, Deflation Is Inevitable - B Prechter

Yield Starved Japanese Scoop Up US Treasury Debt - Bloomberg

Fed Shows Its Hand With Discount Rate Hike - Econobrowser

Low Borrowing Rates Meaningless Without Income - NYT

Fundamental Financial Reform Victim Of Competing Special Interests - NYT

Too Big To Fail And Systemic Risk Issues Will Remain Unresolved - WSJ

The Fed’s Risky Early Exit Strategy - Financial Sense

The FDIC is encouraging banks under its supervision to increase lending to small businesses.   In a recent Financial Institution Letter, the FDIC highlights reasons for the decline in lending to small businesses as well as the rationale for banks to lend more aggressively.

The FDIC’s message to banks seems clear - a) regulators are willing to take a lenient position in regards to the risk management policies related to small business lending b) declines in collateral value will not be deemed as a sufficient reason to adversely classify a loan and c) financial institutions that engage in “prudent small business lending” will not be subject to criticism.

Based on the theory that more lending is necessary for an economic recovery, the FDIC is promoting loan growth while most banks are still attempting to come to grips with the huge losses from the last recent round of lenient lending and poor underwriting decisions.  Strong collateral values, once viewed as a fundamental principle of sound lending, no longer seem important to the FDIC as they advise banks that declines in collateral values will be largely ignored.   The FDIC’s promise that they will not criticize  “prudent lending” to small businesses seems especially odd.   If a loan was “prudently approved”, why would it possibly be subject to later criticism?

Perhaps the point the FDIC is missing is that banks have reduced lending for very valid and fundamental reasons.  Many qualified borrowers do not need new loans due to reduced demand for their goods and services in a weak economy.  Banks are still justifiably reluctant to lend to any but the best credits due to mounting defaults and the struggle to raise additional capital.   One glance at the chart below clearly shows why banks are more concerned with reducing the current massive level of loan defaults rather than making new loans.

Banks are in business to make loans but they also want to stay in business.   Until banks can resolve the mountain of bad debts they are struggling with, the FDIC’s plea to increase lending is likely to be futile.  There are valid reasons why lending and loan demand have decreased and until those fundamental issues are resolved, new lending or borrowing is probably not the “prudent” thing to do.