By Colin Barr, senior writerDecember 23, 2009: 9:36 AM ET
NEW YORK (Fortune) -- The New Year is shaping up to be a rough one for community lenders.
Dozens if not hundreds of small banks figure to disappear in 2010, as a weak economy and regulatory pressure lead to more failures and mergers.
President Obama met Tuesday with eight community bank executives, including the chiefs of German American Bancorp (GABC) and Monadnock Bancorp. Obama hailed the bankers as playing a "vital function," and cited "enormous opportunities" for economic growth if they keep lending.
The community bankers surely made for a more receptive audience than the big-bank CEOs Obama addressed last week. Small-business lending, after all, is what smaller banks do best. The Independent Community Bankers of America trade group notes that community banks account for almost a third of small business loans under $1 million.
But the smallest banks have been dropping like flies for years, as they labor to master expensive new technologies and regulatory changes -- at a time when giant banks spawned in a rash of megamergers are expanding their reach.
The consolidation trend should only strengthen in the coming year. Dozens of banks will fail as their customers retrench in a weak economy. Meanwhile, regulators will keep pressuring bankers to lend cautiously -- prompting weaker banks to merge into stronger ones as growth remains elusive.
"A lot of the regional and community banks are going to struggle to remain independent," said Terry Moore, a managing director at Accenture. "We're going to see those numbers shrinking."
They have shrunk a lot already. The number of commercial banks with assets of $50 million or less has dropped by more than 3,600 since 1994, to 1,198, according to recent Federal Deposit Insurance Corp. data.
At the same time, the deposits held by the biggest banks have soared, following years of megamergers punctuated by last year's bailouts. The five biggest banks -- Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Citi and PNC (PNC, Fortune 500) -- held 37% of all deposits at June 30. That's triple the top five's share 15 years ago, according to the FDIC.
Questions about concentration at the top of the industry have been intensified by a steady drumbeat of small bank failures. This year has brought 140 bank failures, and nearly four times as many institutions are now classified by regulators as troubled -- meaning failures in 2010 are likely to reach into triple digits again.
Given those daunting numbers, the FDIC appears to be focusing on closing weak banks rather than luring in new capital from the likes of private equity investors.
Yet at the same time, even troubled megabanks such as Citi have been able to raise staggering sums in the marketplace, in part because it has become clear the government won't let them fail. This apparent disconnect chafes some observers who say private investors could be helping to rebuild small banks.
"What Citi tells you is there are enormous pools of capital willing to take risk, given the right circumstances," said Hal Reichwald, a lawyer at Manatt Phelps & Phillips in Los Angeles who represents investors.
With tens of billions of dollars of souring construction and commercial real estate loans on their books, regional and community banks could use some of that capital. But the weak economy and the wave of bank failures have made it hard for smaller banks to raise new funds.
Of course, economic stress spells opportunity for stronger community banks. Ted Peters, CEO of Bryn Mawr Bank Corp. (BMTC) in suburban Philadelphia, said he sees the wide-open merger landscape in financial services as "a once-in-a-career opportunity" for him and his $1.2 billion firm.
Bryn Mawr agreed last month to acquire First Keystone Financial, a Media, Pa., savings bank, and Peters said he's considering possible tie-ups with investment firms and other financial institutions.
Peters said the fact that community banks didn't help blow up the economy with derivatives has resonated with lawmakers and now creates another selling point with customers.
"Right now, the big banks are being portrayed as the bad guys and the other 8,100 banks are being seen as the good guys," he said.
He expects this perception to enable his bank to continue to grab market share over the next year. But he isn't expecting any miracles.
For instance, Obama pledged Tuesday, in response to complaints from the Independent Community Bankers of America about heavy-handed regulation, to "see if there are possibilities to cut some of the red tape."
But Peters remains skeptical. "I've been a bank president for 25 years, and I'm still waiting for them to cut red tape for the first time," he said.
Monday, December 28, 2009
Big paydays for Fannie and Freddie bosses
NEW YORK (CNNMoney.com) -- Top executives at mortgage finance giants Fannie Mae and Freddie Mac, both of which have been under government control since last year, received millions of dollars in pay in 2009, according to documents filed by the companies Thursday.
The chief executive officers of each company got annual pay packages worth $6 million apiece, while other top execs pulled in at least $2 million.
Fannie Mae (FNM, Fortune 500) CEO Michael Williams, who was promoted to CEO on April 21, will receive about $4.2 million in base salary and deferred cash payments for his time in the top job. The filing does not detail how much he was paid for his time as chief operating officer before his promotion, or what he will earn in 2010.
David Johnson, the chief financial officer and No. 2 at the company, was paid at a $3.5 million annual rate. The annual pay rate of five other top Fannie executives topped $2 million apiece.
In addition, Williams and three other top executives are eligible to receive payments pursuant to a 2008 retention program, according to the filing.
At Freddie (FRE, Fortune 500), its slightly smaller rival, CEO Charles Haldeman will receive about half his $6 million package in 2009 since he was named to the top spot on July 21.
Haldeman, former chairman of Putnam Investment Management, is due to receive $6 million in 2010.
Bruce Witherell, Freddie's chief operating officer and No. 2 at the company, was paid at a $4.5 million annual rate and is due to get that amount in 2010, while Ross Kari, the chief financial officer, was paid at a $3.5 million annual rate this year and is also due the same next year. Both joined the company since September so they will get only a fraction of that money this year.
The executives' pay packages were approved by both the Federal Housing Finance Agency, the regulator that oversees their operations, as well as the Treasury Department, according to the filings.
The statements were released just after Congress had adjourned for the holiday recess, which limited the amount of criticism the packages might spark.
One expert said it is important that both firms retain good executives in order to come up with ways to fulfill the government's demands to support the housing market while minimizing the ongoing losses.
"It's a difficult environment for both firms. They've had a hard time keeping people at both places," said Edward Pinto, a financial services industry consultant who was chief credit officer at Fannie back in the 1980s. "Having said that, the government gets a lot of people to work at Housing and Urban Development for a lot less than that."
Both firms have gotten huge bailouts from Treasury to help cover their losses since they were taken over by the government, with Fannie having drawn down $60.9 billion and Freddie having drawn $50.7 billion. Both firms had $200 billion credit lines with Treasury. On Thursday, Treasury announced that it would remove the cap for the next three years.
Treasury spokespeople were not available for comment Thursday. And neither Fannie nor Freddie had any statement beyond their filings with the Securities and Exchange Commission.
The chief executive officers of each company got annual pay packages worth $6 million apiece, while other top execs pulled in at least $2 million.
Fannie Mae (FNM, Fortune 500) CEO Michael Williams, who was promoted to CEO on April 21, will receive about $4.2 million in base salary and deferred cash payments for his time in the top job. The filing does not detail how much he was paid for his time as chief operating officer before his promotion, or what he will earn in 2010.
David Johnson, the chief financial officer and No. 2 at the company, was paid at a $3.5 million annual rate. The annual pay rate of five other top Fannie executives topped $2 million apiece.
In addition, Williams and three other top executives are eligible to receive payments pursuant to a 2008 retention program, according to the filing.
At Freddie (FRE, Fortune 500), its slightly smaller rival, CEO Charles Haldeman will receive about half his $6 million package in 2009 since he was named to the top spot on July 21.
Haldeman, former chairman of Putnam Investment Management, is due to receive $6 million in 2010.
Bruce Witherell, Freddie's chief operating officer and No. 2 at the company, was paid at a $4.5 million annual rate and is due to get that amount in 2010, while Ross Kari, the chief financial officer, was paid at a $3.5 million annual rate this year and is also due the same next year. Both joined the company since September so they will get only a fraction of that money this year.
The executives' pay packages were approved by both the Federal Housing Finance Agency, the regulator that oversees their operations, as well as the Treasury Department, according to the filings.
The statements were released just after Congress had adjourned for the holiday recess, which limited the amount of criticism the packages might spark.
One expert said it is important that both firms retain good executives in order to come up with ways to fulfill the government's demands to support the housing market while minimizing the ongoing losses.
"It's a difficult environment for both firms. They've had a hard time keeping people at both places," said Edward Pinto, a financial services industry consultant who was chief credit officer at Fannie back in the 1980s. "Having said that, the government gets a lot of people to work at Housing and Urban Development for a lot less than that."
Both firms have gotten huge bailouts from Treasury to help cover their losses since they were taken over by the government, with Fannie having drawn down $60.9 billion and Freddie having drawn $50.7 billion. Both firms had $200 billion credit lines with Treasury. On Thursday, Treasury announced that it would remove the cap for the next three years.
Treasury spokespeople were not available for comment Thursday. And neither Fannie nor Freddie had any statement beyond their filings with the Securities and Exchange Commission.
Monday, December 21, 2009
Mortgage Bankers Oppose SEC Proposal on Disclosure of Preliminary Ratings
December 21, 2009
National Real Estate Investor
The Mortgage Bankers Association has notified the Securities and Exchange Commission (SEC) of its opposition to a proposed rule requiring the disclosure of preliminary ratings of securities. The rule could potentially affect many investors in commercial real estate securities.
The Washington, D.C.-based bankers group contends that disclosing preliminary ratings of commercial mortgage-backed securities (CMBS) carries the risk of providing misleading information to investors in commercial real estate.
The SEC is considering a number of steps to make the process of rating securities more transparent in order to protect investors. The proposed rule is intended to curb the practice of “ratings shopping,” which involves soliciting a number of rating agencies for a preliminary rating and choosing an agency based on the early rating that is most favorable.
The mortgage bankers group says that the composition of a group of loans can change substantially after it is initially rated, before the final selection of loans is made, so that the early rating often is no longer relevant for the resulting security.
“In the case of CMBS, the pool of properties comprising the securitization can change significantly from the initial pool that received the preliminary rating,” John Courson, president and CEO of the Mortgage Bankers Association told SEC Secretary Elizabeth Murphy. Therefore, disclosure of the preliminary rating information for a loan pool is unlikely to accurately reflect the final pool of loans that were securitized, Courson said.
“What this rule requires is that the preliminary rating be disclosed. On paper, it doesn’t sound like a bad idea but once you understand how a commercial mortgage-backed security works, it’s really not a good idea,” says George Green, associate vice president of MBA.
For example, if 100 loans are contributed to a pool and packaged into a commercial mortgage-backed security, the loans are stratified by rating and different investors buy different portions of the pool, says Green. Some tranches of the security may be rated AAA while others are rated BBB.
The investor who buys sub-investment grade tranches, below a B rating, can pick and choose and eliminate some loans from the original pool, which affects the final rating.
In addition, an initial rating can be very cursory, says Green. After rating examiners conduct due diligence and investigate the quality of the bundled loans, the final rating can also change.
The proposal to require disclosure of preliminary ratings of securities would amend statements filed under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. After devastating losses throughout the CMBS and other securities markets over the past two years, the SEC is trying to assure that investors are properly informed before making investment decisions.
The agency called for comment on the proposed rule change, and now that the comment period is closed it will study the responses for several weeks or months before making a final determination on whether to require the disclosure of preliminary ratings.
In general, the mortgage bankers group supports transparency in the ratings process, says Green.
One way potential investors can learn more about CMBS is to weigh both solicited and independent ratings.
An emerging group of ratings agencies conduct unsolicited or independent ratings of securities. The agencies are not paid in the traditional way, by the issuer of the security, but by subscribers to the agencies’ services. The independent ratings have become increasingly popular.
“Really they are providing a second opinion of the issuer-provided ratings,” says Green. “They can then be compared to the ratings that were performed by the issuer-commissioned ratings. We see that as the way to resolve the problem.”
National Real Estate Investor
The Mortgage Bankers Association has notified the Securities and Exchange Commission (SEC) of its opposition to a proposed rule requiring the disclosure of preliminary ratings of securities. The rule could potentially affect many investors in commercial real estate securities.
The Washington, D.C.-based bankers group contends that disclosing preliminary ratings of commercial mortgage-backed securities (CMBS) carries the risk of providing misleading information to investors in commercial real estate.
The SEC is considering a number of steps to make the process of rating securities more transparent in order to protect investors. The proposed rule is intended to curb the practice of “ratings shopping,” which involves soliciting a number of rating agencies for a preliminary rating and choosing an agency based on the early rating that is most favorable.
The mortgage bankers group says that the composition of a group of loans can change substantially after it is initially rated, before the final selection of loans is made, so that the early rating often is no longer relevant for the resulting security.
“In the case of CMBS, the pool of properties comprising the securitization can change significantly from the initial pool that received the preliminary rating,” John Courson, president and CEO of the Mortgage Bankers Association told SEC Secretary Elizabeth Murphy. Therefore, disclosure of the preliminary rating information for a loan pool is unlikely to accurately reflect the final pool of loans that were securitized, Courson said.
“What this rule requires is that the preliminary rating be disclosed. On paper, it doesn’t sound like a bad idea but once you understand how a commercial mortgage-backed security works, it’s really not a good idea,” says George Green, associate vice president of MBA.
For example, if 100 loans are contributed to a pool and packaged into a commercial mortgage-backed security, the loans are stratified by rating and different investors buy different portions of the pool, says Green. Some tranches of the security may be rated AAA while others are rated BBB.
The investor who buys sub-investment grade tranches, below a B rating, can pick and choose and eliminate some loans from the original pool, which affects the final rating.
In addition, an initial rating can be very cursory, says Green. After rating examiners conduct due diligence and investigate the quality of the bundled loans, the final rating can also change.
The proposal to require disclosure of preliminary ratings of securities would amend statements filed under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. After devastating losses throughout the CMBS and other securities markets over the past two years, the SEC is trying to assure that investors are properly informed before making investment decisions.
The agency called for comment on the proposed rule change, and now that the comment period is closed it will study the responses for several weeks or months before making a final determination on whether to require the disclosure of preliminary ratings.
In general, the mortgage bankers group supports transparency in the ratings process, says Green.
One way potential investors can learn more about CMBS is to weigh both solicited and independent ratings.
An emerging group of ratings agencies conduct unsolicited or independent ratings of securities. The agencies are not paid in the traditional way, by the issuer of the security, but by subscribers to the agencies’ services. The independent ratings have become increasingly popular.
“Really they are providing a second opinion of the issuer-provided ratings,” says Green. “They can then be compared to the ratings that were performed by the issuer-commissioned ratings. We see that as the way to resolve the problem.”
Hotel Deal Volume Forecast to Rise Up to 40% Globally in 2010
December 21, 2009
National Real Estate Investor
For the first time in two years, hotel transactions may finally be on the upswing. In a new report, Jones Lang LaSalle Hotels forecasts that global hotel transaction volume will increase next year by 20% to 40%.
The brokerage and real estate services firm projects that transaction levels could reach $11 billion to $13 billion in 2010, up from an estimated $9 billion worth of deals in 2009.
Asian investors are expected to play a key role in the investment surge, as they scout for buying opportunities in the United States and Europe.
Across the world, the trading of single hotel assets will initiate the recovery, said Arthur de Haast, global CEO of Jones Lang LaSalle Hotels. “Entrepreneurial transactions that can be financed regionally or locally will be the first to re-enter the market.”
The projection is encouraging after the anemic showing of 2009. For the year, projected deal volume is down 64% from 2008, when $24.8 billion in hotel transactions were recorded. In its 2010 investment outlook, Jones Lang LaSalle said transactions were expected to rise after hitting the lowest level in a decade.
Single asset deals will be particularly attractive to investors shying away from big portfolio buys, according to de Haast. “Equity-rich opportunistic buyers will also look at select larger single-asset transactions in global gateway markets, but our 2010 volume forecast assumes there will be few substantial portfolio transactions in the new year.”
Sovereign wealth funds re-emerge
Asian investors are expected to play a pivotal role. “Asian conglomerates are poised to emerge as one of the primary global acquisition groups in 2010 as they seek prime assets in gateway markets, especially in the United States and the United Kingdom, playing to currency fluctuations,” de Haast said.
Sovereign wealth funds from the Middle East and Asia are expected to re-emerge in the market, investing in hotels as a hedge against inflation.
However, apart from the Asian conglomerates and Middle Eastern investors, buyers are expected to be risk-averse and to prefer their home markets.
As of Dec. 10, cross-border activity amounted to just 38% of total capital invested globally in 2009, and that figure is not expected to change by the end of the year. It represents a substantial drop from 2008, when cross-border activity reached 48% of transaction volume.
In 2010, cash buyers will be in the best position to capture investment deals. However, with traditional loans scarce, new investment vehicles have sprung up to help hotel borrowers, propelling deals that might not otherwise have occurred in this credit-strapped environment.
Public stock offerings and mortgage and equity REITs will also drive acquisitions, according to de Haast. But deal volume is expected to be far lower than during the market peak of 2007, when commercial mortgage backed securities were readily available.
Lenders sell more troubled assets
Worldwide, the hotel market is suffering significant stress, and lenders have offered workouts to many strapped borrowers as they try to recapitalize debt rather than foreclose.
Still, more troubled assets are expected to fall into lenders’ hands. “As more assets are placed under the control of banks, we expect more of the upcoming sales activity to be driven by banks, which will provide a lift to hotel transaction volumes. But the number of distressed assets on the market will not come in form of a tidal wave,” said de Haast.
The pace of recovery is expected to vary across global markets, as investors look for at least three consecutive months of year-over-year room rate and occupancy growth. After a year of frozen liquidity and stalled transactions, 2010 will bring improvement, according to Jones Lang LaSalle.
National Real Estate Investor
For the first time in two years, hotel transactions may finally be on the upswing. In a new report, Jones Lang LaSalle Hotels forecasts that global hotel transaction volume will increase next year by 20% to 40%.
The brokerage and real estate services firm projects that transaction levels could reach $11 billion to $13 billion in 2010, up from an estimated $9 billion worth of deals in 2009.
Asian investors are expected to play a key role in the investment surge, as they scout for buying opportunities in the United States and Europe.
Across the world, the trading of single hotel assets will initiate the recovery, said Arthur de Haast, global CEO of Jones Lang LaSalle Hotels. “Entrepreneurial transactions that can be financed regionally or locally will be the first to re-enter the market.”
The projection is encouraging after the anemic showing of 2009. For the year, projected deal volume is down 64% from 2008, when $24.8 billion in hotel transactions were recorded. In its 2010 investment outlook, Jones Lang LaSalle said transactions were expected to rise after hitting the lowest level in a decade.
Single asset deals will be particularly attractive to investors shying away from big portfolio buys, according to de Haast. “Equity-rich opportunistic buyers will also look at select larger single-asset transactions in global gateway markets, but our 2010 volume forecast assumes there will be few substantial portfolio transactions in the new year.”
Sovereign wealth funds re-emerge
Asian investors are expected to play a pivotal role. “Asian conglomerates are poised to emerge as one of the primary global acquisition groups in 2010 as they seek prime assets in gateway markets, especially in the United States and the United Kingdom, playing to currency fluctuations,” de Haast said.
Sovereign wealth funds from the Middle East and Asia are expected to re-emerge in the market, investing in hotels as a hedge against inflation.
However, apart from the Asian conglomerates and Middle Eastern investors, buyers are expected to be risk-averse and to prefer their home markets.
As of Dec. 10, cross-border activity amounted to just 38% of total capital invested globally in 2009, and that figure is not expected to change by the end of the year. It represents a substantial drop from 2008, when cross-border activity reached 48% of transaction volume.
In 2010, cash buyers will be in the best position to capture investment deals. However, with traditional loans scarce, new investment vehicles have sprung up to help hotel borrowers, propelling deals that might not otherwise have occurred in this credit-strapped environment.
Public stock offerings and mortgage and equity REITs will also drive acquisitions, according to de Haast. But deal volume is expected to be far lower than during the market peak of 2007, when commercial mortgage backed securities were readily available.
Lenders sell more troubled assets
Worldwide, the hotel market is suffering significant stress, and lenders have offered workouts to many strapped borrowers as they try to recapitalize debt rather than foreclose.
Still, more troubled assets are expected to fall into lenders’ hands. “As more assets are placed under the control of banks, we expect more of the upcoming sales activity to be driven by banks, which will provide a lift to hotel transaction volumes. But the number of distressed assets on the market will not come in form of a tidal wave,” said de Haast.
The pace of recovery is expected to vary across global markets, as investors look for at least three consecutive months of year-over-year room rate and occupancy growth. After a year of frozen liquidity and stalled transactions, 2010 will bring improvement, according to Jones Lang LaSalle.
$128 Million Sale of Intuit Real Estate Solutions to Close in January
December 21, 2009
National Real Estate Investor
Intuit Inc.’s sale of Intuit Real Estate Solutions to Vista Equity Partners, a private equity firm for $128 million in cash is expected to close Jan. 31, according to company officials.
Intuit (Nasdaq: INTU), based in Mountain View, Calif., announced in early December that it had signed a definitive agreement with Vista to sell the software provider, formerly known as Management Reports, Inc. Intuit is known for high-profile financial products such as Quicken and Turbo Tax.
Based in Highland Hills, Ohio, Intuit Real Estate Solutions is part of Intuit’s global business division and is a major provider of software and services to real estate management and investment firms. It has approximately 340 employees globally and more than 1,700 customers.
Vista Equity Partners focuses on investments in software and technology-enabled businesses.
“Intuit Real Estate Solutions is a great business with a bright future,” said Brad Smith, Intuit’s president and chief executive officer. “As we’ve focused our strategy on providing connected services that help consumers and small businesses, the Intuit Real Estate Solutions business model and the enterprise customers it serves are no longer a strategic, long-term fit for Intuit.”
However, the software operation does fit into Vista’s strategy. “We are long-term investors in enterprise application software businesses that are committed to being leaders in their markets,” said Robert Smith, managing principal of Vista Equity Partners.
Vista is interested in Intuit Real Estate Solutions’ products and its global customer base, said Smith. “We look forward to working with them to help them reach their full potential.”
Intuit Real Estate Solutions’ revenue totaled $74 million in fiscal year 2009 and was expected to rise to $80 million in fiscal year 2010.
Intuit said it expects its fiscal year 2010 revenue to grow 4% to 8% when IRES revenue is excluded from its fiscal 2009 results and 2010 guidance.
National Real Estate Investor
Intuit Inc.’s sale of Intuit Real Estate Solutions to Vista Equity Partners, a private equity firm for $128 million in cash is expected to close Jan. 31, according to company officials.
Intuit (Nasdaq: INTU), based in Mountain View, Calif., announced in early December that it had signed a definitive agreement with Vista to sell the software provider, formerly known as Management Reports, Inc. Intuit is known for high-profile financial products such as Quicken and Turbo Tax.
Based in Highland Hills, Ohio, Intuit Real Estate Solutions is part of Intuit’s global business division and is a major provider of software and services to real estate management and investment firms. It has approximately 340 employees globally and more than 1,700 customers.
Vista Equity Partners focuses on investments in software and technology-enabled businesses.
“Intuit Real Estate Solutions is a great business with a bright future,” said Brad Smith, Intuit’s president and chief executive officer. “As we’ve focused our strategy on providing connected services that help consumers and small businesses, the Intuit Real Estate Solutions business model and the enterprise customers it serves are no longer a strategic, long-term fit for Intuit.”
However, the software operation does fit into Vista’s strategy. “We are long-term investors in enterprise application software businesses that are committed to being leaders in their markets,” said Robert Smith, managing principal of Vista Equity Partners.
Vista is interested in Intuit Real Estate Solutions’ products and its global customer base, said Smith. “We look forward to working with them to help them reach their full potential.”
Intuit Real Estate Solutions’ revenue totaled $74 million in fiscal year 2009 and was expected to rise to $80 million in fiscal year 2010.
Intuit said it expects its fiscal year 2010 revenue to grow 4% to 8% when IRES revenue is excluded from its fiscal 2009 results and 2010 guidance.
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