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7 more banks fail as FDIC mulls rules for sales

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By STEPHEN MANNING, The Associated Press Updated 8:06 PM Thursday, July 2, 2009

WASHINGTON — Six Illinois banks and one bank in Texas were shuttered Thursday as government regulators proposed new rules for private equity firms seeking to take over failed banks.

Regulators shut down John Warner Bank of Clinton, Ill.; First State Bank of Winchester in Winchester, Ill.; Rock River Bank of Oregon, Ill.; Elizabeth State Bank of Elizabeth, Ill.; Danville, Ill.-based The First National Bank of Danville; Founders Bank of Worth, Ill.;and Dallas-based Millennium State Bank of Texas, bringing the number of U.S. bank failures this year to 52.

That's more than double the 25 which failed in all of 2008 and the three closed in 2007. The Federal Deposit Insurance Corp. was appointed receiver of all seven. The total cost to the Deposit Insurance Fund from the seven closings will be $314.3 million, the FDIC said.

The failure of the six Illinois banks, which are all controlled by one family, resulted primarily from losses on investments in risky instruments known as collateralized debt obligations and other loan losses, the FDIC said. The closings bring to 12 the number of Illinois banks closed this year.

Deposits of John Warner Bank were acquired by Lincoln, Ill.-based State Bank of Lincoln. Three John Warner Bank branches will reopen on Friday as branches of State Bank of Lincoln, the FDIC said in a statement.

As of April 30, The John Warner Bank had total assets of $70 million and total deposits of approximately $64 million. In addition to assuming all the deposits of the failed bank, State Bank of Lincoln agreed to buy about $63 million of assets. The FDIC will retain the remaining assets for later disposition.

The deposits of First State Bank of Winchester were acquired by Beardstown, Ill.-based The First National Bank of Beardstown. Two offices will reopen on Monday under the new bank name.

The First State Bank of Winchester had total assets of $36 million and total deposits of approximately $34 million as of April 30. The First National Bank of Beardstown also agreed to buy about $33 million of assets.

Rock River Bank's deposits and most of its assets were acquired by The Harvard State Bank of Harvard, Ill. Four bank branches will reopen on Monday as Harvard banks.

At the end of April, Rock River Bank had $77 million in assets and $75.8 million in deposits.

The Elizabeth State Bank's two offices will reopen Monday as branches of Galena State Bank and Trust of Galena, Ill. In addition to assuming all of the failed bank's deposits, Galena agreed to buy $52.3 million of the bank's assets.

The Elizabeth State Bank had total assets of $55.5 million and total deposits of $50.4 million at the end of April.

The seven offices of The First National Bank of Danville will reopen on Monday as branches of First Financial Bank of Terre Haute, Ind., which assumed all of the bank's deposits. As of April 30, The First National Bank had total assets of $166 million and total deposits of $147 million.

The PrivateBank and Trust Co. of Chicago agreed to assume all of the deposits of Founders Bank. Its 11 offices will reopen on Monday as branches of The PrivateBank, which also agreed to buy $888.4 million of assets.

As of April 30, Founders Bank had total assets of $962.5 million and total deposits of $848.9 million.

Millennium State Bank of Texas became the first bank in Texas to fail this year. Its sole office will reopen on Monday as a branch of Irving, Texas-based State Bank of Texas, which is assuming all of Millennium's deposits. State Bank of Texas also agreed to buy essentially all of the bank's assets.

As of June 30, Millennium had total assets of about $118 million and total deposits of $115 million.

Under new rules proposed Thursday by the FDIC, private equity firms seeking to buy failed banks would face strict capitalization and disclosure requirements, but some regulators already warn the proposal may go too far.

The FDIC is seeking to expand the number of potential buyers for the growing number of banks it has closed during the financial crisis. With mounting interest from private equity firms, whose methods and motives aren't always clear, the FDIC is trying to set requirements to ensure the banks won't fail again.

One of the new proposals under discussion would require investors to maintain a healthy amount of cash in the banks they acquire, keeping them at about a 15-percent leverage ratio for three years. Most banks have lower leverage ratios, which measure capital divided by assets.

Investors also would have to own the banks for at least three years and face limits on their ability to lend to any of the owners' affiliates.

Regulators said their intent was to tap into the potentially deep source of private equity, while ensuring that banks remain well capitalized once they are sold.

"We want nontraditional investors," FDIC Chairman Sheila Bair said at the board meeting. "There is a significant need for capital and there is capital out there."

Still, some regulators worried that the rules could stifle a potentially valuable new source of investment. Bair said the proposal was "solid," but acknowledged that some details, including the high capital requirements, could be controversial.

Comptroller of the Currency John Dugan said that the rules, which will now be subject to public comment, may be too restrictive.

The Private Equity Council, a Washington-based advocacy group for firms, criticized the proposed FDIC guidelines. In a statement, the group's president, Douglas Lowenstein, said the proposals would "deter future private investments in banks that need fresh capital."

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