With deal off, InterBank's status is in doubt

The future of a struggling savings and loan in Maple Grove has been cast into doubt after its planned acquisition by a Virginia insurance company fell through.

In November, Richmond, Va.-based Genworth Financial Inc. agreed to acquire InterBank fsb of Maple Grove so that Genworth could apply to become a savings and loan, which would make it eligible for the U.S. Treasury Department's $700 billion bailout program.

However, the companies' immediate hopes of accessing federal aid were dashed late last week when regulators failed to approve Genworth's bid to become a savings and loan before a key deadline.

Now, InterBank is left out in the cold, facing rising loan losses as the Twin Cities residential housing market continues to deteriorate. Some industry observers said InterBank must find a way to unload problem assets quickly and raise more capital or face government-mandated changes, including a possible takeover.

"This is a pretty significant issue, because if InterBank is losing that much money ... it likely will need more capital," said Michael Carlson, a partner in the finance and restructuring group at Minneapolis law firm Faegre & Benson. "And at this point in time, raising capital from the public is going to be exceedingly difficult or impossible. Their options are limited."

Though InterBank is well capitalized compared with many of its peers, its loan portfolio includes primarily residential real estate loans going bad at an accelerating rate. The thrift, with assets of about $840 million and branches in Maple Grove, Edina, Lakeville and Roseville, last year lost $23.4 million. It was the largest loss of any lending institution chartered in Minnesota.

During the housing boom, InterBank was known for finding creative ways to qualify people for mortgages. It offered a diverse mix of unconventional loans -- including 15-year, fixed-rate mortgages and so-called "hybrid ARMs," which offer an initial period at a fixed interest rate followed by a floating rate. Like other thrifts that have fallen into financial trouble, InterBank kept most of its mortgages on its books rather than resell them.

"That's a big concentration, when you consider that we haven't yet reached the bottom in the residential market," Anderson said.

'We still have a business'

InterBank's chief executive, Fred Stelter, said he remains confident of its financial position. He said it began to dramatically curtail the number of mortgages on its books two years ago as the housing market deteriorated. InterBank continues to make mortgages -- issuing $70 million in April alone -- but more than 95 percent of those loans are resold into the secondary market.

Stelter noted InterBank does not own many of the exotic mortgages, such as no-documentation loans or option ARMs, that have gotten many home lenders in hot water. However, its losses on bad loans more than quintupled last year, forcing the bank to dip into its cash earnings to boost its reserves against future loan losses. Last year, InterBank increased its loan-loss reserves by $16.5 million, compared with just $3 million the previous year.

InterBank's business plan involves working with borrowers to collect on delinquent loans, while generating fees from new mortgages, Stelter said. The deal with Genworth was not critical to survival, he added. "We had a business plan in place prior to Genworth coming along. Without Genworth, we still have a business."

Carlson said InterBank must move quickly to clean up its balance sheet or face a fate similar to such large thrifts as Washington Mutual and Indymac, seized by regulators last year after too many of their mortgages turned sour.

Federal regulators, he said, "have an obligation to protect the deposit insurance fund, so they need to resolve these problem banks in a least-cost manner. So they will move in earlier rather than wait for things to deteriorate further."

The housing crisis has touched off a spate of bank and thrift failures. Last year, 25 banks went under, followed by 23 so far this year. By comparison, there were no bank failures in 2005 and 2006.

Genworth, which sells life insurance and mortgage coverage, has had problems of its own. The insurer has canceled its dividend and cut 1,000 jobs, about 14 percent of its workforce, after an increase in claims tied to mortgage defaults drained capital.

The idea of two weak financial institutions merging to access public funds was "a long shot," said Tony Plath, finance professor at the University of North Carolina at Charlotte. The purpose of TARP, he said, was to bolster the finances of healthy banks and thrifts so they would kickstart the economy by making more loans. "Why give money to a couple of sick institutions when you have plenty of perfectly healthy ones with their hands out?"