FDIC Pledges $1 Billion to Save Big Texas Bank

Federal regulators Wednesday pledged nearly $1 billion to rescue the fourth-largest bank in Texas in the second-largest such bailout in U.S. history.

The rescue plan for First City Bancorporation of Texas gives control of the bank to A. Robert Abboud, former president of Occidental Petroleum and former chairman of First Chicago Corp., the parent company of First National Bank of Chicago, and other private investors.

The Federal Deposit Insurance Corp. gave preliminary approval to a plan to pump $970-million worth of government aid into the Texas holding company, which owns 62 banks. The plan calls also for Abboud and a New York investment bank to raise $500 million in new capital for First City through a public stock offering.

122 Banks Have Failed

The outlay is the FDIC’s largest by far since the $4.5-billion rescue of Continental Illinois Bank & Trust in 1984. Regulators predict that bank failures will reach a post-Depression high of 200 or more in 1987. So far this year, 122 banks have failed nationwide and 38 of them have been in Texas--roughly one a week in the Lone Star State.

Like many financial institutions in economically ailing Texas, Houston-based First City has been weakened by losses on oil and real estate loans, and a bailout had been expected for months.

What came as a surprise was the prospective infusion of half a billion dollars from private investors, which was viewed by analysts as a bright sign for the troubled Texas banking industry.

“First City was the most pressing financial problem among the banks in Texas, and it has been cured,” said Frank W. Anderson of the Dallas consulting firm of Ferguson & Co. “This also shows that Abboud and other sophisticated investors believe in the long-term status of the Texas economy.”

After more than a decade of dramatic growth, huge losses on real estate and oil loans have plunged dozens of Texas banks and thrifts into the red over the last two years, creating the shakiest banking climate in the country.

The state’s major banks have been forced to merge or sell out to survive: Two Dallas powerhouses, RepublicBank and InterFirst, have agreed to merge; New York’s Chemical Bank acquired Texas Commerce Bancshares; First Interstate Bancorp of Los Angeles agreed to buy Houston-based Allied Bancshares.

Depositors Fearful

Yet depositors have remained fearful and they have been moving their funds out of the state’s financial institutions, according to the Federal Reserve Bank of Dallas. Although deposits in thrifts and banks rose nationwide during the last several months, they declined by $1 billion in the first three months of the year in Texas.

Although many analysts and economists feel that the Texas economy has bottomed out, they warn that it may be two years or more before banks can shed existing bad loans and register even modest improvements.

Partly in response to the deep public concern, FDIC Chairman L. William Seidman used the announcement of the First City bailout Wednesday to sound an optimistic note.

“It should have a stabilizing effect because it shows that private funds are willing to come into Texas,” said Seidman, who added that he expects First City to be the last big Texas bank requiring federal assistance.

Abboud, who will be chairman and chief executive of the bank holding company, was equally upbeat, saying in a telephone interview, “One of my primary interests in identifying First City is my conviction that the Texas economy is beginning to turn around.”

Abboud was one of several bidders for the ailing holding company. Others that were considered by the FDIC reportedly included New York’s Citicorp, Houston investor Robert Carney and several foreign banks. Abboud, who has operated an investment firm in a Chicago suburb since leaving Occidental Petroleum two years ago, won the bidding after several months of behind-the-scenes negotiations with regulators.

Abboud said he will invest $5 million of his own money. The New York investment banking firm of Donaldson, Lufkin & Jenrette will arrange to raise about $500 million more through an offering of new stock in First City, part of a complex transaction that will reduce the share of the old common stockholders from the current 100% to less than 3%.

The shareholders still must approve the plan worked out by the regulators and Abboud. Analysts say they are likely to do so because otherwise the bank would fail and the shareholders would lose everything. It would have cost the FDIC far more than $970 million to declare the bank insolvent and pay off depositors.

Continental Illinois Bailout

The role of Abboud and other private investors in the First City bailout is a major difference between this and the Continental Illinois bailout. In the Continental rescue, no private buyer could be found, and the FDIC wound up owning the bank and losing $1 billion.

First City owns 61 banks in Texas and one in South Dakota and had assets of $12.2 billion as of June 30. The holding company lost $160.9 million in the first six months of this year and $402 million in 1986. The chief problem has been $1.79-billion worth of unproductive assets, largely bad loans--classified as non-performing or past due by bankers--for real estate and energy projects.

Under the bailout plan, those assets will be transferred to a new entity, called a collecting bank, which will be spun off from First City. Subsidiaries of First City will hold the senior notes of the collecting bank and a five-year note for $970 million from the FDIC. The FDIC note will bear interest at the Treasury bill rate plus half a percentage point, with principal payable by the FDIC in 10 equal semiannual installments.

Any collections that the new entity makes from the bad assets will be used first to pay First City subsidiaries, then to repay the FDIC notes.

Seidman said that, in the worst case, the FDIC could lose $800 million to $900 million on the transaction. But he said he still expects the agency’s insurance fund to break even this year and to remain at about the $18-billion net worth level.

Removing the bad assets will leave First City Bancorporation with assets of more than $10 billion and a far healthier institution, although much of its portfolio will still be in oil and real estate loans.

“Abboud is going to get . . . an institution with assets of roughly $10 billion for just $500 million,” said Christof M. Kotowski of the New York investment firm of Oppenheimer & Co. “That’s the draw for his investment group. But it’s still a question mark as to how soon the Texas economy will become robust again.”