Billionaire Banker's Blowout Year

Texas banker Andy Beal had a great 2009, but says we're in a credit bubble again.

Billionaire banker Andrew Beal continued one of the more intriguing stories of the financial crisis by nearly doubling his bank's profits in 2009--then he headed for the sidelines.

The maverick Texas banker virtually shut down his Beal Bank in the years prior to the financial crisis because he thought credit markets were going to blow up. After markets collapsed, he bought furiously and Beal Bank's assets grew to $9.2 billion at the end of 2009, more than three times higher than in the fall of 2007.

According to financial statements filed with bank regulators, Beal Bank's net income increased 95% last year to $547 million on net revenues of $606 million.

Now Beal has again largely stopped acquiring assets. "We are back in a credit bubble," says Beal. "We were buying like crazy a year ago, but all the good opportunities have gone away. We have slowed down dramatically and are not buying."

Beal's one exception: failed banks. He recently purchased failed banks in New Mexico and Alabama in deals that Beal found attractive because the Federal Deposit Insurance Corporation agreed to share losses on the acquired asset pools. "There are really no growth opportunities today other than failed banks," says Beal.

Beal Bank's strong 2009 financial performance was driven by a low cost of funds and assets like residential and commercial mortgage-backed securities that Beal scooped up cheaply in the months prior to the summer of 2009. Beal no longer finds those securities attractive, saying assets have been overvalued because the Federal Reserve has held interest rates extremely low. He says he will only buy assets that will remain profitable when interest rates rise to levels of around 6%. "I think it is all driven by the Fed and easy money, and that is what will have to change for this bubble to contract," says Beal. "A lot of people are speculating on interest rates using the zero base as their cost and they bid a lot of stuff up."

Beal does plan on originating about $1 billion of loans in 2010 but expects such originations will keep the bank's assets flat because he estimates about $1 billion of prior loans will be paid off. While there has been much hand wringing about a lack of bank lending in the country and an inability to get loans, Beal says he has found it hard to find good loan opportunities. "There are not that many borrowers who have sufficient collateral and cash flow who want to borrow money," says Beal.

Sitting out the credit boom has helped make Beal Bank one of the healthiest banks in the nation. With $5.3 billion in assets, his Nevada bank unit finished 2009 with a tier one risk-based capital ratio of 38.5%, and his Texas unit, with $3.9 billion of assets, had a tier one risk-based capital ratio of 26.75%, according to SNL Financial. The average tier one risk-based capital ratio for U.S. commercial banks at the end of 2009 was 11.43%, according to SNL Financial. JPMorgan Chase ( JPM - news - people ), for example, finished 2009 with a tier one capital ratio of 11.1%, a figure it boasted about in a press release.

Beal has, however, run into some problems in Atlantic City. He recently chose to sell 51% of a $485 million first-lien loan made to Trump Entertainment Resorts ( TRMP - news - people ) at a discount to a Carl Icahn investment vehicle. Beal made the decision after Donald Trump switched sides and joined bond holders in a bankruptcy court battle. A U.S. bankruptcy judge in New Jersey will soon decide whether to approve the Icahn-Beal proposal to convert the bank debt into equity or side with a bond holder plan that favors those unsecured creditors.