Friday, April 10, 2009

This Week in Bank Failures

Changes in accounting rules will allow some banks to report impressive-looking profits for the first quarter. These accounting changes allow banks to record assets such as loans at greater than market value when, in the bank’s opinion, there is not a well-functioning market for the asset. This is something banks were doing anyway, but with the rule change, they are likely to stretch it that much further. But more write-downs are ahead. Experts caution that most banks’ asset valuations are based on a projected unemployment level of 7.5 percent for this year. The actual unemployment level is already higher than that and is likely to reach 11 percent around the end of the year. Unemployed workers often make late loan payments, which is bad news for banks.

Saturday afternoon (morning on the west coast), A New Way Forward is organizing rallies nationwide to protest the Wall Street bailout. Offering the formula, “Nationalize–Reorganize–Decentralize,” they are asking for the largest banks to be broken up into pieces small enough that they can’t threaten the national economy.

According to published reports, the Treasury’s stress test has been completed and was designed to pass all of the 19 largest banks in the United States regardless of the condition they were in. The laws that cover bank examinations prevent the Treasury from saying much about any specific bank, but the secrecy surrounding the stress test is not reassuring.

The North Carolina Commissioner of Banks tonight ended the saga of Bank of Wilmington. This bank was founded in 1998 in Wilmington, North Carolina. It was known for the last two years as Cape Fear Bank as a reflection of a plan to expand its operations southward, yet in the end, six of its eight offices were in the Wilmington area. The bank saw massive loan losses that began soon after the name change and became the focus of a proxy fight that lasted most of last year. Proxy fights at banks are almost unheard of, and this one ended in a compromise when the bank’s CEO resigned in September. But the bank’s problems were just beginning, as losses continued to mount, and in February, the bank’s stock value fell to less than $2 million as the FDIC issued a cease-and-desist order to prevent the bank from paying any dividends to stockholders. One week ago, the bank suggested it was undercapitalized and had “substantial doubt” that it could continue to operate.

Cape Fear Bank’s $400 million in deposits are being taken over by a South Carolina bank, First Federal of Charleston, South Carolina. First Federal is also purchasing most of the assets at book value, with the FDIC providing loss protection on most of the purchased assets. The FDIC estimates the costs from this bank failure at $131 million.

A much larger bank failure occurred tonight in Colorado, where New Frontier Bank of Greeley, Colorado, was closed. Unable to find a buyer for this failed bank, the FDIC set up a temporary bank, calling it the Deposit Insurance National Bank of Greeley, or DINB. DINB will operate for 30 days under the management of Bank of the West. DINB will take over all insured deposits and will process checks and other payments during the next 30 days, but customers should start next week on the process of moving accounts to another bank.

The FDIC will take over New Frontier Bank’s $2 billion in assets and will collect payments from its loan customers. The closure is expected to cost the FDIC $670 million.

The FDIC found multiple deficiencies in New Frontier Bank in a cease-and-desist order issued in December. New Frontier Bank reported a loss of $11 million last year, the only loss in its 10-year history, but its bad loans nearly doubled between October and December, and then its largest customer went bankrupt in January. The bank had expected to be bought out by an investment group, but the investors and regulators apparently could not agree on the amount of capital needed, and the prospective buyers gave up about a week ago after another large loan failed at the bank. This came around the same time that the FDIC had ordered the bank’s founder removed from his job as president. This week customers were lining up to withdraw their money in anticipation of a possible failure, in some cases just wanting to make sure they took out enough to pay their taxes next week.