Banking executive Allen Stanford has been indicted for fraud and related charges and has pleaded not guilty. According to the charges, Stanford and others exaggerated the financial condition of the Stanford group of companies, including Stanford International Bank in Antigua, reporting about $1 billion more in assets than actually existed, in order to mislead investors. In Antigua, a financial regulator has been charged with taking bribes from Stanford.
The House of Representatives is still trying to figure out what happened at the end of last year when Bank of America acquired Merrill Lynch, an iffy deal that could eventually contribute to the bank’s collapse. There are conflicting stories of what happened, and Fed chief Ben Bernanke said little to clear things up in his testimony Thursday. He said that Fed officials acted “with the highest integrity” but failed to explain why he did not take action to stop the deal, or to alert other banking regulators, after the financial consequences to the bank became clear in December.
The secrecy with which the Fed operates, in general, has continued to be a subject of discussion, with some lawmakers calling for an audit of the Fed, and others proposing to reduce the Fed’s authority in some areas.
Why has Georgia seen so many banks fail? Part of it is just that the economic slowdown hit Georgia a year or two earlier than the rest of the country. What is happening now in Georgia may hit the rest of the country starting next year. But it is also true that Georgia has more banks than most states. Even though a few have failed and a few have arranged to be bought out to avoid failure, Georgia still has a lot of banks. The failures that have occurred in Georgia do not represent the kind of threat to the state that is posed by the bank failures in Nevada, for example, which did not have so many banks to begin with, and where some areas no longer have convenient access to banking services.
Many of the Georgia banks that have failed had just four offices, and that was the case again tonight when Neighborhood Community Bank of Newnan, Georgia, failed. The Fed on May 27 had rejected the bank’s capital plan, saying it would not provide it sufficient capital to operate, and ordered it to arrange sufficient capital levels within 30 days. That deadline passed yesterday, and tonight, the bank was closed and its deposits turned over to CharterBank.
Geographically, the deal makes perfect sense for CharterBank, a community bank operating along the I-85 corridor on both sides of the Alabama-Georgia border. Neighborhood Community Bank was also along Interstate 85, in the next two towns to the north.
CharterBank is also purchasing 94 percent of the assets of the failed bank, with the FDIC providing partial loss protection.
Another bank failure occurred nearby a few minutes earlier. One county to the north, in Villa Rica, Community Bank of West Georgia failed. This bank had a second office in Kennesaw, Georgia, that operated under the name Cobb Commercial Bank. The FDIC did not have a buyer for this bank, and will mail checks to the depositors on Monday. Customers of the bank who receive automatic deposits in their accounts should immediately make arrangements to receive their money at another bank or in another form, to avoid delays in getting that money.
The two failed Georgia banks had the same financial story. Both were formed only a few years before Georgia’s real estate market peaked — Neighborhood Community Bank in 2000, and Community Bank of West Georgia three years later. Both had heavy real estate loan exposures. At the end of the first quarter, about one third of their loans were delinquent, and their net worth was vanishing, just $5 million and $7 million, respectively, amounts certain to be wiped out by losses on real estate they had already foreclosed on. Each bank had total deposits that were a little under $200 million. The FDIC estimates costs around $150 million from the two bank closings combined.
The two banks were not affiliated with the several other banks in the area that use variations on the Community Bank name.
Some of the least fruitful real estate investments in recent years have been on the fringes of the suburbs of major cities. Real estate developers trying to pick the next hot location for suburban expansion ended up planning and building homes, stores, and offices that no one wanted. It is no surprise, then, that so many bank failures have been found in these areas. The first bank failure in Minnesota this year was Horizon Bank, just beyond the northern suburbs of Minneapolis-St. Paul, in Pine City and North Branch. This was a small bank in a small town, with just $69 million in deposits, in a town of 3,000, and because of its small size, regulators might been slow to respond to its deteriorating finances. The bank’s offices, deposits, and most assets are being transferred to Stearns Bank, based in nearby St. Cloud. With the two new branches, Stearns Bank now has six offices in Minnesota, along with one in Arizona. The closing will cost the FDIC about $34 million. Horizon Bank was known until recently as Pine County Bank. It is not connected to the better-known Horizon Bank owned by Horizon Financial Corp. of Bellingham, Washington.
In California, an equally small bank closed tonight, MetroPacific Bank in Irvine. The office, deposits, and assets are being transferred to Sunwest Bank, a commercial bank with four offices across southern California. This closing will cost the FDIC about $29 million.
The last bank closing tonight was a larger bank in California. Mirae Bank was founded in 2002 with an emphasis on reaching Korean-speaking businesses and consumers in Los Angeles. It had four locations in Los Angeles and one in Torrance. As of a month ago, it had $362 million in deposits.
Its deposits are being transferred to Wilshire State Bank, which is also purchasing 99 percent of the assets and will be operating the five offices. Wilshire State Bank is a large bank with 12 offices in Los Angeles County, four elsewhere in California, and six in other states. In its letter to Mirae Bank customers, Wilshire State Bank takes pains to emphasize its own Korean-American and multi-ethnic background. The FDIC is providing partial loss protection on most of the assets. This closing may cost the FDIC around $50 million.
The FDIC has tallied 45 bank closings in the first half of 2009. That compares to 25 for all of 2008 and 3 in 2007. A year ago, as the current string of bank failures was just getting underway, some economists were forecasting 200 U.S. bank failures. At this rate, though, the final total is likely to be higher than that.
A failed credit union was resolved on Wednesday when the NCUA merged Eastern Financial Florida Credit Union into Space Coast Credit Union. Eastern Financial had been put into conservatorship on April 24. This move more than doubles the size of Space Coast Credit Union.
