Credit card reform might not be hitting the United States until next year, but a few reforms are taking hold now in China, where regulators are worried about late payments and delinquencies that are approaching U.S.-like rates. Under the new rules in China, banks must stop issuing credit cards to teenagers who do not have a source of income, stop setting sales quotas for credit cards, and stop offering gifts to consumers who accept cards. Other rule changes are meant to prevent banks from charging fees they have not earned.
All this week, CIT Group has been seeking emergency funding, and Wall Street was not optimistic about its prospects after talks with regulators broke off Wednesday night. Trading in the stock was halted late Wednesday afternoon, and the stock lost three fourths of its value overnight as Wall Street concluded that a bankruptcy was likely. The stock recovered some of its losses this afternoon on reports that CIT was in negotiations for short-term financing. The problems at CIT do not involve its bank, but its business lending operation, which is set up as a separate company to avoid the capital requirements of banking. Still, its continued operations depend, in the same way as a bank’s, on the liquidity of its borrowers.
It is rare, but possible, for a bank holding company such as CIT to go bankrupt while its bank is still operating. One risk in that scenario is a possible run on the bank by customers who may not want to rely on the legal separation between a bank and its holding company.
A larger risk stems from the common confusion between CIT Group and the similarly-named Citigroup. A quick look at blog comments and message boards this week confirms that many consumers, along with a few Wall Street reporters and traders, get the two companies confused. This could lead to a run on Citibank, or even a run on banks generally, if people mistakenly believe that the largest bank in New York is involved in a bankruptcy. Citigroup’s own financial difficulties could contribute to this kind of confusion.
In Washington, Henry Paulson yesterday acknowledged that he threatened to have Bank of America CEO Ken Lewis removed. Paulson was testifying before the House Oversight and Government Reform Committee about his role as Treasury Secretary in the Bank of America acquisition of Merrill Lynch. That deal nearly fell apart between the stockholder approval on December 5 and closing on December 31 because of huge trading losses at Merrill Lynch during that quarter. Paulson pushed to have the deal go through anyway.
Paulson insisted in his testimony that the purchase was a good investment for Bank of America shareholders. The acquisition, though, along with Bank of America’s other recent acquisitions, seems to put the bank’s future in doubt, and $20 billion of the bailout money Bank of America subsequently received was tied to the Merrill Lynch deal, according to Paulson.
Separately, according to reports, Bank of America is now operating under a secret regulatory sanction which requires it to upgrade its management.
The largest banks are reporting profits for the second quarter, but the profits are small and stem more from securities trading than from banking. That was during a quarter in which the stock market had its biggest run up in recent memory, and the next quarter could easily reverse that. Lewis was in a cautious mood when Bank of America released earnings today: “Profitability in the second half of the year will be much tougher than the first half.”
Profitability is very important for banks right now, as it allows them to rebuild their capital base, which serves as a cushion for any future loan losses or other risks.
Under rules proposed by the FDIC, the easiest way for private equity firms to acquire a failed bank is if they operate a bank already. This has led to an increased interest from private equity in buying out very small banks. One such deal was announced today with First American Financial Management Co. paying $16 million to buy Community Bank of Rowan, which has offices in the towns of Salisbury and China Grove in west central North Carolina. The buyers are paying a 50 percent premium over the bank’s book value and plan to keep all of the bank’s management in place.
Two large California banks failed tonight, each with about $1.5 billion in deposits. The two failed banks were Vineyard Bank, which had 16 offices mostly across the suburbs east of Los Angeles, and Temecula Valley Bank, which had 11 offices along the I-15 corridor north of San Diego.
Vineyard Bank faltered last year when many of its real estate construction loans went bad. New homes in the area are selling at half the price they were when many of these loans were made. The collateral for the loans is not worth much now. The bank knew it was in financial trouble at least a year ago. Its chairman formed a new company to buy out the bank and spent at least 6 months trying to round up investors to fund the buyout. When that fell through two months ago, the bank was out of options.
Vineyard Bank was the leader in some West Coast loan pools, and observers are now wondering about the health of the other banks participating in those loan pools.
Deposits, offices, and about 95 percent of assets are being purchased by California Bank & Trust.
California Bank & Trust is based in San Diego and already had a presence in the area, but had been stronger in the I-5 corridor than in the I-15 corridor. The new acquisition comes just a month after California Bank & Trust announced that it had completed the conversion of accounts in its February 9 acquisition of another failed bank, Alliance Bank. With the three Alliance Bank branches, and adding the 16 Vineyard Bank branches, California Bank & Trust will have 109 offices in California.
Temecula Valley Bank had been negotiating with institutional investors to try to add more than $200 million in additional capital. That deal fell through on July 1. Bancroft Capital, which would have been the lead investor, ultimately could not persuade all the investors to go along. It cited “the continued deterioration in market fundamentals” as a challenge that it could not overcome.
The bank had been losing money since early last year, and faced a July 15 deadline from the state to raise more capital.
The deposits, assets, and branches are being taken over by First Citizens Bank, a regional bank based in Raleigh, North Carolina, with a territory extending north to Maryland and west to Tennessee.
The two California banks had remarkably similar stock charts, reflecting their similar business risks. Both stocks peaked around $33 in 2005 but fell below $1 late in 2008.
The cost to the FDIC for the two California bank closings is estimated at nearly $1 billion.
Earlier tonight, two small banks failures occurred east of the Rockies.
Georgia shut down yet another bank in the Atlanta metro area at closing time tonight. The bank was First Piedmont Bank of Winder, Georgia, on the fringes of the eastern suburbs of Atlanta. It had been in business for 11 years. Like many other banks in Georgia and in outer suburban areas, it had heavy losses in real estate construction loans, especially ones issued between 2004 and 2008 when the bank was rapidly expanding its lending.
First American Bank and Trust Company, a larger community bank based a half-hour drive to the east in Athens, Georgia, is taking over the bank’s $109 million in deposits and two offices and is buying 97 percent of the assets.
Meanwhile, South Dakota was shutting down BankFirst, a small bank based in Sioux Falls, with a second office in Minneapolis, Minnesota. BankFirst made loans nationwide, concentrating on real estate loans in high-growth areas. The problem with that strategy is that the areas that were growing the fastest before 2006 have seen the fastest declines in real estate values since then. BankFirst had $254 million in deposits.
Alerus Financial has assumed the deposits of BankFirst, but will be keeping only the Minneapolis office. It has agreed to sell the Sioux Falls office to First Dakota National Bank. Initially, Alerus Financial will operate this office as a branch of First Dakota National Bank, and presumably the formal control of the branch will be transferred to First Dakota in the very near future.
Alerus Financial is a North Dakota bank with its offices around Fargo and Grand Forks. It also has a Minneapolis office. First Dakota National Bank has offices throughout South Dakota.
The FDIC estimates its costs for these two closings at $120 million.