Friday, August 14, 2009

This Week in Bank Failures

The banking crisis has made its way to Nigeria, where the central bank today took over five banks and fired their executives. The five banks lost money in bad loans, and there were questions about the propriety of some of the loans — essentially the same story that has been seen around the world during the last year.

The bank that CIT Group owns isn’t in any particular trouble, but still, as a bank holding company, CIT has to live up to the Fed’s liquidity rules. Liquidity is an area where CIT has fallen short this summer, although a payment deadline today was met with days to spare. An agreement with the Fed gives CIT until October to come up with a financial plan that will provide sufficient levels of capital through next year.

Mortgage rates are up sharply from their lows of April and May. Mortgage rates are a double-edged sword for banks. Higher rates mean more interest income for banks, but they also reduce the market value of real estate, making it harder for banks to foreclose, and they lead to a greater risk of defaults.

Banks have become the owners of huge swaths of commercial real estate as developers and landlords become insolvent and banks foreclose on retail and office centers. That’s a trend that is likely to accelerate next year. Normally, banks would sell foreclosed real estate at auction, but they would be reluctant to sell off income-producing properties at a loss. There have been suggestions that the Fed, FDIC, and Treasury might have to create an investment fund to purchase much of this real estate in order to improve the liquidity of the banks. Alternatively, this is a task that might be handled through the the Public-Private Investment Program for Legacy Assets (PPIP).

The troubles at Colonial Bank may also be a threat to Bank of America. Bank of America yesterday claimed that Colonial Bank was holding $1 billion in mortgage funds as a custodian for Ocala Funding LLC, for which Bank of America says it is the collateral agent. It filed suit, asking a federal court to preserve the assets in question. That would be equivalent to about 4 percent of Colonial Bank’s liabilities, and could have basically the same effect as a run on the bank. Bank of America might have filed the suit yesterday in anticipation of Colonial Bank being put into receivership today, and the court seemed to view it in that context, as it issued a temporary order today freezing the assets. It is not clear how much effect the court’s order will ultimately have, but at least that is a matter that can be sorted out later.

While Bank of America may end up protecting its interests, this story does not make it look good. If Bank of America’s allegations are basically correct, then it was taking unnecessary risks with assets it was responsible for, either out of neglect or as a reflection of a high-risk management approach.

The stock market suspended trading in Colonial Bank today as word leaked out early that Alabama banking officials would shut it down tonight and the FDIC would sell its deposits and offices to regional banking giant BB&T, which operates mostly in Virginia and North Carolina. BB&T already had a presence in Florida, but would significantly expand that and reach around the Gulf Coast to Texas.

The FDIC confirmed that transaction with an announcement around 6 p.m. ET. With 346 offices and about $25 billion in assets, Colonial Bank is the largest bank to fail so far this year and the 6th largest bank failure in U.S. history. It is not too much smaller than the $32 billion IndyMac failure last year.

BB&T is buying 88 percent of Colonial Bank’s assets. The FDIC is estimating a cost of $2.8 billion for the Colonial Bank closing, but that is a number that could easily go higher if real estate values in Florida decline further.

It is the first bank chartered in Alabama to fail since 1987, a notable contrast to the state to the east, Georgia, which has seen the greatest number of bank failures since last year.

Colonial Bank had been very active in the consolidation of the banking industry, acquiring nearly one company every quarter over its 27-year history.

The end of Colonial Bank may be the beginning of the end for mortgage warehouse lending, according to banking industry observers. That was a mechanism for funding mortgages, and Colonial Bank was one of the largest players in that market, along with Taylor Bean & Whitaker, which shut down last week. Without these two companies, there may no longer be a competitive mortgage warehouse market. Banks will not be able to fund nearly as many mortgage loans, and will be forced to raise interest rates or turn borrowers away. Although BB&T is acquiring most of Colonial Bank’s assets, no one seems to expect it to try its hand at the mortgage warehouse business.

BB&T will probably also want to wind down or sell off the Colonial Bank offices in Nevada, which is outside of its geographical area of focus and does not seem to be an auspicious place to conduct banking business this year. In addition to the Nevada offices affected by the Colonial Bank failure, there was another large bank failure in Nevada tonight. Community Bank of Nevada, in Las Vegas, was closed, and the FDIC was unable to find a buyer.

Instead, the FDIC is transfering the checking and savings accounts to a temporary bank, Deposit Insurance National Bank of Las Vegas, or DINB, at all 12 offices of Community Bank of Nevada. DINB will be managed by Nevada State Bank and will operate for approximately 30 days to allow customers time to move their funds to other banks. DINB will use the Community Bank of Nevada name for check-clearing purposes. Although customers have 30 days, they should start immediately on Monday to open new accounts and move direct deposits and other automatic transactions to those new accounts.

The FDIC will mail checks to holders of CD and IRA accounts.

Community Bank of Nevada had $1.38 billion in deposits. The FDIC estimates that $4 million of the deposits exceeded the insurance limits.

Community Bank of Nevada was involved in the high-rolling real estate development scene in Las Vegas, making loans that were highly profitable during the real estate boom there, but which failed spectacularly when the boom turned to bust. The bank had not yet finalized its first quarter financial reports.

The FDIC will liquidate the assets of Community Bank of Nevada over the coming months. This closing is expected to cost the FDIC $782 million.

Two Phoenix, Arizona, area banks were closed tonight, each with more than $100 million in deposits. One, Community Bank of Arizona, was owned by the same holding company as Community Bank of Nevada. The other was Union Bank, NA, which had just one office, in Gilbert. The offices and deposits of both Arizona banks were sold to MidFirst Bank, which is also buying nearly half the assets of the two closed banks.

MidFirst calls itself “the new bank in Phoenix,” where it has 7 offices open, 18 preparing to open, and still more on the drawing board. It has a longer history around Tulsa and Oklahoma City, Oklahoma, where it has 36 offices.

The two Arizona bank closings are expected to cost the FDIC $86 million.

A small S&L closed tonight in Pittsburgh, Pennsylvania. Dwelling House Savings and Loan Association had $14 million in deposits and a slightly smaller amount of assets. The office and deposits are being taken over by regional bank PNC Bank, which is also buying 23 percent of the assets.

Dwelling House and four of its directors and officers were penalized recently for lax management that the OTS said left the bank open to fraud and money laundering.

The NCUA liquidated a credit union this week, the fifth this year. Community One Federal Credit Union had 21,000 members in Clark County, Nevada. Its accounts were merged into America First Federal Credit Union, which operates mostly in the neighboring state of Utah.