FDIC head Sheila Bair was out this week warning about problems with commercial real estate loans. She expects losses on these loans, not residential mortgages, to be the main factor behind bank failures over the next year. Commercial real estate loans tend to be much larger than residential mortgages, so just a few failed loans can lead to the failure of a bank. With the economy in decline, an unusually large proportion of retail, office, and industrial space is sitting vacant, putting the squeeze on building owners and real estate developers, who may then have trouble making loan payments on time.
The earnings report from Capmark reinforced the troubles in commercial real estate. Capmark, one of the largest commercial real estate lenders, warned about a possible bankruptcy when it reported a $1.6 billion loss on Wednesday. Capmark is considered to be well-managed, so troubles at Capmark may indicate troubles across commercial real estate.
There is some confusion in reporting on commercial real estate because many analysts and some data aggregators classify large apartment buildings and some residential development projects as commercial real estate. The problems with residential real estate, including apartment buildings and condo developments, are already well-documented. The new concerns are specifically for buildings used for commercial purposes, especially retail, office, and industrial. There is less concern for other commercial real estate, such as hotels. The economy would have to worsen considerably before these categories would become a threat to banks.
The stock market, after showing less and less conviction about its upward movement as August wore on, started September in a downward move that was blamed on a rumor of an impending bank failure or bailout. The rumors were vague, but some pointed the finger at CIT Group or Corus Bank. But CIT’s recent near-death experience was widely reported, and Wall Street was already discounting Corus’s chances. If there is a much larger bank on the brink, regulators have managed to keep that under wraps for now.
CIT announced it would not make an interest payment due September 15, and that is just the kind of story that the rumor mill can blow out of proportion.
Corus shares recently have been trading between 0.27 and 0.30, down 99 percent from the peak years of 2005–2006. Its founder, who resigned in April, sold most of his remaining shares at the end of August, in a series of transactions reported yesterday. The bank’s deadline from regulators passed June 18, and there were reports two weeks ago that its failure would be coming today. That did not occur, but there was more bad news at the bank today as its auditor resigned. Corus Bank is known for its condominium loans, and less than half of the loans in that portfolio are paying on time.
The first bank failure reported tonight was First Bank of Kansas City, with a single location in Kansas City, Missouri. It was a very small bank with $15 million in deposits. It was so small it had only a business-card web page.
Great American Bank is purchasing the assets and taking over the deposits. Great American Bank is a small bank located outside the beltway in De Soto, Kansas. It was founded in 1901 as De Soto State Bank. It was sold in 2005 and again in 2008. Its new branch gives it a presence in the city.
The FDIC estimates costs of $6 million from this bank closing.
The failures got bigger as the evening wore on. The next was InBank, with three offices in the Chicago metro area. An August 7 cease-and-desist order from the state and the FDIC directed the bank to make accounting and management changes and raise capital. The bank reported a net loss of $22 million in the first half of the year, and that is before regulators ordered the bank to fully recognize its loan losses.
In an example of the kind of trouble the bank faced, it was in the process of foreclosing on the foundation of a commercial building. The builder couldn’t finish construction on the four-story building because the bank never provided the last $1.5 million in financing it had promised.
InBank had $200 million in deposits. The deposits and assets are being purchased by MB Financial Bank, a regional bank with more than 80 offices mostly in the Chicago area. The FDIC estimates its costs for the failure at $66 million.
In Sioux City, Iowa, Vantus Bank failed. Vantus Bank had 15 offices, mostly in the city itself, and $368 million in deposits.
Vantus Bank had been warned last month by federal regulators to raise capital urgently. It also received a delisting notice from NASDAQ as its market value had fallen to around $2 million. The bank’s CEO had offered his resignation, but the resignation had not yet taken effect.
The bank’s assets had declined from about $500 million at June 30 to about $450 million today. The plummeting asset values had less to do with loan losses than with rating agencies downgrading derivatives held by the bank. These were trust preferred securities, a kind of hybrid security based on collateralized debt obligations (CDOs), which is itself already a derivative. The bank bought just 14 of these in 2006, intending to hold them only temporarily, but then found itself unable to sell them as their value declined by 85 percent.
With the losses and the lack of liquidity of the assets, the bank found itself with hardly any working capital. The bank had loan losses, particularly on a few failed commercial real estate development projects, but it was mostly the losses on the securities that killed it. It is estimated that about half the banks in the country own the same type of securities, but usually in much smaller amounts that wouldn’t by themselves be a threat to a bank’s financial security.
The deposits and 85 percent of the assets of Vantus Bank are being purchased by Great Southern Bank. This is not the first failed bank acquisition by Great Southern Bank. It is still integrating the deposits from its acquisition of the offices of Teambank in March, which gave it 14 new locations in Kansas, Missouri, and Nebraska. The Vantus Bank locations extend its reach north along the Missouri River.
The FDIC estimates its costs for the Vantus Bank failure at $168 million.
The FDIC will be mailing out checks for $305 million after the failure of Platinum Community Bank, in the Chicagoland suburb of Rolling Meadows, Illinois. The payments might be less if there were deposits that exceeded the deposit insurance limits, something the FDIC was not able to determine at the time of the bank closing.
The FDIC usually prefers to sell a bank’s assets and deposits to a successor bank, but it was unable to find a buyer in this case. It has appointed MB Financial Bank (specifically the office closest to the failed bank) as an agent for the sole purpose of receiving direct deposits from the federal government. All other direct deposits will be rejected. Customers who had arranged to receive direct deposits at Platinum Community Bank should immediately on Tuesday make arrangements to receive these payments in an account at another bank.
Platinum Community Bank was the one subsidiary owned by Taylor, Bean & Whitaker, the mortgage lender that was tied to the failure and criminal investigation of Colonial Bank a month ago. Regulators, mortgage programs, and government agencies, one by one, cut off Taylor, Bean & Whitaker’s privileges while the U.S. Treasury conducted a criminal investigation. On August 7, Florida ordered Taylor, Bean & Whitaker to stop lending, which it had already done two days earlier, and on August 21, it ordered the lender to stop late charges, reports to credit bureaus, and foreclosures. To issue that order, the state must have been convinced that many of the charges and foreclosures were fraudulent and many of the credit bureau reports had been falsified. The next business day, Taylor, Bean & Whitaker declared bankruptcy. It is highly problematic, at least, for a bankrupt holding company to own a bank, and the OTS had ordered the bank to immediately sell off all its mortgage loans and to stop relying on services from its parent company. The difficulty in selling the potentially tainted mortgage portfolio may have led to the closing. This might also be the reason the FDIC could not find a buyer for the bank. I have not seen anything to indicate that the criminal investigation extended to the bank, but I also can’t imagine a banking executive who would want to take that chance on such short notice.
The FDIC estimates the cost of the Platinum Community Bank closing at $114 million.
Next, a smaller bank in Flagstaff, Arizona, First State Bank, failed. It had deposits of $95 million and assets valued at just $10 million more. Southern California community bank Sunwest Bank is acquiring the assets and deposits. The estimated cost to the FDIC is $47 million.
First State Bank’s holding company had consented to Fed restrictions at the end of July. The consent decree prohibited dividends and included other restrictions meant to preserve the bank’s capital. Previously, in June, the FDIC had ordered the bank to raise $2 million in additional capital and expand its board of directors.
The bank was founded in 1998 by a banking family that moved to Flagstaff from Kansas.
Another credit union failed this week. Kaiser Lakeside Credit Union of Oakland, California, which had 3,500 members and $24 million in assets was placed into liquidation on Monday. Deposits and memberships were transferred to SafeAmerica Credit Union, a larger California credit union with 26,000 members.