Friday, November 6, 2009

This Week in Bank Failures

Five more bank failures occurred tonight, including one that had the FDIC taking action in Shanghai. And there were many other stories this week about banks at risk.

The two largest banks in the United Kingdom are downsizing, selling off operations because of concern over their size and government support. Could something similar happen in the United States? A consensus is developing in the U.S. Senate that some sort of provision ought to exist to allow the government to break up large, high-risk banks, but some senators want to go farther and mandate the breakup of any bank that is large enough to be a risk to the economy, the banking system, or the deposit insurance system.

Those who are worried about how messy such a process might be can take heart from the relatively effortless way it is being done in the two giant U.K. banks. Citibank’s recent restructuring efforts also suggest that downsizing can be all in a day’s work. In the last year, for example, Citibank has considered selling off parts of its retail banking operations, state by state. Previously, it had considered selling or spinning off its entire retail banking operation.

AIG reported its second consecutive quarterly profit today, but warned that the stock market gains that have driven its profits may have run out. Without the run-up in the stock market, AIG would have lost about $2 billion in the quarter. AIG also warned that its insurance business, previously the core of the financial conglomerate, is declining rapidly, with premiums down 13 percent from a year ago. AIG is taking another $4 billion in federal money this quarter to resolve structural problems in two subsidiaries, one in aircraft leasing, and the other an insurance company that it was unable to sell. AIG has been trying to wind down its disastrous derivatives business, but it still has more than $1 trillion in potential liabilities, and all its restructuring will be moot if even minor problems develop in that portfolio.

On Wednesday, a merger was announced that could save First Keystone Bank. The bank, which has assets of half a billion dollars, has been operating under regulatory restrictions for several years, and has been losing money for the last four quarters. Most of its loan portfolio is residential mortgages and commercial real estate, and these have been problem areas for banks, even in Pennsylvania where real estate values have been more stable than in most of the country. Bryn Mawr Trust, which is barely twice as large, has agreed to buy it out in a deal that is expected to close in about six months. Both banks operate in the western suburbs of Philadelphia. Bryn Mawr Trust had been looking to expand by buying locations from other banks. This deal will double its number of branch offices and expand its territory southward.

Tonight there was a large bank failure with international implications. United Commercial Bank had $11.2 billion in assets, $7.5 billion in deposits, and 63 offices in the United States. In addition, it had an office in Hong Kong and a Chinese subsidiary based in Shanghai. The FDIC sorted all this out, turning over all the deposits and selling 90 percent of the assets to East West Bank. The U.S. and Hong Kong offices will become offices of East West Bank. The bank in China will continue operating without interruption, apparently retaining the United Commercial Bank name, but becoming a subsidiary of East West Bank. This arrangement has preliminary approval of the Chinese banking authorities and is expected to obtain final approval in due course.

United Commercial Bank was a San Francisco-based bank that was created to function as an extension of the Chinese banking system. It was founded in 1974, originally for transacting business between the United States and China, but soon expanding to provide broader banking services. It had acquired four other banks in the same niche in recent years. In obvious financial trouble last year, it received $300 million in TARP funds, an investment that can now be written off by the Treasury. This comes just days after the CIT Group bankruptcy wiped out $2.3 billion in TARP funds.

United Commercial Bank discovered in September 2008 that its financial statements were in error and, even after the removal of some senior executives, never quite managed to sort out its accounting mess. It had sought to raise capital from within China, but was restricted in doing so by banking regulations that limit the extent of Chinese ownership in U.S.-chartered banks.

East West Bank is also a Chinese-American bank, based in California (but in Pasadena, in the southern part of the state), with an office in Hong Kong and representative offices in Beijing and Shanghai. It is, prior to the current acquisition, only slightly larger than United Commercial Bank, with 71 U.S. offices and $12.7 billion in assets. At the same time that East West Bank announced the acquisition, it announced that it had raised $500 million in additional capital, most of it by issuing new shares to existing shareholders.

The United Commercial Bank closing is estimated to cost the FDIC $1.4 billion. However, given the dubious quality of the failed bank’s financial statements, the actual losses could be much higher.

Four small banks failed tonight, each with deposits of less than $200 million. The estimated cost to the FDIC for these four closings is $132 million. These bank closings, in order from largest to smallest, were:

  • Prosperan Bank, with three offices around the Minneapolis-St. Paul beltway in Minnesota. Prosperan lost $10 million in the first half of this year. In September, the FDIC ordered it to raise capital. The deposits and 87 percent of the assets are being purchased by Alerus Financial, a North Dakota bank that is creating a Minneapolis presence by taking over failed banks.
  • United Security Bank, based in Sparta, Georgia, a county seat in the central part of the state. The bank had a second office operating as Bank of Woodstock in Woodstock, Georgia, on the edge of the Atlanta metro, where so many other banks have run into trouble. The deposits and assets are being purchased by Ameris Bank, which bought out another failed Georgia bank just two weeks ago.
  • Gateway Bank of St. Louis. Deposits and assets are being purchased by Central Bank of Kansas City, from the other end of Missouri.
  • Home Federal Savings Bank, with two offices in Detroit, Michigan (no connection to banks of the same name in other states). The deposits and assets are being purchased by Liberty Bank and Trust Company, a New Orleans bank “with a focus on disadvantaged minority communities who traditionally have been underserved” that already had four offices outside Louisiana. Its two new offices will be its first presence in Michigan.

Tonight’s five bank failures bring the tally for the year to 120.