Put together a struggling developer and a struggling bank, and there is a very good chance that someone will start pointing fingers. Lawyers, the good ones, don’t need anyone to tell them to start taking notes.
I am getting a local perspective on this now. Near here, a developer had planned a sprawling multi-use development on the largest piece of undeveloped land in the neighborhood of a large corporate enter, also taking over the land occupied by a lumberyard. Progress on the development has been so slow that local residents struggle to remember what was there before the construction vehicles moved in. Yet the only thing that has been built so far is a supermarket, and that happened apparently just because the supermarket was providing the financing for their building. The supermarket was to have opened in 2007, and construction on the building could wrap up a few weeks from now. With one building complete, the development ought to be a partial success, but the supermarket cannot plan its opening because access roads have not yet been built. The project’s other retail and office tenants have vanished. Some were forced by the delays to move on, some faced cutbacks because of the recession, and others apparently never existed in the first place. And naturally, given the state of the housing market, the luxury condos that were to have been the cornerstone of the project have been postponed indefinitely.
So who’s to blame? The developer blames the lead lender, and filed an $8 billion lawsuit this week. The bank has not released a statement on the suit yet, and probably will not have to say anything if they can get the case dismissed. Yet if that happens, it will not exactly be a victory for the bank. If this case follows the usual pattern, the developer will be liquidated in bankruptcy and the bank will take a loss of $40 million or more after it forecloses. The supermarket may be able to take possession of its building at some point, but with lawyers having to make their points in multiple courts, there is a risk that even that obvious first step may be delayed for a year or more.
What jumps out at me when I look at this story is the massive waste that the development project, and the lenders’ decision to finance it, created. Even in the absence of a recession, there was little chance that this project could have been completed. As evidence of this, the project was already falling apart three years ago, in a time when most business people had an optimistic view of the economy. This is not just a story of money moving around, and some getting lost along the way. A lumberyard, which had been operating at a profit, is gone. I would guess at least 20,000 worker-hours of demolition, tree removal, and earth-moving took place, not counting the work on the supermarket. And basically all of this work was for nothing. The bad decisions that lenders make can ruin a bank, but they are also a problem for the economy as a whole. They lead to wasted resources on a massive scale. The one failed local project is bad enough, but they same thing is happening across the United States and in a dozen other countries. Multiply the miscalculations of this one project by a few thousand, and the scale is large enough to upset the global economy. The totality of the work that has gone to waste is of greater consequence, in the long run, than the loss of a few hundred banks.
Developments this week: Sloppy financial reporting is blamed for a liquidity crisis in Greece, where the country was slow to recognize the need for drastic cost-saving measures. Details of emergency financing for the country’s debt are reportedly being worked out, but budget cuts will have to come first. ◾ Senate leaders put off the vote on the reappointment of Ben Bernanke as long as possible, worried that they might not have a majority. When the vote was finally held yesterday, Bernanke was confirmed by more than 2 to 1, but it was still the narrowest margin of any Fed chair ever. ◾ WaMu (Washington Mutual) shareholders will be represented in bankruptcy court, a judge decided today. Shareholders’ estimates of money left for them at the end of the bankruptcy liquidation are probably hopelessly optimistic, but the court decided that it was too soon to come to that conclusion. The WaMu holding company was driven into bankruptcy by the creative mortgage lending of its banking subsidiary. ◾ Harleysville National Bank reported a slight improvement in its December 31 balance sheet. If the numbers stand up to regulatory scrutiny, it could pave the way for the bank to be bought out by First Niagara. First Niagara’s application to become a bank holding company, another requirement for the deal, is also pending. Harleysville National Bank reported a $220 million loss for the year, and if regulators do not approve its sale, it might need to raise capital quickly. ◾ A similar merger was called off today. The Jacksonville Bank, in Florida, and Heritage Bank, in Norfolk, Virginia, called off a merger they had agreed on one year ago. The two companies released a statement saying only that the merger no longer made financial sense because of changing market conditions.
The largest bank failure tonight was First Regional Bank, with 8 locations in southern California. It had close to $2 billion in deposits. The deposits are being transferred to North Carolina-based First-Citizens Bank & Trust Company, which is also purchasing nearly all the assets.
In addition to the usual losses on real estate development loans, First Regional Bank had taken losses on loans to real estate investors, including some in Florida.
Nasdaq had sent the bank’s holding company a notice of delisting a month ago, and halted trading in the company before the open this morning. That followed a 3-year slide in which the bank lost more than $120 million and its stock lost 98 percent of its value.
Another billion-dollar bank failed tonight, this one in Georgia. Community Bank & Trust, based in Cornelia, Georgia, was closed by Georgia banking regulators. It has $1.1 billion in deposits and 36 locations in Georgia and Alabama, most inside grocery stores. Some locations used the name Bulldog Bank & Trust. South Carolina Bank and Trust (SCBT) is taking over the deposits and purchasing the assets. The new locations represent a logical geographical expansion for SCBT, extending southwest along I-85 toward Atlanta.
Community Bank & Trust had been operating for 110 years. Its loans for residential real estate development projects ran into trouble in 2009, with about a quarter of loans delinquent by the end of the year.
Also in Georgia, First National Bank of Georgia failed tonight, with $758 million in deposits and 11 locations in western Georgia, generally along I-20 west of Atlanta.
A new bank formed tonight is purchasing the deposits and assets, paying a 1.25 percent premium on the deposits. A press release from the new bank, Community & Southern Bank, identifies its top executives as John Spiegel, former CFO of SunTrust Bank, and Patrick M. Frawley. Frawley has a recent history of managing troubled banks, sometimes succeeding in turning them around.
Florida had its second bank failure in two weeks tonight: Florida Community Bank, with 11 offices between Naples and North Port in southwest Florida. The bank had $796 million in deposits as of September.
The failed bank had almost $200 million in bad loans, representing almost a third of its loan portfolio. An aggressive real estate lender during the boom years, it was just trying to hold itself together over the past year as it absorbed the inevitable losses.
In addition to its losses on loans for failed real estate projects, it lost $6 million on loans to the former CEO of the failed Orion Bank, who is now being investigated by regulators for improper loans he arranged as Orion Bank CEO. Most of the collateral for the loans was in the form of now-worthless Orion Bank stock.
Miami-based Premier American Bank paid a 0.4 percent premium for the deposits and is purchasing 57 percent of the assets. The buyer is the new Premier American Bank formed just one week ago to take over the assets of the former Premier American Bank when it failed. The Florida Community Bank branches will keep the Florida Community Bank name, at least for now.
Washington State closed American Marine Bank, which was based in Bainbridge Island, with 11 locations along the northern Puget Sound. It had $300 million in deposits. Columbia State Bank is taking over the deposits and purchasing the assets, paying a 1 percent premium on the deposits.
Bank officials cited losses on loan participations as one of the reasons for the bank’s financial difficulties a month ago when a consent decree from the FDIC took effect. Loan participations, an arrangement in which several banks share in the gains and losses on a loan made by one of the banks, have been a problem in several bank failures since last year, and especially for two failed correspondent banks that were involved in arranging the participations. In the consent decree, the bank agreed to improve its management practices and strengthen its financial condition.
A smaller bank in Minnesota was closed tonight, with less than $55 million in deposits, but it, in some ways, is the most interesting story among tonight’s bank failures. The bank was Marshall Bank, with three locations in the northwestern corner of state. United Valley Bank, based nearby in North Dakota, paid a 7.35 percent premium for the deposits and is also purchasing the assets of the failed bank.
Marshall Bank was known as Northwestern State Bank until 2003. One of the bank’s problems was a loan to the Nooksack tribe of Washington state for the construction of the Nooksack Northwood Casino, which it built in Lynden, Washington, along the Canadian border. Revenue last year was less than the tribe had planned on, and it ended up in litigation with the bank after it missed interest payments. One of the challenges that banks face with casino loans is that a bank cannot foreclose on a casino without shutting it down, at least temporarily, as a banking license isn’t consistent with running a gambling operation.
The FDIC estimates costs of $1.9 billion for tonight’s bank closings. This month’s 15 failed banks represent a pace of bank failures similar to last year.