Friday, March 12, 2010

This Week in Bank Failures

Lehman Brothers used essentially fictitious transactions to disguise its dwindling liquidity in the year before its collapse, according to an explosive examiner’s report that was released yesterday. (Actually, the release was just the first 200 pages of a report that is said to be thousands of pages long.) The report points fingers at JPMorgan Chase and Citigroup, saying that problems there hastened the collapse of Lehman Brothers.

According to reports, Bank of America is resisting regulators’ advice to downsize its operations in order to boost its chances of survival. Bank of America plans to sell some assets it considers redundant, but hints that it wants to continue to expand its operations otherwise.

Bank of Florida announced a $45 million stock offering today, hoping to raise the additional capital by June 30. It lost $145 million last year, and warned in a recent SEC filing that its prospects were doubtful if its stock offering failed.

The FDIC this week extended a transitional safe harbor rule for bank debt securitization that was to have expired March 31. In practical terms, the safe harbor rule allows credit card debt to be sold to investors, which is the way the credit card banks have worked in recent years. When the rule expires, it will be the end of the credit card business as we have known it at least since 2003, and it could bring down a dozen or more large credit card issuers, similar to the way Advanta shut down last year. The new date for the collapse of the credit card industry: September 30.

Florida banking regulators closed Old Southern Bank, which had been in business for just four years in central Florida. The $320 million in deposits and a slightly smaller amount in assets were purchased by Centennial Bank, which is paying a 1 percent premium for the deposits. Centennial Bank’s holding company, Home Bancshares, had raised $100 million in a stock issue for the purpose of acquiring a failed bank. Centennial Bank already had 12 branch locations farther south in Florida, and with this acquisition, it adds 7 in the central part of the state.

Old Southern Bank was founded in 2006, an awkward time for a bank to be entering the real estate market. It started with $60 million in initial capital, but would have needed at least that much more to weather its losses, mostly from loans for commercial real estate projects. It had planned to raise money in a stock offering, but regulators rejected the plan, probably because they thought the terms of the offering were too unfavorable to attract investors.

Louisiana banking regulators closed Statewide Bank. The bank had six locations north of Lake Pontchartrain, in an area significantly damaged by Hurricane Katrina in 2005. The bank had apparently opened and closed several locations since that time. No other Louisiana banks have failed since Hurricane Katrina, partly because the real estate bubble scarcely reached the state. Statewide Bank lost money on commercial real estate loans. It was dogged by purchases of mortgage-backed securities it made in 2006 and 2007, and the sluggish real estate market in southern Louisiana made it hard for the bank to make up its losses with new business.

Home Bank, also of southern Louisiana, is purchasing the assets and assuming the $209 million in deposits.

Two banks failed in New York City:

  • The Park Avenue Bank, with four offices and $495 million in deposits. The failure was not unexpected, after an affiliated investment company which funded more than 10 percent of the bank’s loans filed suit last week in an effort to stop the bank from settling some of its failed loans. Observers saw the lawsuit as an attempt to slow down an expected FDIC liquidation. The bank’s net worth had gone negative in its latest financial statements, so only a well-funded buyout could have saved the bank from being seized and liquidated. The bank appeared to be in over its head in a web of real estate development intrigue. (The Park Avenue Bank is not related to a larger bank by the same name in Georgia and Florida, which was also in the news this week. It announced a $85 million stock offering this week and is in the process of selling off 5 branches to improve its capital position.)
  • LibertyPointe Bank, with three offices. It was closed last night in an unusual Thursday night bank closing. The failed bank had $209 million in deposits as of December 31 and a similar amount in assets.

The successor for both banks is New Jersey-based Valley National Bank, which paid a 0.15 percent premium for the deposits and purchased all the assets. Valley National Bank already had around 200 branches in New Jersey and New York.

There was a credit union failure a week ago, Lawrence County School Employees Federal Credit Union, of Lawrence County, Pennsylvania, which had a thousand members and $3 million in assets. The credit union’s membership had fallen by almost half, partly because of reports about its financial condition, and partly because of local layoffs. First Choice Federal Credit Union took over part of the membership accounts, with the NCUA taking charge of the rest. First Choice did not hire any of the employees of the failed credit union.