Friday, May 28, 2010

This Week in Bank Failures

Investor fears have turned their focus to Europe, and banks there are being squeezed. Four large savings banks in Spain announced a merger on Tuesday; it is hoped that the combination will have stronger liquidity. While commercial banks in Spain are tightly regulated and have thrived through the economic slowdown in that country, savings banks were heavily exposed to the real estate bubble there, and their lending troubles are being exacerbated by the loss of investor confidence.

Mischaracterizing repo transactions in financial statements appears to be commonplace in banking. This week, both Citibank and Bank of America disclosed, after investigating the question, that they have done this in recent years. In both cases, though, the errors are too small to matter, and neither bank expects to restate its past balance sheets.

Little progress has been made in the planned Prudential buyout of AIG’s East Asia unit AIA, with the head of AIA now coming out publicly against the deal, hinting that it could lead to the collapse of both AIA and AIG if it goes ahead as currently structured. The deal is equally problematic for Prudential, which may need to raise $21 billion in a new stock offering for the purchase of a company that may not turn out to be that valuable. The spinoff of the insurance units was supposed to be the easy part of the AIG puzzle, but has become problematic since the discovery that they have not been nearly as profitable in recent years as was previously imagined. Winding down AIA is not seen as an option, so AIG is taking a new look at a stock offering for the unit.

The financial reform legislation in its latest form would appear to push banks out of large-scale, high-risk financial arrangements such as leveraged buyouts that traditionally have been done outside of the banking business. This change would increase the importance of private investors in large financial deals. The Wall Street banks might be forced to spin off their private equity operations if the reform bill passes in something close to its current form.

The three banking subsidiaries of Bank of Florida Corporation were closed tonight. The three banks, Bank of Florida Southeast, Bank of Florida Southwest, and Bank of Florida Tampa Bay, operated as separate companies, but shared a common problem: a desperate shortage of capital, and an April 17 deadline from regulators to raise enough capital to keep operating. The three banks entered into a consent decree with the FDIC last Friday, which followed earlier prompt corrective action orders.

The holding company, Bank of Florida Corporation, reported a negative net worth in its latest financial statements, and received a delisting notice from Nasdaq last week. The company released first quarter results on May 3 showing a loss of $33 million, giving it a book value of $10 million. The first quarter earnings were revised downward by $15 million last week because of additional problem loans, giving the company a negative net worth. The banks took losses on loans in real estate development loans for three years, and recently had been forced to write down loans to companies in the construction business, as new construction projects in the southern half of Florida have nearly ground to a halt this year.

The banks had a combined 13 locations, all in Florida, and $1.3 billion in deposits. EverBank is taking over the deposits and purchasing the assets.

Two West Coast banks were also closed. The larger of these was Sun West Bank, with $354 million in deposits and 7 locations, most in Las Vegas, but two in Reno. Sun West had hoped to raise capital with a stock offering, but in the end, could not line up enough investors to make it work.

Los Angeles-based City National Bank is taking over the deposits and purchasing the assets.

In California, Granite Community Bank was closed. Granite Community Bank had 3 offices in the northern suburbs of Sacramento and $94 million in deposits. Tri Counties Bank, one of the larger banks in the area, is taking over the deposits and purchasing the assets.

With these five closings, the FDIC has recorded 78 bank failures so far this year, or 16 per month, a pace similar to that of last year.