Friday, September 17, 2010

This Week in Bank Failures

The case against former Countrywide executives will go to trial, a judge ruled yesterday. A jury will decide whether the defendants misled stockholders or profited from inside information. The executives made more than $100 million from stock transactions between 2005 and 2007 while the company was staggering toward financial collapse from poor-quality mortgage loans.

Under new rules approved by the SEC today, banks will have to work harder to disguise the distressed assets on their balance sheets. The new rules will require banks to disclose short-term borrowing activity as part of their quarterly financial statements.

New global rules that increase capital requirements for large banks, agreed to at a Sunday meeting, will be phased in over the coming decade. It is hoped that the higher levels of capital will permit banks to weather minor crises without government assistance. The new capital requirements are being phased in slowly to avoid having any sudden impact on liquidity, which is already impaired under the current guidelines at many banks.

A Philadelphia-area bank failed tonight, ISN Bank, with a single location in Cherry Hill, New Jersey. From everything I know, the failure was the result of a weak mortgage loan portfolio, but ISN Bank did not have the common risk factors for heavy mortgage losses. It was not on the edge of a metropolitan area, it did not go into business or expand aggressively in 2005 (but it started in 2001), and real estate values in the Philadelphia metro area have not declined by much. There are no indications I could find that the bank was badly mismanaged, that it took inordinate risks, or that it took large losses in securities. The three banks that have previously had to be rescued in the Philadelphia area had histories of large-scale management mistakes, but ISN Bank seemingly just had bad market positioning and bad luck. The news of its failure is taking away some of the “can’t happen here” attitude that was previously seen in banking in the Philadelphia area.

ISN Bank had $80 million in deposits, down by more than a third from its peak. The deposits are being transferred to New Century Bank, a bank based in the far corner of the Philadelphia suburbs which earlier this year had amassed a war chest for acquisitions. This acquisition will provide New Century Bank its first branch in New Jersey. The bank failure was the first in New Jersey in over a year.

Peoples Bank, in Winder, Georgia, was one of three Georgia banks to fail tonight. Like the many other Georgia banks that have failed, it had a concentration in real estate loans that proved problematic over the last five years. It had $400 million in deposits and 14 locations. Community & Southern Bank is taking over the deposits and purchasing the assets. Peoples Bank is not connected to four other banks in Georgia with similar names.

Four other bank closings were reported tonight, of small banks with between $40 and $250 million in deposits:

  • Bank of Ellijay, in far northern Georgia.
  • First Commerce Community Bank, in the Atlanta suburbs. The successor for these two Georgia banks is also Community & Southern Bank.
  • Bramble Savings Bank, Milford, Ohio. The successor is Cincinnati-based Foundation Bank.
  • Maritime Savings Bank, southeastern Wisconsin. North Shore Bank is the successor.