How do banks show profits while they are losing money on operations? A new Congressional report fills in part of this mystery, showing that banks borrowed more than $1 trillion from the Fed that they then lent back to the federal government, gaining perhaps $150 billion in interest-rate spreads over the last two years from this twisted mechanism for subsidizing banks.
Of all the bank failures so far this year, the one that will worry the banking industry the most is Georgia’s The Park Avenue Bank. This bank is not to be confused with a New York bank of the same name that failed one year ago, with a charge of TARP fraud filed against its president.
The Park Avenue Bank was a billion-dollar bank based in Valdosta, Georgia, with 11 offices across Georgia and one in Florida. At this point last year, it had announced a recapitalization and reorganization plan that looked to put it on reasonably sound financial footing again. Regulators were not impressed, however, and by the end of the year, the Fed had issued a prompt corrective action ordering the bank to take any available steps to shore up its capital, which usually means arranging to be sold to another bank or investor. If The Park Avenue Bank could fail, as it did tonight, then so could a thousand other banks that have taken some hits but look like they are set to weather the current storm.
The Park Avenue Bank made some reckless loan decisions, former employees have said, but its main mistake was to put most of its money at risk in the metro Atlanta real estate market, which collapsed hard and early, compared to real estate nationally.
Bank of the Ozarks is assuming the deposits and purchasing the assets of The Park Avenue Bank along with those of another Georgia bank that failed tonight, First Choice Community Bank. This bank had seven offices but only $310 million in deposits. Its assets were less than its deposits as of December 31.
Another two banks failed in Florida: First National Bank of Central Florida, with six offices in east central Florida, and Cortez Community Bank, with two offices in west central Florida. The deposits were assumed and assets purchased by Miami-based Premier American Bank. The two banks combined had $373 million in deposits.
In Michigan, state regulators closed Community Central Bank, which had $385 million in deposits at four locations. Deposits and assets are being transferred to Talmer Bank & Trust. The president of the failed bank had died of a gunshot wound under mysterious circumstances in October. His disappearance had prompted a run on the bank, and when he was found dead, it did not reassure depositors or the bank’s executives. The bank said in a regulatory filing last month that it was desperately short of cash and would likely not be able to continue operating. The bank was losing money so rapidly it had stopped filing financial disclosures, probably at regulators’ request. Regulators apparently did not close the bank until after it actually ran out of cash.
With tonight’s failures, there have been 39 bank failures so far this year. That’s a slower pace than the past two years, but bank failures are likely to continue at an unusually rapid pace for at least the next five years.