Friday, November 2, 2012

This Week in Bank Failures

Wall Street was in disarray all week, the result of weather so extreme that the New York Stock Exchange at one point had to issue an angry denial of rumors that its building had been flooded. But with electrical tunnels flooded, large areas of lower Manhattan including the financial district could remain in the dark for weeks. Meanwhile, with subway service shut down across the same area, most of Wall Street has no easy way to get to work.

The stock exchanges were closed for the first two days of the week, and when they reopened, the market dynamics were obviously off, with most of Wall Street not represented in the trading. Some buildings in the Financial District experienced flooding for the first time, but remained operational. The transportation problems, though, could bedevil Wall Street for the rest of the year or longer.

Hurricane Sandy and the subsequent northeaster caused damage in 13 states and parts of Canada, but the worst damage was in New Jersey, where tidal overwash made a mess of Atlantic City and dozens of coastal towns. Banks took direct losses when their own branches were flooded, but face larger losses from the damage to homes and businesses financed by bank loans. Early estimates rank Hurricane Sandy and its aftermath around number 6 among the all-time most destructive storms to hit the United States. Before the storm hit, analysts warned that $3 billion in insured property damage was likely. The damage remains to be counted, but is obviously on a larger scale than that. Regulators have offered guidance indicating that catastrophic loan losses from Sandy are transitory in nature and do not indicate a pattern of mismanagement at a bank. Nevertheless, it is easy to imagine weather-related losses sinking a bank already weakened by previous real estate loan losses.

The United States holds a presidential election on Tuesday. Both major-party candidates are staunch supporters of Wall Street and the banking sector, but Romney goes farther in that direction. He has promised to repeal most banking regulation and to allow Wall Street to write financial regulations in those areas where they are needed. Obama, by contrast, has hinted at a modest expansion of law enforcement on Wall Street, particularly when it comes to fraud. Neither candidate has lent any support to proposals to reform Wall Street or to break up or shrink the banking giants.

There was a medium-sized election-eve bank failure in Obama’s backyard with the closing of Citizens First National Bank, based in Princeton, Illinois. The bank had $869 million in deposits and 21 locations. Heartland Bank and Trust Company is taking over the deposits and purchasing the assets.

The failed bank dates back to 1865, but most of its growth took place since 2001 with an expansion into the nearby Chicago metro area. This exposed it to outer-suburban real estate loan losses that depleted its capital. It was the subject of a prompt corrective action order in March.

A small Florida bank also failed tonight. Heritage Bank of Florida had $223 million in deposits and three locations. Centennial Bank is taking over the deposits and purchasing most of the assets.

Earlier this week the NCUA liquidated Women’s Southwest Federal Credit Union. The credit union had 743 members in Dallas, Texas, and $2 million in deposits. Some accounts were transferred to City Credit Union. The NCUA sent checks to other members for their deposits.