Friday, November 7, 2008

This Week in Bank Failures

The FDIC has extended the deadline for banks to decide whether they want to participate in its new senior unsecured debt guarantee program. The new deadline is December 5. The debt guarantees are supposed to make it easier for banks to borrow money.

National leaders continue to meet in Europe to try to find a way forward in dealing with the international banking crisis. France came out of the latest meeting saying that leaders had agreed to a common framework for dealing with the problems, but other nations made statements that emphasized the differences in points of view.

Tonight in the United States, two midsized banks failed, the first in Texas, the second in California.

There had been rumblings about Franklin Bank of Houston, Texas, whose stock had fallen from $20 at the beginning of last year to $1 by May after a series of “wholesale” loan deals reportedly went bad. The stock continued to fall, hitting 23¢ at one point this morning, giving the bank a market capitalization of just $6 million. Franklin Bank had been growing aggressively in 2005 and 2006, and that posture apparently is what got it into trouble. Accounting failures related to real estate loans had prevented it from filing a 2007 annual statement or any subsequent financial statements.

Franklin Bank, which had operated for just 7 years, had 46 offices across Texas and $3.7 billion in deposits. The deposits and a few assets of Franklin Bank are being acquired by Prosperity Bank, also located in Houston. Franklin Bank’s offices will temporarily be operated by Prosperity Bank until it can transfer the accounts to its own systems, a process that is likely to take at least until January. Prosperity Bank has 129 offices all in the eastern half of Texas, half of them in the Houston area. Acquisitions are nothing new to Prosperity Bank; half of its offices were added in acquisitions of the past 10 years. Prosperity Bank was similar in scale to Franklin Bank, with around $5 billion in deposits, before its acquisition of the Franklin Bank deposits.

In Los Angeles, the deposits and branches of Security Pacific Bank have been acquired by Pacific Western Bank. Pacific Western will reopen the branches on Monday and integrate the accounts into its own operations in the coming months. Security Pacific had four offices and deposits of just $450 million, but was a larger presence in California commercial banking than its footprint suggested. Much of its business involved real estate development loans in the southern half of California, an area where real estate values have plummeted since last year.

Pacific Western is a much larger bank with 60 offices in southern California.

The FDIC is retaining most of the assets of these two failed banks and will dispose of them later at an estimated cost around $1.6 billion.

One week ago, my thought that no bank would be closed during the pre-election weekend was mistaken. Freedom Bank of Bradenton, Florida, had been trying for months to raise capital, but ultimately fell short. Its $254 million in deposits and four branches were acquired by Fifth Third, a large Michigan bank holding company. Freedom Bank was already considered to have dangerously low levels of capital, then reported a loss of $18 million. It had opened for business in May 2005, just at the time when the real estate loan problems were starting to hit nationally, though they wouldn’t become obvious until two years later. By then, though, Freedom Bank had a troubled loan portfolio and was having trouble raising additional capital.

Fifth Third already had a small presence in the west coast of Florida, and substantially expands its presence in the area with the Freedom acquisition.

The bank closure might have been on voters’ minds during Tuesday’s election, but the timing of the closure did not affect voters’ decisions in any obvious way. Election results for Manatee County, where the closure took place, were similar to those of the surrounding counties.