Friday, December 12, 2008

This Week in Bank Failures

The State of Illinois said Monday it was preparing to cut its ties with Bank of America. The governor offered a tangential connection to a labor dispute as a reason, or perhaps an excuse. Then in rapid succession, the governor was indicted for trying to auction off the state’s vacant Senate seat (held until a month ago by President-elect Barack Obama) and the bank announced a plan to lay off 35,000 workers. It will be a busy weekend for conspiracy theorists trying to tie all this together.

Almost every commercial bank will have some kind of exposure to the auto industry, but do some have a large lending exposure that they’ve been hiding? That’s a question people are asking after last night, when it became clear that the Detroit bailout had become too complex to pass. General Motors and Chrysler have hinted at possible bankruptcies around the first week of January, and the failure of either could shut down enough parts suppliers to stop auto production at factories around the world for a couple of months while the problems are sorted out. That’s a scenario that could lead to the failure of lenders who were foolish enough to bet big on the U.S. auto industry. The problems in Detroit have been well known for at least three years, though, so you would think no bank would stake its future on the survival of the industry in its current form.

Yet another Georgia bank failed tonight. Haven Trust of Duluth, Georgia, was shut down. Its deposits and four offices were transferred to BB&T, a large regional bank. In addition to acquiring all of the $515 million in deposits, BB&T is acquiring $55 million of the bank’s assets. The FDIC expects to lose $200 million disposing of the other assets. All lines of credit at the failed bank have been frozen.

BB&T plans to continue to operate the four Haven Trust offices, which are in the Atlanta metro area. The new branches will add to BB&T’s already strong presence in the area.

Like the other failed Georgia banks, Haven Trust had a lopsided real estate exposure. Almost half of its loan portfolio consisted of real estate development loans. So far this year 5 Georgia banks have failed, along with 5 in California, 1 in Michigan, and 3 in Nevada, all states particularly hard hit by the real estate downturn. Another 6 banks in other states have failed this year.

That count includes a smaller bank in Texas that also failed tonight. Sanderson State Bank had $28 million in deposits. The Pecos County State Bank is acquiring the deposits and one tenth of Sanderson State Bank’s assets. It will decide later whether to acquire Sanderson State Bank’s office. The Pecos County State Bank is based in Fort Stockton, Texas, 65 miles north of Sanderson — not far away at all by the standards of west Texas. The FDIC’s cost for this bank closure is estimated at $12 million.