Friday, July 3, 2009

This Week in Bank Failures

Collateralized debt obligations, or CDOs.

The FDIC is usually not so specific about the cause of a bank failure. Often, it says nothing at all about it.

But for Founders Bank and five other banks controlled by the Campbell family that failed in Illinois last night, the FDIC said the culprit was a business model based on collateralized debt obligations. These are highly risky derivatives — investments that are inherently risky because they lack the transparency that ordinary investment vehicles depend on.

Founders Bank had $850 million in deposits and 11 offices in the Chicago area. Two other banks owned by the same holding company and three other loosely affiliated banks also failed, with a combined 18 offices and $371 million in deposits. The FDIC found six different banks to assume the deposits of these six failed banks located all across Illinois.

Failed BankLocationsSuccessor
Founders Bank11 in Chicago areaThe PrivateBank and Trust Co.
The First National Bank of Danville7 in Danville, WestvilleFirst Financial Bank (Terre Haute, Indiana)
Rock River Bank4 in Oregon, RockfordHarvard State Bank
The John Warner Bank3 in ClintonState Bank of Lincoln
The Elizabeth State Bank2 in Elizabeth, GalenaGalena State Bank and Trust
First State Bank of Winchester2 in Winchester, MurrayvilleFirst National Bank of Beardstown

The successor banks are all local banks. They are buying almost 90 percent of the assets of the failed banks, and in a few cases, they paid a small premium for the deposits. The ability of the FDIC to find six buyers at once suggests that Illinois banking remains mostly pretty sound. The total cost to the FDIC for the six Illinois banks is estimated at $515 million.

You might think that a family that lost six banks in one day would be wiped out, but the Campbell family still controls a few banks. The holding company of Founders Bank still operates Peotone Bank near Chicago, and the holding company of the Elizabeth State Bank still owns Legacy Bank in Scottsdale, Arizona, although this is a tiny bank that reportedly only accepts millionaires as customers.

Banking regulators got an early start on bank closings this week because of the holiday weekend, closing banks on Thursday night instead of Friday. In addition to the bank closings in Illinois, there was one in Texas. The total of seven failed banks makes this the busiest bank closing weekend in recent memory.

The Texas Department of Banking closed Millennium State Bank of Texas, a bank with one office in Dallas, Texas. The office, deposits, and assets are being taken over by State Bank of Texas, which will only have to cover up the word “Millennium” on the front of the building to show the new name.

State Bank of Texas was in need of a new office, as its headquarters in nearby Irving will be swallowed up next year by a highway project.

Millennium was founded in 2003, and was profitable only in 2005. Texas was the center of bank failures in the early 1990s, but has seen very few banks fail in the past decade.