Friday, August 21, 2009

This Week in Bank Failures

The Swiss government has come to an agreement with the IRS over accounts at UBS held by U.S. customers. After the deal is finalized next week, UBS will turn over information on about 1/12 of the accounts with U.S. owners. The IRS had sought the identities of all the U.S. accounts at UBS, but says the final agreement will give it information on the accounts that were most likely to be hiding income or assets. Many of the accounts were closed years ago or earlier this year.

This settlement clears up one of the biggest clouds hanging over UBS. The bank had previously agreed to pay $780 million to settle its part in obscuring the nationality of U.S. customers, but to turn over the data that the IRS wanted, it needed to find an approach that would fall within the limits of Swiss banking secrecy laws.

The Swiss government had taken a 9 percent stake in UBS to stabilize it financially, and is now preparing to sell its shares to the public.

At a time when consumer income is falling and many consumers are skittish about keeping their savings in the bank, where will banks’ deposit base come from? This is an important question because when many loans are not being paid on time, a small decline in total deposits can turn into a large decline in liquidity for the banking system. Part of the answer is businesses. Business lending has become so dysfunctional that, even for a large, successful business, running out of cash could mean bankruptcy this year. Even with revenue declining, businesses have no choice but to save more than they did last year. And unlike consumers, who can keep cash at home in the freezer if they choose, businesses have few options but to keep their money in the bank.

This is better news for midsized banks than for large banks. A large business wanting to work within the deposit insurance limits could have deposits in dozens of banks; it cannot safely concentrate all its deposits in a few very large banks the way it might have done in more financially calm times.

The FDIC is preparing to relax rules on who can buy failed banks, especially as they apply to private equity investors, to try to protect its Deposit Insurance Fund. Though the FDIC will not admit this, the fund looks like it will be depleted around November. At that point, the FDIC will be living on money borrowed from the Treasury, and Congress will likely have to take action next year to increase its line of credit.

More foreign banks are likely to be taking over failed U.S. banks in the next year, according to a story in the Wall Street Journal. A significant part of the banking system is already foreign-owned, including 11 of the 50 largest banks, and that may become a trend as more banks fail.

Tonight we saw the first foreign bank buy a bank out of receivership from the FDIC. Banco Bilbao Vizcaya Argentaria SA (BBVA), of Spain, through its BBVA Compass subsidiary, bought the deposits and a matching amount of assets of Guaranty Bank after it failed tonight. BBVA Compass (called Compass Bank prior to the BBVA acquisition two years ago) already had 767 offices across the southern tier of states from Florida to Arizona. BBVA is trying to build up its presence in Sunbelt states that have large Spanish-speaking populations, so it makes sense that it might want to take over a bank with 103 offices in Texas and 59 in California. Another point that made the transaction convenient for BBVA is that BBVA Compass and Guaranty Bank use much of the same operating software, so it will take only about six months to combine their operations. One of the world’s largest bank holding companies, BBVA owns the second largest bank in Spain and the largest in Mexico.

Guaranty Bank is the third largest bank failure this year, with nearly $12 billion in deposits and about $13 billion in assets. It is about half the size of the Colonial Bank failure last week and apparently slightly smaller, in terms of assets, than the BankUnited failure in May. The failure of Guaranty Bank had been widely anticipated, especially after it issued a going-concern warning a month ago. It is only the second bank failure this year in Texas, after two last year, although more are expected.

Guaranty Bank was previously owned by cardboard manufacturer Temple-Inland. It was spun off two years ago, but since then, has never reported a profit. Two billionaire-investors, Carl Icahn and Robert Rowling, own more than a third of Guaranty Bank and have taken the biggest loss in its collapse. Yet the eventual cost to the FDIC, estimated at $3 billion, will be considerably greater.

It was not a good day for banks in the southern United States, as Guaranty Bank was part of a series of bank failures that swept across the South.

The first was ebank, an Atlanta-based bank founded in August 1998 that tried to be the dot-com of the banking business. Despite its national presence, it had only $130 million in deposits. Its attempt to operate on the Internet made underwriting a challenge. It launched an online mortgage division in 2006, which was unfortunate timing, just when the lending bubble was starting to fall apart. A year later, the OTS cited the bank for problems in its approach to real estate loans. By 2008, nearly 10 percent of ebank’s loan portfolio consisted of delinquent real estate development loans, and the bank was looking for additional capital.

The deposits, office, and assets have been sold to Stearns Bank, a Minnesota bank that has already acquired several failed banks this year. The FDIC estimates its costs for this closing at $63 million.

Around the same time, a short distance southwest of Atlanta in Newnan, Georgia, First Coweta Bank failed. It had four offices and $155 million in deposits. The offices and deposits and a matching amount of assets are being purchased by United Bank, based in the nearby village of Zebulon, Georgia. United Bank already operated across the area generally south of Atlanta, so this acquisition is a natural geographical extension to the west.

First Coweta Bank was founded in 2004, but did not really get going until 2005 and 2006. It was a bad time for any bank to get started in real estate lending in the United States, and First Coweta Bank’s location on the fringes of the suburbs of a metropolitan area is also problematic, as a high proportion of residential development projects in such areas have been abandoned. By the middle of 2009, only two thirds of its loans were still current.

The FDIC estimates its costs for this closing at $48 million.

Then, one state to the west, Alabama closed CapitalSouth Bank, which had 7 offices located mostly around Birmingham, and 3 more in Jacksonville, Florida. It had $546 million in deposits. The offices and deposits and most of the assets are being sold to Iberiabank, a regional bank based in Louisiana. Iberiabank already had one office in Alabama, in the port city of Mobile, from its 2007 acquisition of Pulaski Bank. This is not its first acquisition of a failed bank; a year ago, it acquired the deposits of ANB in northwest Arkansas.

CapitalSouth surely did not realize the extent of its financial difficulties in 2007, or it would not have purchased a troubled Florida bank at that time. It has not reported a profit since, and a few weeks ago sold off a fourth Florida office in an attempt to downsize its operations.

Alabama banking authorities closed banks on consecutive Fridays after not having to close a bank in nearly a quarter century. The FDIC estimates a cost of $151 million from closing CapitalSouth.