Friday, October 2, 2009

This Week in Bank Failures

Bank of America CEO Ken Lewis is resigning at the end of the year, two years earlier than previously planned. Usually the surprise departure of a CEO would hurt the stock of a company, but in this case, stockholders saw it as a positive step. It seems that the fatigue of managing the world’s most top-heavy bank was the deciding factor in Lewis’ decision.

With Bank of America still in a state of crisis, the new CEO is likely to be an insider who already understands the bank’s operations and challenges. Some of the candidates being suggested have previous experience as senior executives of banks that Bank of America acquired.

Facing the possibility of running out of cash as soon as next month, the FDIC has proposed to collect the next three years of deposit insurance fees in advance. The FDIC is hoping those advance payments will be almost enough to get it through the current run of bank failures. Realistically, though, this approach is likely to buy the FDIC no more than a few more months. With bank failures expected to run at historically high levels for the next three years or longer, the FDIC will need many times the funding that its usual insurance fees could bring in.

Troubled business lender CIT Group has drawn up a bankruptcy plan. CIT still hopes to restructure its debt outside of bankruptcy, but it is running out of time to do so, and the bondholders who would need to approve the restructuring are skeptical of CIT’s plans. If CIT goes into bankruptcy this month, that could limit retailers’ ability to finance Christmas-season inventory.

Warren Bank, of Warren, Michigan, was the first bank failure announced tonight. Warren Bank was already in desperate financial condition in July, when the Fed rejected its capital restoration plan and issued a Prompt Corrective Action directing the bank to raise capital immediately. The bank at that point had $501 million in deposits and only $37 million more in assets. It had six locations in eastern Michigan.

The Huntington National Bank is purchasing the deposits, paying a slight premium, but is purchasing only 15 percent of the bank’s assets, a ratio so low that it probably does not include any of Warren Bank’s loans. Huntington is a regional bank that already had a strong presence in eastern Michigan, including six offices in Warren.

The FDIC will sell Warren Bank’s loan portfolio at a later date. The FDIC estimates its costs will be $275 million.

There were small bank failures in Minnesota and Colorado. These failures cost the FDIC an estimated $18 million.

  • Jennings State Bank; two offices in Spring Grove, Minnesota, and Stillwater, Minnesota, farm country along the state’s eastern border; $52 million in deposits. Deposits and 67 percent of assets purchased by Central Bank, based in Stillwater, with locations across the Minneapolis metro area. Stillwater is on the fringes of the metro area, and residential real estate development loans in this area ran into trouble. Jennings State Bank also had substantial losses from loan participations, in which it bought shares of other banks’ loans.
  • Southern Colorado National Bank; two offices west of Pueblo, Colorado; $32 million in deposits. Legacy Bank purchased the deposits and assets, paying a 1 percent premium for the deposits. The latest blow to SCNB came three weeks ago when the municipal government of Pueblo West voted to pull its deposits out because of concern over the bank’s financial condition.

Yesterday morning, the NCUA closed two credit unions:

  • The Members’ Own Federal Credit Union, Victorville, California; $85 million in assets, 11,000 members. Share accounts were transferred to Alaska USA Federal Credit Union, which already had a presence in California.
  • West Texas Credit Union; $78 million in assets, 25,000 members. Share accounts were transferred to Security Service Federal Credit Union, which is based in San Antonio and operates nationally.