Friday, November 13, 2009

This Week in Bank Failures

Developments this week: CIT Group is trying to maintain business as usual in bankruptcy, though layoffs are probably coming as soon as January. A hearing December 8 is expected to rubber-stamp the company’s reorganization plan, but that is never a sure thing in a bankruptcy of this magnitude — the 5th largest in U.S. history. As CIT cuts back, hundreds of small retailers and their suppliers are expected to close. ◾ Bank of America is reportedly having difficulty finding outside candidates to be its new CEO. An inside candidate, someone who is already familiar with the company’s operations, is probably a better idea anyway. ◾ The FDIC has approved a plan for prepayment of deposit insurance premiums. Banks will pay estimated premiums for 3-plus years. This should provide enough liquidity to keep the FDIC going through May. ◾ The FDIC took emergency action, not announced officially until late this evening, to keep the credit card business from collapsing, by temporarily extending the safe harbor provision for its guarantees of securitized credit card debt, along with other bank obligations. The credit card time bomb is now set to go off March 31. ◾ The Fed announced new restrictions on debit card and ATM overdraft fees, permitting banks to charge them only with the customer’s permission. Checks are not covered under the new rules. The rules go into effect July 1. Banks will lose about $30 billion a year in fees.

Two more banks along the Gulf Coast of Florida failed tonight. There have been a cluster of failures in this region, not because its real estate was especially hard-hit compared to south Florida, but perhaps because its decline began sooner. Of the 11 Florida banks to fail this year, about half have been on the Gulf Coast. The two banks to fail tonight were Orion Bank, with 23 offices and $2.4 billion in deposits, and Century Bank, with 11 and $631 million. The successor for both banks is Louisiana-based Iberiabank, which is getting a 1.5 percent discount on the deposits and is buying 90 percent of the assets. The cost to the FDIC for the two closings is estimated at slightly under $1 billion.

The discount for the deposits is unusual, but the FDIC decided it made sense as part of a deal in which it would sell most of the assets of the two failed banks. Usually in good economic times, and in a few cases this year, banks pay a premium of 1 to 2 percent to acquire the deposits of a failed bank.

Orion Bank had about 10 percent of its assets in non-performing loans and had been operating under a Fed cease-and-desist order since August. The bank had become the owner of or was in the process of foreclosing on high-profile office buildings and other commercial real estate projects all across the region.

The Office of Thrift Supervision (OTS) gave Century Bank 10 days to find a buyer on October 22, after it rejected the bank’s capital plan. As of June 30, 20 percent of the bank’s loans were behind on payments. The OTS had issued a cease-and-desist order on August 11, saying the bank had inadequate capital, had violated flood insurance regulations, and had been violating the Truth in Lending Act.

Century Bank is not connected to Century Bank of Florida, which operates in the same region.

Iberiabank is a regional bank that previously had only a token presence in Florida, consisting of the out-of-state branches of a previous acquisition.

In California, federal regulators closed Pacific Coast National Bank, a small bank with offices in San Clemente and Encinitas, along the coast north of San Diego. It had $131 million in deposits and just slightly more assets. Sunwest Bank is acquiring the deposits and assets.

Pacific Coast National Bank had appeared healthy enough a year ago to receive $4 million in TARP funds from the Treasury. It discovered in April that its loan portfolio was not nearly as stable as it had appeared, and by August, regulators were ordering it to improve its financial condition.

Prior to this month, no TARP recipients had failed, but in recent days, we have seen the CIT bankruptcy and the failures of United Commercial Bank and now Pacific Coast National Bank, and observers warn that at least 1 in 20 TARP banks is in some kind of financial distress.