Friday, December 11, 2009

This Week in Bank Failures

Developments this week: “Take the money and run” can’t be the strategy for bank executives, the government has decided. New Treasury rules limit cash salaries for executives at bailed-out banks to $500,000 per year, with other compensation deferred three years or more. This gives executives a new incentive to keep their companies from collapsing. ◾ Bank of America paid back all its TARP funds to steer clear of the new pay restrictions, but the move has not improved its luck in recruiting a new CEO. Some at Bank of America are now convinced that the new CEO must come from outside the company because of the ongoing legal problems that may entangle the current executives. ◾ The banking crisis in Venezuela has shaken consumers in that country, who are spending less on Christmas gifts as a result, retailers say. Some indicted bankers have fled the country.

The largest bank failure reported tonight was SolutionsBank, with five offices in and around Kansas City, plus its original office in the opposite corner of Kansas, and $421 million in deposits. The bank’s optimistic approach, forging ahead with its real estate lending strategy despite the conditions of the economy, is what did it in. The go-for-broke mentality, which emphasized expansion and growth right up through today, fueled a rapid expansion in the real estate boom years from 2002 to 2005, but then burned through the bank’s capital just as rapidly when the real estate expansion came to a stop.

Arvest Bank, an expanding regional bank with more than 200 locations in four states, is assuming the deposits and purchasing the assets of SolutionsBank. Arvest Bank got its start in the Kansas City market by purchasing the three area branches of Harrington Bank four months ago.

Republic Federal Bank failed tonight in Miami. The bank was formed out of the 2006 combination of Hemisphere National Bank and Pine Bank, but lost $5 million in 2007, $25 million in 2008, and $11 million in the first quarter of 2009, giving it a negative net worth. The bank’s president resigned at that point, and it closed one of its five branches and tried to raise more capital, but its loan portfolio continued to deteriorate. Its deposits fell from $383 million in March to $353 million in September.

The deposits are being transferred to 1st United Bank, which is also buying 62 percent of the assets. The cost to the FDIC is estimated at $123 million.

A small bank failed tonight. Valley Capital Bank, with a single office in Mesa, Arizona, and $41 million in deposits was closed tonight, and its deposits and assets were purchased by Enterprise Bank & Trust. Enterprise Bank & Trust is based in Missouri, but had previously opened a lending office in Arizona with an eye toward expanding into that state.