Friday, December 18, 2009

This Week in Bank Failures

Tonight is the finale for bank failures in 2009 as the year winds down. With the wheels of commerce slowing down for two holiday weekends, more bank failures will happen only if something sudden and unexpected occurs at a particular bank. There were 140 bank failures in 2009, five times the pace of 2008. If past bank failure episodes are a guide, the number of failures will double in 2010, and the end of 2010 will mark the midpoint of the bank failures, which will continue at a declining rate for at least five more years. Of course, a great many things about the current period of financial turbulence are not like what has happened before, so this is certainly not a time to become complacent and imagine that we know how things will turn out.

Among the challenges that banks will face next year:

  • A change in accounting rules for credit card securitization could lead to the failure of the credit card business at several large banks or conceivably at every credit card issuer in the United States. Security issues related to card transactions may also hit a crisis point with little or no warning.
  • The largest wave of mortgage resets ever will occur over the next 10 months or so, and this is expected to lead to the largest wave of foreclosures in history. This, of course, will further depress housing prices and lead to more problems with real estate development loans.
  • Commercial real estate values, which have held up pretty well so far, are expected to tumble in 2010. This will mean that some very large loans, some of them over a billion dollars, will be left with incomplete collateral.
  • Several waves of layoffs are coming, starting with the retail layoffs that come every year at the end of the holiday shopping season, and the largest wave of government layoffs ever. U.S. unemployment is expected to hover between 10 and 11 percent all year. Unemployment is traditionally the main factor that prevents consumers from repaying loans.
  • The economic recovery underway in other countries will lead to higher global energy prices, and that will squeeze U.S. businesses and consumers.

The big advantage that banks have going into 2010 is that they have had plenty of time to see that the world has changed, and that some risks are greater than they looked a few years ago. The banks that are most likely to fail in 2011 and 2012 are the ones that take a back-to-normal philosophy in 2010 and try to do business as if it is 2005 again.

Developments this week: Giving up on recruiting an outside candidate for its CEO vacancy, Bank of America has selected an insider, Brian T. Moynihan, for the position. Moynihan seems like a good choice — he has experience in many of the bank’s divisions, so he is less likely than his predecessor to overlook any of the many challenges that the bank faces. ◾ With major banks rushing to repay the TARP money they got from the Treasury, there has been a delay in Citigroup’s stock offering for that purpose, apparently because after Wells Fargo’s stock offering, there wasn’t enough big money left to cover Citi’s planned stock offering. The Treasury stands to lose about $1 billion as it sells off its share in Citi, but this is less than its gains in shares of other banks. ◾ Venezuela is tripling its deposit insurance limit to boost confidence in its banks, but banks there are complaining about the increase in deposit insurance fees.

On what I expect to be the last night of bank failures this year, four billion-dollar banks failed. Two were in southern California: First Federal Bank of California, with 39 branches and $4.5 billion in deposits, and Imperial Capital Bank, with 9 branches and $2.8 billion in deposits.

The 80-year-old, expansion-minded First Federal Bank of California had grown to be the second-largest savings & loan in the country, and was still opening new locations through last year. But then, after a $245 million quarterly loss, it realized it was in trouble and started laying off workers and selling assets.

In its expanding period, unfortunately, it had emphasized adjustable rate home mortgages, issuing more than $4 billion of them in 2005 alone. Loan losses piled up as soon as real estate values stopped rising.

OneWest is acquiring the bank’s deposits and assets. OneWest is the successor to IndyMac Bank, which was one of the largest originators of risky mortgage instruments, and its experience with those loans may help OneWest sort out the First Federal Bank of California loan portfolio. The FDIC estimates its costs for this bank closing at $146 million.

Imperial Capital Bank had been operating under a cease-and-desist order since February. It went on to lose more than $100 million in the first three quarters of this year. Its lending problems were compounded by the high interest rates it paid on CDs, some of the highest in California, making it hard for it to make a profit on its loans. Three of its nine locations were outside the state — two in Nevada, and one in Maryland.

The successor to Imperial Capital Bank is City National Bank, which is assuming the deposits and purchasing 78 percent of the assets. With the acquisition, City National Bank becomes the largest bank in Los Angeles.

Another bank in Florida failed tonight, but this time, it was in the Florida panhandle. Peoples First Community Bank was based in Panama City, but also had offices across the northern half of the state, 29 in all. It had $1.7 billion in deposits. Mississippi-based Hancock Bank is assuming the deposits and purchasing about 90 percent of the assets.

The OTS issued a prompt corrective action against the bank last month, ordering it to arrange a sale or merger immediately. This came after it rejected the bank’s capital restoration plan, submitted in August. The bank blamed its difficulties on the real estate crash, which hit parts of the Florida gulf coast three years before it hit nationally.

Hancock already had branches in Pensacola and Tallahassee, but this acquisition gives it a much stronger presence in Florida.

The FDIC estimates its costs for this bank closing at $557 million.

In Alabama, New South Federal Savings Bank failed. The bank had just one office, in Irondale, a suburb of Birmingham, but had $1.2 billion in deposits. Mounting losses, $41 million in the third quarter, forced the bank to shut down its mortgage lending operation, which at one time had been the heart of the bank.

Beal Bank is acquiring the failed bank’s deposits and assets. Beal Bank, based in Texas, previously had made its money as a wholesale bank, acquiring problem mortgage loans from other banks and often reworking them or foreclosing. In this deal, it has acquired New South’s entire portfolio, with loss-sharing from the FDIC to limit its potential losses. New South’s single location, compared to the size of its loan portfolio, probably made it a less attractive target for more conventional banks to bid on.

The FDIC estimates costs of $212 million for this bank closing.

Three smaller banks also failed tonight, and the FDIC was unable to find a successor:

  • Independent Bankers’ Bank (IBB), a correspondent bank in Springfield, Illinois, with $512 million in deposits. At least two other correspondent banks have nearly identical names, but are not affiliated with the failed bank. Its depositors were about 450 banks located in four states. It had been operating under a cease and desist order from the FDIC since September. Like other correspondent banks, it was involved in loan participations and other complex deals among multiple banks, and I can only guess that it allowed itself to get caught in the middle of too many deals related to loans that ultimately failed. The FDIC has created a bridge bank, Independent Bankers’ Bank Bridge Bank, to continue operating the business of the bank for at least several months. The cost to the FDIC is estimated at $68 million, and it could gain or lose money on the operation of the bridge bank.
  • RockBridge Commercial Bank, in Sandy Springs, Georgia, along the Atlanta beltway. It opened three years ago with the intention of concentrating on business lending, but instead, nearly three fourths of its loans are to real estate developers. The bank started out with an impressive $36 million in capital, but had virtually none left by the time the FDIC issued a prompt corrective action against it in September. The bank had $292 million in deposits, and the FDIC estimates that 1 percent of deposits were uninsured. The FDIC will send checks to the depositors on Monday, but because of the Christmas holiday and the heavy volume of mail next week, many of the checks may not arrive until the following Monday. Debit cards issued by the bank will no longer function, and this will surely affect some people’s shopping plans. The FDIC could not find a buyer for the bank, in part because it was located in an office building, away from the street. The FDIC estimates its costs for this closing at $124 million, though based on the mix of loans, the ultimate costs will probably be higher. Georgia had 25 bank failures this year, the most of any state.
  • Citizens State Bank, with 6 branches around New Baltimore, Michigan, north of Detroit, with $157 million in deposits. About 0.5 percent of deposits were uninsured. The bank had been operating for 87 years. It took big losses on real estate development loans, including loans to a developer who fled the country a year ago after his projects failed. The FDIC is creating a bridge bank, which will hold the deposit accounts for 45 days, but depositors should begin taking action immediately on Monday to open new accounts at other banks. The bridge bank is called Deposit Insurance National Bank of New Baltimore and will be operated under the management of Huntington National Bank. The FDIC estimates its costs for this closing at $77 million.