Friday, November 19, 2010

This Week in Bank Failures

Wells Fargo will pay Citigroup $100 million to settle lawsuits surrounding the acquisition of Wachovia when it was on the brink of collapse in 2008. Citigroup had agreed to purchase parts of Wachovia with FDIC assistance, but a day later, Wells Fargo stepped in and bought Wachovia whole. It is somewhat strange that Wells Fargo is paying Citigroup any money to settle the case, considering that Citibank surely would have imploded financially if the deal had gone through. Even without the added weight of Wachovia, Citibank required a massive government bailout before 2008 was over.

A European debt crisis team is looking at Ireland’s banks. The worry is that the banks, and perhaps the country, are in much worse financial condition than what they’ve been saying. The main danger in this kind of investigation is that it could create the impression of a country in financial free-fall even though no major problems are present, as previously happened in Greece, and this is what seems to be happening in Ireland. The situation in Ireland is important to watch, because if bond-market speculators succeed in bringing down Ireland, it will suggest that they can take on any country with sovereign debt much larger than its annual GDP. If so, the United States could be on their list by early next year.

Foreclosure fraud lawsuits are being filed in large numbers now, and the giant banks also face an investigation by the state attorney generals and a cautionary note from the TARP Congressional Oversight Panel. The foreclosure error problem is so vast that there is no quick way out for the banks involved. It may be another year before the full scope of the mortgage processing problems can be measured.

The Fed is ordering new stress tests for the largest U.S. banks. Early indications are that the new stress tests will be every bit as forgiving as the previous ones.

The Wall Street Journal reported this week that at least 50 criminal investigations are underway in connection with recent U.S. bank failures. Probably less than half of these will turn out to have any substance, but still, if criminals are identified and prosecuted, it may serve as a deterrent to criminal-minded bank executives in the future.

Pennsylvania has had its share of banks in distress as a result of the economic factors at work on the banking industry, and that turned into a bank failure tonight. In Bala Cynwyd, just across the street from Philadelphia, state regulators closed Allegiance Bank. The failed bank had $92 million in deposits at 5 branch offices, one in Philadelphia and the rest in its inner suburbs. It took losses in commercial mortgages, with $6 million in non-performing commercial mortgage loans as of September 30. The problem loans were made mainly in 2007 and 2008. The bank lost $4 million in 2009 from the liquidation of a real estate lending portfolio it had funded. The bank had reported losses of $13 million in the last two years.

VIST Bank, the banking operation of a Wyomissing, Pennsylvania, mortgage company, paid a 0.5 percent for the deposits and is also purchasing the assets. The acquisition allows VIST Bank to expand its territory toward Philadelphia.

In Wisconsin, state regulators closed the 17 locations of First Banking Center. It had $665 million in deposits. First Michigan Bank is paying a 0.5 percent premium for the deposits and is also purchasing the assets. First Michigan Bank previously operated only in Michigan. It says it plans to keep all of its 17 new Wisconsin locations, and it will keep the First Banking Center name in Wisconsin.

First Banking Center was founded in 1920. It had seen its stock decline from a peak of $96 in 2006 to less than $1 in August of this year. The bank lost money on commercial real estate loans and real estate development loans, including a loss of about $8 million in the bankruptcy of a Milwaukee-area condo developer last month. The Fed had issued a prompt corrective action order in August giving the bank until October to raise capital.

State regulators in Florida closed Gulf State Community Bank, which had five offices in the Apalachicola area in the Florida panhandle. It had $112 million in deposits and a slightly smaller amount in assets. The deposits and assets were transferred to Arkansas-based Centennial Bank.

So far this year, 149 banks have failed in the United States. The pace of bank failures has been slightly faster than last year.