Friday, January 7, 2011

This Week in Bank Failures

Appeals courts are upholding court rulings on foreclosure paperwork. Banks that don’t get their paperwork together before they appear in court for a foreclosure case can have their cases dismissed. In other words, banks that have been trying to cut corners with their paperwork are finding that the courts aren’t going along with their plans. Some bank executives and analysts have suggested that banks can get foreclosures done for legal and administrative fees averaging around $5,000. That estimate is proving to be impossibly optimistic on the banks’ part.

Some analysts have suggested that the average size of failed banks will be shrinking. The thought is that larger banks will have an easier time lining up new capital. It could also be said, though, that it is easier for the smallest banks to get bought out. So far, there hasn’t been an obvious trend in the size or character of failed banks.

The Fed has suggested rules that would limit debit card transaction fees to an amount proportionate to the transaction costs. This would reduce banks’ revenue in this area by about a factor of five and take away yet another cash cow for the industry. It would also eliminate all incentive plans for debit cards. Banks looking for new ways to charge fees are demonstrating that the “gotcha” mentality in consumer banking isn’t dead. For example, some banks are proposing inactivity fees around $9 a month for debit cards. At least one bank has created a monthly fee for checking account customers who don’t sign into their account on the Internet at least once during the month. The idea of these contingent fees is to make them so hard to understand and manage that the ordinary banking customer will not be able to avoid them completely. The risk with new fees is that, if they scare a significant fraction of customers away, some banks could end up insolvent.

The FDIC has begun filing civil lawsuits against officers, directors, and attorneys of failed banks where it believes fraud or negligence took place. A few hundred lawsuits have been filed so far, but observers believe the FDIC will file far more legal actions than this at failed banks where obviously false financial statements were published or specific assets were misrepresented.

Bank failures resumed tonight after the holiday recess with banks closed by state regulators in Florida and Arizona.

In Florida, First Commercial Bank of Florida failed. It had nine locations in central Florida and $530 million in deposits. It was founded in 1999 and prided itself on its independence in an area where few banks are locally owned. Its customers will now be served by a South Florida bank, Boca Raton-based First Southern Bank, which is taking over the deposits and purchasing the assets.

First Commercial Bank of Florida made miscalculations in its real estate lending that were exacerbated by the local decline in real estate values, which have fallen by as much as half from their peak in 2006. By late last year, the bank’s capital had fallen by three fourths, and if a year-end balance sheet had been prepared, it would probably show assets that were less than the bank’s deposits.

First Southern Bank has troubles of its own with bad loans, but it has plenty of capital remaining, and regulators evidently decided it was enough to cover its own loan losses and also take over a (slightly) smaller bank.

Scottsdale, Arizona-based Legacy Bank was the second bank failure of 2011. It should not be confused with the dozens of other banks elsewhere that have similar names. The failed bank had two locations, both in Scottsdale, and $126 million in deposits, many of which were Internet deposits from customers who lived in other states or outside the country. Missouri-based Enterprise Bank & Trust is taking over the deposits, paying a 1 percent premium, and is also purchasing the assets.