Friday, March 26, 2010

This Week in Bank Failures

Will there ultimately be an effective investigation of Wall Street? Sen. Ted Kaufman says yes. He says law enforcement targeted at financial fraud is finally well funded. Bank of America says no. It admitted this week that it has been manipulating its balance sheet with repo transactions for years to boost its reported level of assets, but insists that the way its bogus transactions were reported is perfectly legal.

The health care reform measures passed by Congress this week figure to reduce personal bankruptcies by about half by putting a cap on out-of-pocket expenses for people who have health coverage, but this won’t happen soon enough to rescue the banks. The reduction in bankruptcies may take about six years to fully take effect. In the meantime, the continuing financial stress of the economic slowdown will keep bankruptcies at elevated levels.

A new bank bailout is going on, in the form of net loss carrybacks. This tax rule, temporarily expanded by Congress last year, allows large banks such as Wells Fargo to postpone income tax payments, sometimes for years. The hope is that this will allow the large banks, and some other large corporations, some breathing room to get their finances in order. The size of this bailout for the banks: maybe $35 billion or so.

With the stock market at its highest level in almost two years, several bank holding companies this week filed papers for stock offerings, either to strengthen their capital position or for the purpose of acquiring a failed bank.

The Fed this afternoon approved First Niagara’s application to become a bank holding company. The approval is a necessary step for First Niagara’s planned acquisition of faltering Harleysville National Bank, which will make it a major presence in the Philadelphia suburbs. First Niagara filed to become a bank holding company in December after realizing that OTS would not approve the Harleysville National Bank acquisition. It said in a press release today that it hopes the remaining steps will follow in the next two weeks. Harleysville National Bank is a bank with a strong history, but got into a squeeze in 2006-2008 when its holding company spent too much money on acquisitions, including the acquisition of a local mortgage company.

Tonight was a night for small bank failures. The largest was Desert Hills Bank in Arizona, with three locations in the Phoenix area and three more an hour to the north in Prescott and Sedona, and $427 in deposits. It reported losses of $13 million over the last two years, which doesn’t sound so bad, until you learn that it had $75 million of real estate on its balance sheet as of December 31. The deposits are being moved to New York Community Bank, which is also purchasing the assets. New York Community Bank is a large New York City-based bank that prior to last year hadn’t ventured west of East Windsor, New Jersey. In December it added the 66 locations of the failed AmTrust Bank, including 12 in Arizona.

There were two bank failures in Georgia, starting with McIntosh Commercial Bank, with four locations west and east of Atlanta and $343 million in deposits. Trouble loans, mostly in real estate, made up 24% of its assets at the end of last year. Its location, on the outer edges of a metropolitan area, was particularly inauspicious for real estate projects started since 2005. The deposits and assets are being acquired by CharterBank, a much larger bank in the local area.

Northwest of Atlanta, the bank closure was Unity National Bank, with five locations and $264 million in deposits. Arkansas-based Bank of the Ozarks is taking over the deposits and purchasing the assets.

A small bank that failed in Florida was also bought out by an Arkansas bank. Key West Bank failed, with one office in Key West and $68 million in deposits, and its deposits and assets were purchased by Centennial Bank, which had raised more than $100 million in a stock issue to purchase failed banks. Key West Bank’s web site listed $11 million in foreclosed vacation homes for sale.