Friday, July 16, 2010

This Week in Bank Failures

Finally, there was a giant bank making a legitimate quarterly profit, not based entirely on stock trading gains. There was a respectable banking profit at JPMorgan and a possible banking profit at Citibank. New rules passed by Congress yesterday as part of the line-drawing exercise known as financial reform will probably prevent a repeat of the phantom profits of last year, so the giant banks will have to cut their costs in order to keep up with their smaller, more efficient competitors.

The financial report was the most bleak at Bank of America, which said it had been making about $1 billion per quarter in the “gotcha” fees on credit and debit accounts that are not longer legal with credit and debit card reform.

AIG has settled a fraud case brought by three Ohio pension funds. The three pension funds alleged accounting fraud and stock manipulation by AIG around 2005, well before the problems of what was then the largest insurance company in the world became publicly known. AIG will pay a total of nearly $1 billion to settle the claims. It is not clear where AIG will come up with the money, or if the settlement payments can ever be made in full.

The rate of foreclosures seems to have leveled off, but not because conditions are improving in the housing market. Instead, more homeowners are avoiding foreclosure because banks are approving more short sales, in which a house is sold for less than the outstanding balance of the loan. Banks agree to short sales because the administrative costs are small compared to those of a foreclosure. In addition, houses sometimes sell for higher prices in a short sale, if it means the house can be shown for sale while it is still occupied. The number of short sales will remain high for many years as millions of homeowners are forced to move to another town to obtain employment.

The first bank closing reported tonight was Woodlands Bank, which was based in Bluffton, South Carolina. It had eight locations and operated in five southeastern states. It had $355 million in deposits. Its losses appeared to be mainly related to failed real estate development projects. The deposits are being taken over by Bank of the Ozarks, which is also purchasing the assets.

Another South Carolina bank, First National Bank of the South, and two Florida banks, Metro Bank of Dade County and Turnberry Bank were also closed early tonight, and their deposits and assets transferred to NAFH National Bank, a bank formed for the purpose of acquiring failed banks. NAFH National Bank’s charter is still tentative, but FDIC rules permit acquiring banks to go ahead with failed bank acquisitions even if they are too new to have definite charter approval, as long as there aren’t other issues. The three failed banks had a combined $1.2 billion in deposits.

First National Bank of the South had 13 locations, mostly in the highlands of northwestern South Carolina. Its holding company was delisted by Nasdaq yesterday, with a market capitalization barely over $1 million, down from a 2006 peak around $100 million, and a share price that had been mostly below $1 for the past year. Tha bank reported a loss around $25 million last year, and was continuing to lose money. It was 3 months late on repaying a $10 million loan it used to purchase another bank in 2007, with no realistic hope of coming up with that money. It had been in business since 2000.

The two Florida banks both received prompt corrective action orders in May. Metro Bank of Dade County operated at 6 locations in Dade and Broward counties in southeastern Florida. Turnberry Bank had its 4 locations in Dade County.

Elsewhere in Florida, Olde Cypress Community Bank failed tonight. The bank had an office in Clewiston, in east central Florida, and may have had other locations. It had $162 million in deposits. The deposits and assets are being transferred to CenterState Bank of Florida.

There was a small bank failure in Michigan tonight. Mainstreet Savings Bank had offices in Hastings and Lake Odessa in western Michigan. It had $64 million in deposits. Commercial Bank paid a small premium for the deposits and is also purchasing the assets.