Sunday, August 16, 2009

Five More Bank Failures, Including The Colonial Bank Doozy; WSJ Reports On FDIC Struggles

Another Friday, another five bank homicides.

The FDIC closed five more banks this past weekend, including the sixth largest failure in the FDIC's history: Colonial Bank at $25 billion asset base.

BB&T stepped up to the plate to takeover Colonial in what looks like a win for the FDIC. The Sheila Bear even went on record as stating, "losses from [Friday's] failures are lower than had been projected." Perhaps not surprisingly, TILB has a alightly different take on the matter.

We have been stating for some time, losses are actually higher than they should be under the FDIC's legal mandate, as the FDIC continues to provide insurance on deposits that are, in fact, not insured. This theft from the FDIC's U.S. citizen owners seems completely ignored by the fourth estate and, frankly, everyone else in the world.

On Friday, all deposits were again protected except potentially $4.2 million from the Community Bank of Nevada. That bank was apparently so toxic that there was no willing buyer at a price the FDIC found acceptable. As such, the FDIC set up a government managed run-off bank and will likely leave those $4 million of depositors out in the cold. As George Orwell warned us so long ago, "All animals are equal but some animals are more equal than others."


While The Sheila Bear may be pounding the table that losses are lower than "projected," TILB will note that a) these losses are still estimates, we'll see how final losses come out; b) it's obviously (and appropriately) weighted largely by Colonial's failure given its size; and c) three of the other four banks that failed had losses that were 50% of assets. Holy shit.

Losses have trended so poorly that even the media is starting to catch on. In tomorrow's WSJ, this article by Joe Bel Bruno will begin highlighting to the masses what TILB has been saying for over a year: losses as a percent of bank assets are trending at a staggeringly high rate.

Banks in the U.S. that failed in the past two years were in far worse shape than those that collapsed during the industry's last crisis, a looming problem for the government agency charged with insuring deposits.

At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency's deposit-insurance fund is expected by the Federal Deposit Insurance Corp. to be about 50% of their assets.

The biggest hit on a percentage basis is coming from Community Bank of Nevada, a Las Vegas bank with $1.52 billion in assets and an estimated cost of $781.5 million. The failure of Colonial Bank, a unit of Colonial BancGroup Inc. that was sold to BB&T Corp., will cost $2.8 billion, or 11% of the Montgomery, Ala., bank's assets.

For the 102 banks that have collapsed in the past two years, the FDIC's estimated cost averaged 25% of assets. That is up from the 19% rate between 1989 and 1995, when 747 financial institutions were closed by regulators, according to the FDIC.
As the number of bank failures escalates, FDIC officials have been trying to find investors and buyers for terminally ill financial institutions, increasingly by agreeing to shield acquirers from certain losses on assets of the failed bank.
Down to the nitty gritty, as the WSJ's nifty chart shown at the top of the post indicates, this was a binary week. Two banks trended better than average (including Colonial) and three were epically horrible:

Weekly Failure Summary:

Dwelling House Savings and Loan Association, Pittsburgh, PA
Assets: $13.4mm, FDIC Losses: $6.8mm, Losses as a Percentage of Assets: 50.7%

Colonial Bank, Montgomery, AL
Assets: $25,000mm, FDIC Losses: $2,800mm, Losses as a Percentage of Assets: 11.2%

Community Bank of Nevada, Las Vegas, NV
Assets: $1,520mm, FDIC Losses: $781.5mm, Losses as a Percentage of Assets: 51.4%

Community Bank of Arizona, Phoenix, AZ
Assets: $158.5mm, FDIC Losses: $25.5mm, Losses as a Percentage of Assets: 16.1%

Union Bank, NA, Gilbert, AZ
Assets: $124mm, FDIC Losses: $61mm, Losses as a Percentage of Assets: 49.2%

Straight Average Losses as a Percentage of Assets: 35.7%
Weighted Average Losses as a Percentage of Assets: 13.7%
As The Sheila Bear noted, the weighted average outcome is a substantial improvement. However, the simple average outcome was by far the worst we've seen. This was driven by the fact that any of the three truly toxic takeovers would have represented the single worst percentage of assets performer in our dataset by a wide margin (our dataset is incomplete and has not yet been backfilled but covers approximately the last 40 failures).

While we have not yet seen it reported, we strongly suspect that the Community Bank of Arizona and Community Bank of Nevada are controlled by the same folks. The Arizona failure probably had to be done at the same time as the Nevada failure to avoid creating a taint from one to the other. Additionally, the FDIC sold both Arizona failures to MidFirst Bank (based in Oklahoma City). Its Arizona presence just jumped a notch...

Tracking the race for the Red Jersey of Shame, it's good to see Nevada (now three) and Arizona (now two) put some points on the board. We highlighted a few weeks ago that we suspected they had some good, toxic bank failure runway in front of them. The leaderboard now stands at:
Georgia with 16, Illinois 13, California 8, Florida 6.