Failure Friday Killed Four More Banks, A Visit From Our Friend Vineyard Bank, And A Prediction As To How Many Banks Will Fail In The Next 15 Months

Friday July 17th, 2009 was a special day for TILB.

As we referenced in our post this past weekend on bank failures, two of this past weekend's four failures communicate a particularly fascinating message. Today we will address one of those messages.

Not only did four banks fail, one of them was Vineyard Bank. TILB first wrote about Vineyard Bank's walking dead status a year ago. In that blog posting, we walked through its deleterious state noting that it was virtually certain to fail.

Vineyard's collapse gives us a specific, useful metric: for all intents and purposes, this bank failed over a year ago in May 2008 when its regulators began sending angry and restricting letters. The FDIC finally admitted as much and took it over this past weekend. As such, that 14.5 month span provides a handy measuring stick for determining how far behind the curve the FDIC is. As of now, it appears the pipeline is 14-15 months deep.

Since May 5th, 2008, we have had 81 banks fail. Of course, the past year has seen much worse credit performance than the year prior. The pace of bank failures has been 4x in 2009 what it was in 2008 (and actually many times greater yet if you just compare 1H08 to 1H09).

Given that asset performance continues to worsen for most banks and we can easily define how far behind the curve the FDIC is by using the Vineyard measuring stick, TILB believes it is fair to extrapolate that the pipeline for failures in the next 15 months is approximately 3x-4x the past 15 months or 243-324 banks. That comes out to somewhere between 3.7 - 5.0 failures per week for that entire 15 month period.

We will state it again: TILB is forecasting over 250 failures in the next 15 months. If borrower performance deteriorates further (which it will), we believe the number could be much greater than 250.

Ignore our warning at your own risk.

Green shoots?

Nay. Brown vines.

More Bad News for Small Banks - Vineyard National Bancorp Says it has Going Concern Issues

Well, the hits keep coming. Vineyard National Bancorp announced in its 10-Q that it is facing going concern issues.

No shit.

On May 5th, they were informed by the Office of the Comptroller of the Corrency (OCC) they they've been deemed to be in "troubled condition".

On May 20th, the Board of Governors of the Federal Reserve System told them the same thing.

On July 22nd, Vineyard "consented" (as if they had a choice) to a Consent Order from the OCC which basically tells Vineyard exactly what they have to do to not be taken over. They are also deemed to no longer be "well capitalized".

And check out this statement from the aforementioned 6/30/08 10-Q. The understated confidence is a thing of beauty:

On a consolidated basis, the minimum ratios that the Company must meet are total risk-based capital of 8.0%, Tier 1 capital of 4.0% and a leverage ratio of 4.0%. At June 30, 2008, the Company’s total risk-based capital, Tier 1 capital and leverage ratios were 2.5%, 1.3%, and 1.2%, respectively.

Wow.

I'm sure it has deteriorated since then, which is saying something.

Stunningly, despositors have not taken well to this set of news. Here is how depositors have reacted (and other liquidity problems) as stated directly from the 10-Q. Honestly, I cannot believe the FDIC allowed the brokered deposit game to continue as long as it did. My comments are in [brackets] and are italicized:

Negative publicity relating to our financial results and the financial results of other financial institutions, together with the seizure of IndyMac Bank by federal regulators in July 2008, has caused a significant amount of customer deposit withdrawals, thus affecting our liquidity and our ability to meet our obligations as they have come due [kind of lame to put any blame on IndyMac when Vineyard so clearly was mismanaged and decaying at an accelerating rate well prior to the IndyMac issue - see the timing of the news flow from above]. During the second quarter of 2008, we obtained $266.3 million in brokered deposits to offset the $226.9 million in run-off of savings, NOW, and money market deposit accounts. [Please understand that this acceptance of brokered deposits (or any deposits for that matter) as a run on the bank is happening is 100% the result of FDIC insurance and thus is going to cost you and me - The American Taxpayer - dearly] As a result of the issuance of the Consent Order by the OCC on July 22, 2008, however, we can no longer accept, renew or rollover brokered deposits unless and until such time as we receive a waiver from the FDIC. The Bank has requested a waiver from the FDIC, but there can be no assurance that such a waiver will be granted [Lord willing, it won't be granted, my taxes are high enough already], granted on the terms requested, or granted in time for the Bank to effectively utilize brokered deposits as a source of required liquidity. If the Bank does not receive such a waiver, we will be unable to employ the use of readily available brokered deposits as a source of liquidity [bold emphasis added due to the incredibility of the fact that a bank this weak still has "readily available" access to deposits].

As of June 30, 2008, we were in default on our secured line of credit with a correspondent bank, as described in Note #10 [doh]. While we were able to negotiate a waiver of the events of default existing as of June 30, 2008, we have subsequently defaulted on the line of the credit as a result of the issuance of the Consent Order by the OCC on July 22, 2008 [double doh]. As a result, while the maturity date has been extended to August 29, 2008, the correspondent bank is entitled to declare the outstanding principal balance and all accrued but unpaid interest on the line of credit immediately due and payable and otherwise exercise its rights as a secured party against the collateral to collect, enforce or satisfy the obligations under the line of credit [triple doh]. Such rights may include foreclosing on the collateral and, subject to regulatory agency approval, acquiring 100% ownership of the Bank or selling the Bank to a third party. As a result of the regulatory restrictions discussed above, prior FRB approval will be required for VNB to make any payments on this line of credit.

Although effective April 21, 2008, the FHLB reduced the Bank’s borrowing capacity from 40% to 30% of the Bank’s total assets, the Bank’s borrowing availability was limited to the amount of eligible collateral that can be pledged to secure that borrowing facility. At June 30, 2008, based on its eligible pledged loan and investment collateral, that availability was $289.4 million of which $155.0 million was outstanding; therefore, the Bank had a remaining borrowing availability of $134.4 million. [emphasis added in bold to highlight how long ago regulators started cracking down on Vineyard]

On July 24, 2008, the Bank borrowed $126.0 million from the FHLB, consisting of four $31.5 million advances with terms ranging from 9 months to 1 year. As a result of these term borrowings, the Bank had a remaining borrowing availability of $2.2 million available against its loan and investment collateral pledged at the FHLB. The proceeds from the FHLB advances were invested in federal funds sold for liquidity needs. At July 24, 2008 the Bank had an aggregate of $178.0 million invested in federal funds sold.[emphasis added in bold: $2.2 million? I know one bank I'll be reading about some Friday in the not too distant future at about 5pm, for sure]

As of June 30, 2008, the Bank had no unsecured correspondent banking facilities with borrowing availability. However, on August 1, 2008, the Bank entered into an intercreditor agreement with the FHLB and Federal Reserve Bank of San Francisco (“FRB San Francisco”) whereby certain eligible loans pledged to the FRB San Francisco, and agreed to by the FHLB, may be utilized to support any advances from the FRB Discount Window. We have pledged loans with an aggregate principal balance of over $400 million which can be used by the FRB Discount Window in determining an available amount to us; however, the FRB Discount Window is not obligated to lend on any collateral deposited.

On July 31, 2008, the FRB notified VNB that VNB must serve as a source of financial strength to the Bank and as such, requested that management perform an analysis of the cash needs for VNB through October 31, 2008. The FRB has further requested that any amounts not required for VNB’s operations be contributed to the Bank to support its operational needs. Management is performing such an analysis at this time.

Going Concern

The conditions and events discussed above cast significant doubt on our ability to continue as a going concern. We have determined that significant additional sources of liquidity and capital will be required for us to continue operations through 2008 and beyond. We have engaged a financial advisor to explore strategic alternatives, including potential significant capital raises, to address our current and expected liquidity and capital deficiencies. However, there can be no assurance that we will be able to arrange for sufficient liquidity or to raise additional capital in time to satisfy regulatory requirements and meet our obligations as they come due. In addition, our regulators are continually monitoring our liquidity and capital adequacy. Based on their assessment of our ability to continue to operate in a safe and sound manner, our regulators may take other and further action, including assumption of control of the Bank, to protect the interests of depositors insured by the FDIC. Finally, there can be no assurance that our correspondent bank will not declare us in default or that the exploration of strategic alternatives will result in an infusion of sufficient additional capital.[bold emphasis added and, on a personal note, good luck!]

As is generally my practice, let's take a look at the losses the FDIC (ie, you and me) are going to have to eat: Vineyard is a $2.3 billion bank (by assets). If we apply the 15-28% loss rate to assets that recent failures resulted in, we are looking at a $345-644 million loss to the FDIC. Amazingly, this almost seems small with the rubble of IndyMac's $5+ billion loss still smoldering and the potential for several $10+ billion asset banks to go under (and really the potential for some $100+ billion banks to be aced).

I suppose that's the silver lining here: at least it isn't an unusually large bank.

Four Banks Fail; FDIC Euthanization Pace Stays Brisk

The overs take it for the third week out of four...and each of those wins was by a wide margin, perhaps indicating a new stage in our ongoing bank failure cycle.

The real turn began four Fridays ago when we had what seemed like the dawning of a new era as five banks failed. That was trumped a week later by an epic Fourth of July fireworks celebration of seven failed banks. The seven failures were followed by a relative snoozer last week with only one failure. This past Friday was back on track with four failures: Temecula Valley Bank in CA, Vineyard Bank in CA, BankFirst in SD and First Piedmont Bank in GA.

As a personal aside, it's nice to see Cali and Georgia get back in the game. Illinois had broken off from the peloton and it seemed California and Georgia might simply compete for second as they let Chief Illiniwek run away and capture the black jersey of shame. But the chase pack has mobilized! In 2009, Georgia has posted ten bank failures, California eight bank failures, and Illinois leads with twelve. Those three states represent 30 of the 57 failures.

Anyway, back to the story at hand. With 17 failures in the past four weeks, it seems to indicate that the FDIC has finally ramped its staff to begin handling a sustainably higher level of failures. It has long been our suspicion that the FDIC was woefully undermanned for the crisis at hand. More than four failures per week for four weeks has us believing that the staffing issues are much closer to being ironed out.

As long time readers of TILB know, one of the metrics we are fond of tracking is what the FDIC assumes losses will be as a percentage of stated bank assets. In mid-2008, losses were averaging 20-25% of assets. More recently it has been in the 30%+ range, which is an enormous number.

Let's see how this week and last week went:

Bank of Wyoming, WY (last week's single failure)
Assets: $70mm, FDIC Losses: $27mm, Losses as a Percentage of Assets: 38.6%

First Piedmont Bank, GA
Assets: $115mm, FDIC Losses: $29mm, Losses as a Percentage of Assets: 25.2%

BankFirst, SD
Assets: $275mm, FDIC Losses: $91mm, Losses as a Percentage of Assets: 33.1%

Vineyard Bank, CA
Assets: $1900mm, FDIC Losses: $579mm, Losses as a Percentage of Assets: 30.5%

Temecula Valley Bank, CA
Assets: $1500mm, FDIC Losses: $391mm, Losses as a Percentage of Assets: 26.1%

Straight Average Losses as a Percentage of Assets: 30.7%
Weighted Average Losses as a Percentage of Assets: 28.9%

This is in line with the longer-term trend and indicates that the lower loss percentage that accompanied the six Illinois-based banks all controlled by one family (the Campbell's) that failed on July 2nd was the anomaly.

When those six and one other bank failed two weeks ago, the summary stats were as follows:

Straight Average Losses as a Percentage of Assets: 23.0%
Weighted Average Losses as a Percentage of Assets: 23.5%

We strongly suspected that because the banks were controlled by a single family, the FDIC took a few down that - if they'd been truly independent - it may have otherwise kept on life support for more time. In fact, we wrote:

We suppose this is "good" news as 23% average losses seems like a bit of an improvement (though still epically horrible). However, this week is a bit of a strange bird given that six of the banks are related to each other and all six were in pretty bad shape even if all six were not in the 30%+ camp. One of the six Illinois cousins was 30%+, one was 20%+, the largest bank was just under 20% and the other three were mid-teens. I suspect the reality is the FDIC knew if it closed one it would have to close all six.
...
The Texas bank, on the other hand, is just a total shit show at almost 40% losses to assets.

We will have more commentary on this week's failures in ensuing posts as two of the failed banks provide particular insight into the state of our current crisis.

Stay tuned...

FDIC's Booty From Failed Banks Includes "Marijuana-Reeking Tour Bus"

TILB is so pleased the FDIC has socialized the capitalist function that depositors should play: it enables banks to make such unusually wonderful loans. We wish that instead of selling or auctioning properties off, the FDIC undertook a lottery system. Even better, a "dibs" system. Dibs on the eight foot palm tree!

Marijuana-Reeking Tour Bus, Red Ferrari Are FDIC’s Crisis Booty
2009-12-22 05:01:01.0 GMT

By James Sterngold
Dec. 22 (Bloomberg) -- The financial crisis that popped the
real estate bubble and pushed U.S. bank failures to a 17-year
high landed the Federal Deposit Insurance Corp. a rapper’s tour
bus that reeked of marijuana.

“It smelled so bad of pot after one tour that they had to
completely pull out most of the interior and replace it,” said
Jerry Jenkins, who sold the bus at Penny Worley Auctioneers
after the FDIC acquired it in the collapse of an Atlanta bank.
“By the time we got it, it was almost brand-new.”

Worley Auctioneers, based in Maineville, Ohio, has the FDIC
to thank for the bus, not to mention a red 2001 Ferrari, an
eight-foot palm tree and stacks of unwanted office furniture --
the detritus of 140 banks closed by the agency this year. Worley
Auctioneers, Rick Levin & Associates and Tranzon Asset
Strategies, the three firms hired by the FDIC to sell
furnishings from shuttered branches and warehouses stuffed with
repossessed collateral, are having a banner year.

The FDIC has reaped $6.2 million from the sale of so-called
other assets in 2009, six times the total last year, according
to the agency. While that’s a sliver of the $38.3 billion of
failed bank assets that the FDIC held as of Sept. 30, any cash
is useful after the surge in crippled lenders sent the FDIC’s
deposit insurance fund into the red.

“Business has been good,” said Penny Worley, who opened
her firm in 1993. “This can be a daunting task, because there
are so much and so many different things. There’s an occasional
Dali. There are rare gold coins.”

ATM Machine, Microwaves

Worley’s Web site offers a snapshot:
-Laptops, desk chairs and an ashtray, complete with
stubbed-out cigarettes, from First Priority Bank of Bradenton,
Florida, which failed in August 2008, and Freedom Bank, also in
Bradenton, shut three months later.
-A Diebold ATM machine -- empty, presumably -- courtesy of
Cooperative Bank of Wilmington, North Carolina, shuttered in
June 2009.
-Ten refrigerators, plus assorted toasters and microwave
ovens, from Vineyard Bank, the Rancho Cucamonga, California-
based lender that lost more than $100 million last year as
builders defaulted on construction loans. It was shut in July [TILB readers should be quite familiar with Vineyard].

Then there was the tour bus, acquired by Omni National Bank
in repossession from a leasing company before the Atlanta-based
lender went bust in March, Jenkins said. The vehicle, which
sported 12 coffin-like bunks, each with flat-panel televisions,
sold for $310,000 to a company in Nashville, Tennessee, that
leases buses to touring musicians.

Drive-Away Purchase

Financial assets such as real-estate loans are sold
separately through auctions that can involve complex financing
and profit-sharing arrangements. “Other assets” sales are as
straightforward as old-fashioned live auctions.

When the electronic hammer comes down, a process conducted
online, the deal is done and the auctioneers try to get the
merchandise, and the customers, out the door as swiftly as
possible. “PLEASE DO NOT BID if you are unable to remove your
items during the scheduled removal times,” the auction company
warns bidders.

“People get what we call auction frenzy,” Jenkins said.
“We don’t want to give them a week to think about it
afterwards, so items usually have to be picked up within one
day.”

Most come prepared. That was the case with the Ferrari, a
360 Spider F1 with 27,363 miles that sold earlier this year. The
buyer paid $61,000 for a car that New Frontier Bank of Greeley,
Colorado, had repossessed from an auto dealer that had defaulted
on a loan. The buyer arrived on a red-eye flight, paid cash, and
drove away, Jenkins said.

Drag-Racing Truck

New Frontier, which cost the insurance fund $670 million,
also left the FDIC with a 1,000-horsepower drag-racing Chevrolet
pickup truck, and almost 1,000 milking cows. Sales from assets
of other failed banks have included armored trucks, industrial
equipment and Thomas H. Benton lithographs. The palm tree
fetched $105.

The savings-and-loan and banking crisis of the 1980s
produced even more unusual auctions, said Tom Moran, the FDIC’s
resolutions and closing manager, based in Dallas. Back then, the
FDIC ended up with items that ranged from yachts, antiques and
luxury homes to paintings and sculptures, he said.

“I personally went in and found safety deposit boxes with
things like collector-type guns,” Moran said.

Some of the one-of-a-kind items can provide special
challenges. The FDIC is trying to unload a framed 10-by-70-foot
watercolor mural by California artist Millard Sheets, Moran
said, a sort of graphic history of California. It was seized
when PFF Bank and Trust, a $3.7 billion bank in Pomona,
California, failed in November 2008, leaving the insurance fund
with $700 million in losses.

“It’s framed right to the wall, and we’re not sure how to
get it off and protect it,” Moran said. “This is going to take
a unique-type buyer.”

*T
For Related News and Information:
Stories on FDIC: NI FDIC
Stories on bank failures: NI BANKFAIL
On the credit crisis: NI CRUNCH BN
Rescue programs: RESQ
Stories on banks: NI BNK
Today’s top financial stories: FTOP
*T

--Editors: Alec McCabe, William Ahearn.

To contact the reporter on this story:
James Sterngold in New York at +1-212-617-4946 or
jsterngold2@bloomberg.net

To contact the editor responsible for this story:
Alec D.B. McCabe at +1-212-617-4175 or
amccabe@bloomberg.net.

[HT: TW]

The Unders Take It! Small Florida Bank Collapses

Well, The Brothers Linebacker had set the bank failure weekly over/under at 1.5 institutions (inclusive of banks and thrifts, exclusive of credit unions, which is probably worth another 0.5 or 1.0 per week). The week of August 15th had a bank failures happen in a non-traditional manner: Federal Trust (ticker FDT ) of Florida was a de facto failure. However, rather than actually collapsing, it was re-capped and taken over at tiny share prices. Amazingly, no banks actually were off'ed by the FDIC. I keep re-reading my blog on Vineyard National and I continue to be baffled as to what will actualy catalyze the FDIC to takeover a bank.

Oddly enough, FDT is the stock of a business I used to own shares in at one time. I purchased FDT shares beginning on March 10, 2003 (basically the stock market bottom, as it turned out) for $5.00/share then bought a bunch more a month later at around the same price. Beginning June 20, 2005 and continuing through July 5, 2005 I sold my stake at $11.20/share, which I felt represented a full price given my increasing skepticism of the Florida miracle and worry that the state was overbanked. The company would ultimately trade in the $12+ range for a period of time before collapsing under the weight of a hideous asset base.

Now it's being acquired at distressed prices by a SPAC, which is funny for reasons I may detail in another post someday.
-TTB

Bank Failure Watchlist

Saw this bank failure watchlist and thought I'd share it. I think it's not as up to date as it ought to be, as Vineyard Bancorp's numbers appear to be too high (it's ranked #107 last I checked with Tier I capital and leverage ratios that appear much stronger than they reported in their recent 10-Q). That said, it is a pretty good automated list to work from and I expect that most of the top 150 (and more) either outright fail or are "acquired".

It doesn't look pretty. Better go home and get your boots.