This past Thursday night, the FDIC closed seven additional banks, including six in Illinois alone. These latest closures bring the number of year to day bank failures to 52, already double the 26 bank closures during all of 2008. The FDIC has closed twelve banks in just the last two weeks. The FDIC’s complete list of all bank failures since October 2000 can be found here.
The 2009 bank failures have been spread across 18 different states, but certain states have experienced a high bank closure concentration. Up until now, Georgia had the dubious distinction of leading the way, having been dubbed the “bank failure capital of the world” earlier this year (refer here).
But with the latest closures, the state with the highest number of bank failures this year is now Illinois, where twelve banks have now failed, compared to nine so far this year in Georgia. California has had six and Florida just three.
There are a number of reasons for the surge of Illinois bank failures, as discussed at length in a July 2, 2009 American Banker article entitled “The Next Georgia? Failures Spike in Illinois” (here). It is probably worth noting that this American Banker appeared before the six bank closures were announced after the close of business on Thursday evening.
Among other things, the number of Illinois bank closures may simply be the “law of numbers.” According to the American Banker article, Illinois, which was one of the last states to allow branch banking, has more banks than any other state, with 652 institutions headquartered there, compared to Georgia, which has only half as many.
The real estate downturn is also part of the explanation, as it is in other states,
But another reason for the particular problems in Illinois is challenge many of these banks are having with their investment portfolios. According to the American Banker article, because these banks had fewer lending opportunities in the slow-growing Midwest, some banks bought heavily into mortgage-backed securities.
According to a July 3, 2009 Bloomberg article (here), the six Illinois banks closed on July 2 were all controlled by a single family and all followed a similar business model, and all suffered losses on collateralized debt obligations (CDOs), as well as on soured loans.
The National Bank of Commerce, an Illinois bank that closed earlier this year, was forced to close after writing down its investments in the securities of Fannie Mae and Freddie Mac, which left the bank in a negative capital position.
The likelihood is that these problems will continue. Data in the American Banker article suggest that Illinois and Georgia led the country in the number of undercapitalized banks at the end of the first quarter, with 17 each. Of the 371 banks nationally judged undercapitalized or in danger of becoming so, 42 are in Illinois compared with 55 each in Georgia and Florida and 20 in California.
But with respect to banks having problems with their investments, Illinois leads the way. At least 17 Illinois banks took hits on their investments during the fourth quarter of 2008 and 11 did so in the first quarter of 2009. No other state came close. Florida, which had the next highest number of banks reporting securities write downs, had seven in the fourth quarter and three in the first quarter.
The latest bank closures once again involved smaller institutions, continuing the trend of the involvement of community banks in the current bank failure wave. All of the seven banks closed on July 2 had assets under $500 million. Of the 52 bank failures this year, 46 have involved institutions with assets under $1 billion. Only twelve banks had assets over $500 million.
In a recent post (here), I noted that with the latest bank failure surge, D&O claims have started to emerge. And as a result, the D&O marketplace has begun to react, as I discuss at greater length here.
Over the last few weeks, I have written frequently about failed banks, perhaps too frequently for some readers’ tastes, but the fact is that something remarkable is happening in the banking sector. In the last 18 months, 78 banks have failed, 64 in just the twelve months since July 1, 2008. The twelve banks that have closed in just the last two weeks alone suggest that his is a problem that is going to get worse, perhaps a lot worse, before it starts getting better.
Anything Called “Hot Money” Can’t Be Good: In case you missed it over the weekend, the New York Times had a front page article on July 4, 2009 entitled “For Banks, Wads of Cash and Loads of Trouble” (here) that describes the complicated role that brokered deposits have played for many banking institutions. The article suggests that many struggling banks are particularly dependent on these deposits, which also may have played a role in many of the recent bank failures.
These deposits are made by out-of-state brokers who deliver billions of dollars in bulk deposits. These funds are often referred to as “hot money” because they arrive in search of the highest interest rates, and leave when better rates are available elsewhere. According to the Times article, hot money comes at a cost. In order to lure the money, “banks typically had to offer unusually high rates” which in turn “often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed.”
The article focuses on banks in Georgia that sought to capture the brokered deposits, but the Georgia banks were hardly alone. Indeed, the article notes the banks that have failed since January 1, 2008 “had an average load of brokered deposits four times the national norm.” In addition, a third of the failed banks had both an unusually high level of brokered deposits and an extremely high growth rate “often a disastrous recipe for banks.”
The article shows that the 371 banking institutions on an independent bank rating firm’s “Watch List” as of March 31, 2009 “held brokered deposits that were twice the norm.”
Securities Docket Mid-Year Litigation Update Webcast: On July 9, 2009, at 2:00 P.M. EDT, I will be participating in a Securities Docket webcast entitled “2009 Mid-Year Review: Securities Litigation and Enforcement.” The webcast will be moderated by Bruce Carton of Securities Docket and the panelists will also include Francine McKenna of the Re: The Auditors blog; Lyle Roberts of The 10b-5 Daily blog; and Tom Gorman of the SEC Actions blog. Further information and registration instructions can be found here.