Small Bank Failure is First of 2008 By Joe Adler Friday, January 25, 2008
WASHINGTON Regulators closed the first bank of 2008 late Friday, shutting $58 million-asset Douglass National Bank in Kansas City, Mo. Douglass, which had a glut of bad loans and less than $1.5 million of Tier 1 capital, was also the first nationally chartered bank to fail since Guaranty National Bank of Tallahassee failed in March 2004 with $74 million in assets. The bank, a subsidiary of Douglass Bancorp Inc., announced plans in August to sell to $821 million-asset First Guaranty Bancshares Inc. in Hammond, La., but that deal collapsed in October. The prospective buyer claimed Douglass shareholders balked at the $2.5 million offering price. Douglass was closed by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. was named receiver. According to the OCC, "There is no reasonable prospect that the bank will become adequately capitalized without federal assistance." The FDIC said Liberty Bank and Trust Co. in New Orleans would assume all of Douglass' deposits, which totaled $53.8 million. The FDIC said the failed bank's three offices would reopen on Monday as Liberty branches. Liberty agreed to purchase $55.7 million of Douglass' assets at book value, less a discount of $6.1 million. The FDIC said it would retain approximately $2.8 million in assets. The FDIC said it expects the failure to cost the Deposit Insurance Fund about $5.6 million. The year's first failure comes after a period of relatively few closures. There were only three in 2007, and the first failure last year, of $15.8 million-asset Metropolitan Savings Bank in Pittsburgh in February, ended an unprecedented two-and-half-year streak of no closures. But as the credit cycle has turned and the lending industry has yet to see the bottom of the subprime mortgage crisis, observers have predicted the failure rate will climb. Mortgage problems were cited in two of last year's failures: the $2.5 billion-asset NetBank in Alpharetta, Ga., in September, and the $86.7 million-asset Miami Valley Bank of Lakeview, Ohio, in October. Prospects Said to Be Dim for Struggling K.C. Bank Thursday, January 24, 2008 By Marissa Fajt Could Douglass National Bank's days be numbered? The African-American-owned bank in Kansas City, Mo., which is awash in bad loans and has nearly depleted its capital, is looking like it could be the first bank to fail this year, according to industry observers. Neither the Federal Deposit Insurance Corp. nor the Office of the Comptroller of the Currency would discuss the speculation, but Bert Ely, an independent consultant based in Alexandria, Va., said, "Unless someone charitably dumps a bunch of capital" into the bank, it is "going to fail." The 25-year-old unit of Douglass Bancorp Inc. has been losing money and assets for two years and has been operating under a regulatory order since March 2006. More than a quarter of its commercial real estate loans were past due as of Sept. 30, according to FDIC data. The bank had a deal to sell itself, but it fell through in October, and William Michael Cunningham, social investing adviser with Creative Investment Research Inc. in Washington, said he has been wondering since then if Douglass could survive on its own. "Given the trouble they have been in and the problems they have lack of income, a buyer backing out, and real estate issues it just wouldn't surprise me if they had reached the tipping point," Mr. Cunningham said. Douglass lost about $5.8 million from Oct. 1, 2005, through Sept. 30, 2007, and its assets shrank 43% in that time. At the end of 2005 its percentage of noncurrent loans was already about six times higher than the national average for banks with less than $100 million of assets and the percentage has more than tripled since then, to 17.2% of its $33 million portfolio. Though it is evident that Douglass has been struggling for some time, Mr. Ely said regulators may have cut it some slack because it is a certified community development financial institution with a mission of redeveloping long-neglected communities. He pointed out that at Sept. 30 the $59 million-asset bank had less than $1.5 million of Tier 1 capital, for a leverage ratio of less than 2.5%. According to FDIC data, the average ratio for commercial banks with less than $100 million of assets was just under 13%. In March 2006 the OCC ordered Douglass to develop a capital program and a lending policy, among other things. In August the bank announced that it had a deal to sell itself to the $821 million-asset First Guaranty Bancshares Inc. in Hammond, La., for $2.5 million. However, First Guaranty backed out in early October, saying that Douglass' shareholders were unlikely to approve the deal, because they wanted a higher price. First Guaranty also claimed that Douglass had failed to settle claims from its creditors, deliver proxy materials, and begin preparing financial information for 2006, according to Securities and Exchange Commission filings. Later that month Douglass' vice chairman told the Kansas City Business Journal that he hoped to find an investor who would put $4 million into the bank to satisfy the terms of the OCC order. (Douglass officials did not return calls from American Banker.) But Mr. Cunningham said that Douglass is likely to have trouble meeting its capital needs, because there are not many investors or investment funds looking to put money into a small minority bank with a souring portfolio. Bank failures have been rare in recent years. Three banks failed last year, and none failed in 2005 or 2006. However, Mr. Ely said that some small banks and thrifts that have been limping along in recent years could fail this year as economic conditions weaken. Those with significant residential and commercial real estate exposure could be especially vulnerable, he said. Of the three banks that failed last year, two, including the $2.5 billion-asset NetBank in Alpharetta, Ga., could trace their problems to making subprime mortgages. FDIC Preps for Possibility of Bigger Failure Burden Thursday, December 20, 2007 By Joe Adler WASHINGTON While stopping well short of predicting the current crisis will worsen, the Federal Deposit Insurance Corp. took steps Wednesday to gird itself for more bank failures. The agency relaunched an effort unpopular with the financial services industry to require large banks to better identify insured deposits, allowing faster payouts in the event of an institution's collapse. It also approved a larger 2008 budget, including an examiner increase and a detailed contingency plan to tap added resources should the situation worsen. "We may be able to work through this period in a relatively benign way. But for our planning purposes, we cannot assume that will be the case," FDIC Vice Chairman Martin Gruenberg said at a board meeting. Despite resistance from the industry, the agency has been developing the depositor plan for more than two years, but officials cited uncertainty about the industry amid credit problems as another reason why the proposal was necessary. The plan would apply to about 159 institutions those with at least $2 billion of deposits that have more than 250,000 accounts or assets of $20 billion. Those banks would have to establish a standard format for providing the agency with depositor information in the case of a failure, helping the FDIC tell which accounts are linked to a single depositor or family and whether a customer's overall holdings in a bank exceed the insured limit. Banks would also have to place a hold on a portion of a large depositor's funds while the agency pores over the failed bank's records, thus allowing the insured funds to be returned faster. This proposal is "crucially important in maintaining public confidence in the deposit insurance system," FDIC Chairman Sheila Bair said at the board meeting. The FDIC hinted that in the event of a large bank collapse it could be overwhelmed by the sheer number of accounts, making it difficult to distinguish between insured and uninsured deposits. The agency has not updated its deposit insurance determination process in nearly nine years, and noted that the largest number of deposit accounts in a failed institution that it has had to handle was 175,000 at NetBank FSB of Alpharetta, Ga. That failure was one of three this year, and was caused at least in part by the subprime crisis. By contrast, the agency said some of the largest banks today have more than 50 million deposit accounts well more than it has ever handled at a single institution. The plan is likely to remain controversial, however. The FDIC first unveiled an advance notice of propose rulemaking in December 2005, and industry representatives criticized the plan for saddling large banks with system costs that they say outweigh the benefit of the plan and likelihood of a large-bank failure. In response, the agency tailored the proposal somewhat to mitigate cost, removing a requirement included in a subsequent 2006 advanced notice of proposed rulemaking that the most complex institutions come up with a unique identifier that could help the FDIC determine the deposits in various accounts held by a single customer. The system proposed Wednesday allows banks to provide just the account data they already possess. The proposal also lays out how the balances of large deposit accounts are determined at the point of failure. Bert Ely, a banking consultant in Alexandria, Va., and an outspoken critic of the plan, said the proposal falls short. "The FDIC still has not justified the benefits as offsetting the cost. They've also really underestimated the cost," Mr. Ely said. Others, however, say the argument that large banks are too diversified to worry about failures has been harder to make in light of recent losses associated to the subprime mortgage debacle. John Douglas, a former FDIC general counsel now in private practice, agrees a large bank failure is less likely but said "the issue is that that doesn't mean that it won't happen." He noted recent losses by major banks stemming from subprime woes. "Nobody at Citi thought they would lose what they lost, or Merrill [Lynch] would lose what they've lost," Mr. Douglas said. The agency also took steps to beef up its examiner staff. It approved a budget of $1.14 billion, which is 3.1% higher than spending in 2007. The small increase includes the addition of 60 new risk management examiners, and 24 examiners to review institutions' compliance with consumer protection laws. Funding priorities outlined in the budget included needs in resolution preparedness and the training of new examiners, and were based on assumptions of greater failures and troubled institutions in 2008. The bulk of additional staff would come from a program of rehiring trained FDIC staff who have retired. But in addition to the standard budget presentation, FDIC chief operating officer John Bovenzi briefed the board on how the agency plans to respond if problems in the industry were to intensify, and the FDIC's resources were tested beyond its anticipated spending. As with measures taken in past crises, Mr. Bovenzi said, a rise in failures or problem institutions could force the agency to take such steps as "postponing some non-essential work," redeploying examination and resolution staff to trouble spots, and hiring midcareer failure response experts on a short-term basis. The budget includes $75 million that officials could access for various needs related to resolution and pre-resolution work. The agency allotted the same amount for such purposes in 2007 but spent only a third. Officials said that in extreme cases the agency could come back to the board to ask for additional resources. "We recognize that there is always the possibility that there would be a bump-up in short-term work over what we present in the budget," Mr. Bovenzi said. The FDIC, like all the federal agencies, could have a hard time maintaining adequate staffing levels as a spike in retirements leads to high turnover. Yet Comptroller of the Currency John Dugan pointed out that the FDIC's needs may exceed those of the other agencies, since its staffing demands expand twofold during periods of crisis. "We hope for the best, but plan for the worst," he said. [Non-text portions of this message have been removed]
