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Construction and land development Loans the Culprit Bank Failures

Through April, the rate of failures was more than twice of last year’s – 64 banks compared to 28 in 2009.

Except for one bank this time period, the three other banks that failed this week had the same common cause of the majority of the smaller, middle size, and regional banks: construction and land development losses, coupled with commercial and industrial loans. Of the 68 banks that failed this year, most were due to construction and land development loans.

These loans are very important; most what they call "bridge loans." Remember when you would drive down the street and see the sign, "construction financing by Greater Bay Area Bank?" After the work was complete, a larger bank or financial group such as a mortgage firm would do the "permanent loan." When the mortgage market dried up, it affected the smaller banks, caught up with a lot of "interim loans" where they made points, interest at a variable rate, and without the permanent being available, the lenders lost their investors or capital to continue the projects. A lender with a lot of real estate, high net worth, and perhaps even stock, found themselves without the liquid to keep the "bridge loan" alive.

As reported last week, the survey of banks, by Greenwich Associates and FTRANS, an accounts receivable outsourcing firm, showed that 86% of commercial banks are moving away from commercial real estate lending. After reading the results for the last year and a half at Bank Beat, this product has cost bank investors a lot of money as well as affecting smaller banks profits as the larger banks are buying up these banks from the FDIC at some "bargain" prices.

In reality, the FDIC has done as well as could be expected, perhaps better, and the FDIC fund could have been hit much harder than it has been. That larger fish each smaller fish has been known for a very long time, but at the same time, the bowl was much larger than it is today. It is the small community that is being hit the hardest throughout the entire country, not just the top five or six states seeing the housing industry fail and high unemployment due primarily to the halt of growth.

Arizona has been one of the hardest hit, and this failure shows the cause again happening across the country, but perhaps more in Arizona, Florida, California, and Nevada:

The sole branch of Towne Bank of Arizona, Mesa, Arizona was closed with Commerce Bank of Arizona, Tucson, Arizona, to assume all of the deposits.

The bank was down to 25 full time employees. Net equity had dropped from $25 million to $7 million year-end 2009 with a loss of $6.5 million the first quarter of this year, following a loss of $18.2 million in 2009 and loss of $11.1 million in 2008. 2009 year-end charge off were $9.9 million in construction and land development, $1.2 million in multi-family residential, $362,000 in 1-4 multifamily residential property, $1 million in commercial and industrial loans. Non-current loans were $10.6 million. Tier 1 risk-based capital ratio 6.32% As of March 31, 2010, Towne Bank of Arizona had approximately $120.2 million in total assets and $113.2 million in total deposits. Commerce Bank of Arizona will pay the FDIC a premium of 0.3 percent to assume all of the deposits of Towne Bank of Arizona. In addition to assuming all of the deposits of the failed bank, Commerce Bank of Arizona agreed to purchase essentially all of the assets.

The EastValleyTribune.com attributes the founding of the bank April 1, 2004 to the East Valley Mesa area as “... the brainchild of S. Rick Meikle, a third-generation community banker who moved to the East Valley from the Seattle area a few years ago. He is the bank’s president and CEO. "I, among others, started a community bank in 1990 in the Seattle area, the same de novo startup from zero, and it was enormously successful," he said.

"Meikle then became president of the regional holding company, but planned to move to the East Valley because his daughter lives here and his family was spending their vacations here.

"'Ever since four to six months after I got here, after examining the economics and demographics, particularly of the East Valley, the competition, my judgment was that the opportunity to do another de novo startup similar to what we had done in the state of Washington made great sense,' he said. "

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $41.8 million.
http://www.fdic.gov/news/news/press/2010/pr10108.html
 

The five branches of The Bank of Bonifay, Bonifay, Florida were closed Friday with First Federal Bank of Florida, Lake City, Florida, to assume all of the deposits. Founded February 1, 1906, the bank currently had 66 full-time employees. As of March 31, 2010, The Bank of Bonifay had approximately $242.9 million in total assets and $230.2 million in total deposits.
 

In 2008, former president Guy Medley came back June 3 as CEO and raised $41 million additional capital. He told nwfdailynews.com that most of the problems stemmed from poor management, and that the collapse of the real estate market on the Emerald Coast also had a great deal to do with the situation.

"Problems came from the depreciation of loans for condos and single-family dwellings," Medley said. "This led to a loss of equity in some cases of 30 to 40 percent."

He listed a number of things that needed to be done.

"We could be through with everything in 12 to 18 months," he said.

The bank had a $3.5 million loss for year-end 2008. The first quarter loss was $4.5 million. which followed a $7.67 million loss year-end 2009 with $28 million in noncurrent loans and leases. Charge off year-end was $2 million ($1.5 million construction and land development, $291,000 in 1-4 multi-family residential property, $156,000 commercial and industrial loans, $244,000 in "other loans." net equity 2008 was $14.2 million and 2009 $6 .Tier 1 risk-based capital ratio 3.72%

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $78.7 million.
http://www.fdic.gov/news/news/press/2010/pr10106.html
 

The six branches of 1st Pacific Bank of California, San Diego, California were closed with City National Bank, Los Angeles, California, to assume all of the deposits. A young bank founded November 17, 2000 with all six branches in San Diego County, the bank had gone from 105 full-time employees year-end 2008 to 79 full time employees year-end 2009.

The bank had a $163,000 loss the first quarter of this year, although the bank lost $15.4 million year-end 2009 and $21.6 million year-end 2008. Net equity had dropped from $27.2 million to $12.6 million with $16.8 million in non-current loans after a charge-off of over $8 million ($7.5 million in construction and land development, $282,000 in loans secured by nonfarm nonresidential land, $594,000 in commercial and industrial loans). Tier 1 risk-based capital ratio 3.77%

As of March 31, 2010, 1st Pacific Bank of California had approximately $335.8 million in total assets and $291.2 million in total deposits. City National Bank will pay the FDIC a premium of 1.62 percent to assume all of the deposits of 1st Pacific Bank of California.

The FDIC and City National Bank entered into a loss-share transaction on $275.7 million of 1st Pacific Bank of California's assets.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $87.7 million.

Full story of as US Bank & Wells Fargo take over branches, rivals win in San Diego:
http://www.signonsandiego.com/news/2010/may/07/1st-pacific-bank-sd-seized-regulators/
http://www.fdic.gov/news/news/press/2010/pr10109.html

Here it was 1-4 multi-family property loans that gave the bank the most trouble. The two branches of Access Bank, Champlin, Minnesota, were closed with PrinsBank, Prinsburg, Minnesota, to assume all of the deposits. Started in September 7, 1946, the bank was down to nine full time employees. The net income loss for the first quarter of this year was $615,000. The bank had loss $2.9 million year-end 2009 and lost $5.8 million 2008. The net equity had dropped from $3.49 million year-end 2008 to $515,000. Non-current loans were $1.69 million after charging of $2 million year-end 2009 ($1.2 million in 1-4 multi-family property, $463,000 construction and land development, $322,000 in nonfarm nonresidential property, $86,000 in industrial and commercial loans. Tier 1 risk-based capital ratio 2.00%

As of March 31, 2010, Access Bank had approximately $32.0 million in total assets and $32.0 million in total deposits.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $5.5 million.

Full story of Access Bank Failure:
http://www.startribune.com/business/93166804.html
http://www.fdic.gov/news/news/press/2010/pr10107.html
 

List of Bank Failures
http://www.fdic.gov/bank/individual/failed/banklist.html

Bank Beat:
http://www.leasingnews.org/Conscious-Top%20Stories/Bank_Beat.htm



Disclosure: no positions