Friday Failures

We have a hat trick tonight. Here are the links.

America West Bank, Layton, Utah

Citizens Community Bank, Ridgewood, New Jersey

Silverton Bank N.A., Atlanta, Georgia

A couple things worth noting here.

First, there was no buyer found for American West Bank. That’s the second bank to fail in Utah for which no buyer emerged. (Update: My Bad. This bank was acquired by another institution. In too much of a hurry this evening).

Silverton Bank is big. It operates as a bankers bank, in other words it provides back office support, clearing services, credit card processing and other services to smaller community banks in the Southeast. It also originated loans and sold them off participations to those same banks. Many of these banks are also investors in Silverton.

From the WSJ:

The Federal Deposit Insurance Corp. estimated the Atlanta bank’s failure would cost its deposit insurance fund $1.3 billion. Silverton’s condition was so poor that the FDIC couldn’t find a buyer.

With $4.1 billion in assets, Silverton is the fifth-largest bank to fail since the financial crisis intensified in 2008. The bank provides services to one of every five banks in the country, and its customers, depositors and investors are all banks. It didn’t take deposits from the general public or make loans to consumers.

The FDIC said loan losses caused Silverton’s failure, as charge-offs for bad loans went from $4 million in 2007 to $69 million in 2008.

Walt Moeling, Silverton’s counsel and an attorney with Bryan Cave LLP in Atlanta, said problems tie back to Silverton’s exposure to the Southeast and Georgia, not its recent expansion across the country into many business lines: “If their core business had stayed strong they wouldn’t have failed.”

Some Georgia bankers argued to FDIC officials that the bank was “too big to fail” because its collapse could take down at least eight to 12 others.

Federal regulators were “not sympathetic” to the argument that a Silverton failure had to be averted, Mr. Moeling said. “The argument tends to be that ‘You guys got yourself into this mess, don’t look for us to come fix it. Don’t look for us to bail you out, because you are not Citigroup.’”

Banks that invested in Silverton will likely incur a loss, FDIC officials said. But regulators played down the possibility that the failure would cause major problems for shareholder banks. The typical bank’s Silverton exposure is “very small” when compared with its overall investment portfolio, said Pam Farwig, associate director of the FDIC’s division of resolutions and receivership.

Banks also stand to lose money on loan participations arranged by Silverton that allowed smaller banks to team up on large multimillion-dollar hotel and real-estate deals, many backed by poor-performing residential real estate. The FDIC will attempt to sell those packages for cents on the dollar, Mr. Moeling said. Also, banks with holding company loans from Silverton may have to scramble to replenish these funds, said Christopher Marinac of FIG Partners in Atlanta.

Federal regulators worried about how to handle the bank’s collapse because Silverton is so interconnected in the Southeast. Chartered in 1984, Silverton used to be known as the Bankers Bank until last year.

Silverton may be the canary in the coal mine. It’s loan portfolio is going to be mirrored at a number of banks so it’s reasonable to assume that there will be follow-on failures. It appears as if its problems may be closely tied to poor performing commercial real estate. This is the asset class that’s going to cause the next wave of failures and it will most likely be a tsunami.

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