FDIC's Latest Closing: Its Own Offices
The Wall Street Journal. - by VICTORIA MCGRANE
Date: October 3, 2011
Wave of Bank Failures Ebbing, Two Temporary Field Offices Deemed No Longer Necessary; a Warning—'It's Not Over'
After putting hundreds of banks out of business since the start of 2008, the Federal Deposit Insurance Corp. is shutting down some of its own offices.
The FDIC has announced plans to soon close two of the three temporary field offices it set up to handle the increase in bank failures, a crush that is starting to ebb. The closings are the latest glimmer that the worst of this period for U.S. banks may be over, though plenty of pain lies ahead.
WSJ's Valerie McGrane reports the FDIC plans to close several of its offices that were set up to handle a heavy load of bank failures. Photo: Getty Images.
About 1,000 U.S. banks and savings institutions have disappeared since the end of 2007, leaving 7,513 FDIC-insured institutions as of June 30. During that period, 396 banks failed and about 600 disappeared through mergers or acquisitions. The latest seizure came Friday when regulators closed First International Bank of Plano, Texas.
While FDIC officials believe the high-water mark for failures was 2010, when the agency put down 157 institutions, they expect many more. The FDIC had 865 banks on its "problem" bank list at the end of June. While that is down slightly from the previous quarter, it is high by historical standards and is likely to remain elevated for some time. At the end of 2007, the list comprised a mere 76 troubled banks.
Camden Fine, president of the Independent Community Bankers of America, a trade group, predicted another 1,000 to 1,500 banks will vanish between now and the end of 2015. Still, he said the closing of the "little death stars"—his nickname for the FDIC satellite offices—is "a very good sign."
Struggling banks face several problems, first among them a lousy economy.
Growth looks to be very moribund," said former FDIC Chairman Sheila Bair. "That's really the challenge that the industry—and the economy—confront at this point."
The bank industry's collective revenue has fallen this year, largely because financial institutions can't find creditworthy customers to lend to, experts say. Industry profits are up, however, in part because banks are putting aside less money to cover lending losses.
Small banks in particular are struggling to generate loans along with the earnings necessary to cover the increased costs of a tougher regulatory environment, said John Douglas, a former FDIC general counsel who now advises banks as a partner at the law firm Davis, Polk & Wardwell LLP. Those trends will contribute to further consolidation, he said.
"We'll see fewer banks, and we'll continue to see failures. It's not over," he said. "But unless Europe explodes and credit markets completely freeze again, this is just going to be the play out of weeding out small banks."
When a bank's primary state or federal regulator determines that it is too troubled to survive, the FDIC starts planning how to dismantle it, often months ahead of time. FDIC employees "market" the bank to potential buyers. Those that sign a confidentiality agreement are able to see the failing bank's books, then submit a bid to buy part or all of its deposits and assets.
For the bank that regulators closed Friday, the FDIC contacted 394 potential buyers and received four bids by the Sept. 21 deadline.
On the day chosen to close the bank—usually a Friday—a small SWAT-like team of FDIC officials descends on the bank. If the institution's primary regulator isn't the FDIC, officials from that agency formally revoke its charter. Then the FDIC spends the weekend making an inventory of the bank's assets and liabilities and oversees the sale.
The winnowing process is creating growth opportunities for the stronger banks.
David Locke, chief executive of McFarland State Bank in Wisconsin, said he gathered his seven-person management team before submitting a bid in January to the FDIC to buy failing Evergreen State Bank in nearby Stoughton, Wisc., telling them "it's not something we have to do ... and if we do it, it's going to be a lot of work for all of us, and there's some risk involved too," he recalled.
But, he said, his team was motivated as much by the desire to keep Evergreen, which began in 1899, under local control as the fact that it was good for McFarland's growth strategy.
"It sounds kind of idealistic but there's a little idealism in me, I did it because I felt it was the right thing to do for the communities," said Mr. Locke, whose bank now has about $550 million in assets.
Toronto-Dominion Bank bought three doomed Florida banks in April 2010 as part of the Canadian bank's steady push to expand retail-banking operations in the U.S.
"When the FDIC deals came through, we were very interested," partly because "a lot of Canadians come down to Florida," said Bharat Masrani, president and chief executive of TD Bank.
The bank got about $3.8 billion in deposits and assets, while the FDIC agreed to cover about half of any losses on loans inherited by TD.
The FDIC started creating these temporary offices in late 2008 to deal with the spike in the workload of its staff that handles bank resolutions and receiverships. The three offices were located in regions hit hardest by failures: the West, the Midwest and the Southeast.
Earlier this year, the FDIC announced its satellite office in Irvine, Calif., would close in January 2012. In September, the agency said it would close the Schaumburg, Ill., office in September 2012.
The third temporary office, in Jacksonville, Fla., isn't closing anytime soon. FDIC officials said the office will remain open at least through late 2013 due to the large number of bank failures in the region.
On Sept. 9, the First National Bank of Florida, based in Milton, was added to that workload. The FDIC arranged for CharterBank, of West Point, Ga., to assume the failed bank's $280 million in deposits and buy its nearly $300 million in assets.
Milton, Fla., Mayor Guy Thompson, said the closure is a blow to the community of about 7,600 and comes on top of news that the city is losing about 200 jobs by the end of the year when a call center closes.
Mr. Thompson said CharterBank had done a good job "of reassuring people that their money is safe" via the local media and a direct mailing. But people are talking about the failure, "and behind that talk is some worry. It is a sign of our times, and we realize that," Mr. Thompson said. "Is it going to get better? When? And what's going to happen?"