FDIC Seizes Two More Banks

In what may become an unfortunate sign of the times, the FDIC seized two more banks yesterday:

From Reuters via the NY Times:

“WASHINGTON (Reuters) - U.S. regulators took over two banks on Friday and sold them to Mutual of Omaha Bank, the sixth and seventh bank failures this year as financial institutions struggle with a housing bust and credit crunch

Two weeks after the Federal Deposit Insurance Corp seized IndyMac Bancorp Inc , the Office of the Comptroller of the Currency said it closed First National Bank of Nevada and First Heritage Bank NA of California.

First National, characterized as undercapitalized, had total assets of $3.4 billion and $3 billion in deposits. First Heritage, described as critically undercapitalized, had assets of $254 million and $233 million in deposits, regulators said.

The FDIC said the cost of the transactions to its insurance fund is estimated to be $862 million, adding that the two failed banks represent just 0.3 percent of $13.4 trillion in total industry assets at about 8,500 FDIC-insured institutions.

The FDIC said the 28 offices of the two banks will reopen on Monday as Mutual of Omaha Bank. Over the weekend, customers can access their money by writing checks, using automatic teller machines or debit cards.

Mutual of Omaha Bank currently has more than $750 million in assets and operates 14 retail branches in Nebraska and Colorado with commercial lending offices in Dallas and Des Moines, Iowa, the FDIC said.

It is a subsidiary of Mutual of Omaha, a 99-year-old insurance and financial services company with more than $19 billion in total assets.

Top banking regulators have warned of additional insolvencies this year and next, but for now do not expect failures the size of IndyMac, which had $32 billion in assets and $19 billion in total deposits at the end of March”

I would take the comment around “not expecting failures the size of IndyMac” with a grain of salt, because IndyMac wasn’t even on the FDIC’s watch list for troubled banks/their radar until it was too late. Personally I’m more concerned about the troubled banks that aren’t on the FDIC’s radar then I am about the ones that are, because those are the failures that are likely to shock consumers, investors and catch the FDIC off-guard. It doesn’t stay much for the FDIC’s “warning systems” when a bank failure the size of IndyMac can just sneak up on them.

In an era when so many banks are scrambling for cash and hiding losses off-book or via “clever” accounting, it will be interesting to see who will be able to seize the day and snap up either failing regional banks or banks that are looking to sell themselves to avert a potential disaster. Since J.P. Morgan is busy digesting Bear Stearns and Bank of America is dealing with the Countrywide morass, I would cross them off the list, out of the big banks I could see Wells Fargo and U.S. Bank using the situation to expand their footprint by snapping up banks on the cheap. Another possibility is a strong regional bank using the opportunities to go national via buying up struggling regional banks, more or less repeating the strategy that make WAMU a national player.

Perhaps the dark horse would be brokerage firms like TD Ameritrade, Fidelity and Schwab attempting to either enter banking (or expand current operations) via buying up struggling banks. It’s a strategy that’s not without precedent as E-Trade entered the banking world in much the same way.

Opportunity abounds in a situation like this the question is who will be able to capitalize on it, because in this environment the number of financial companies that can go on buying sprees are few and far in between.

Sources:

Reuters via The NY Times: “U.S. Regulators Seize Two More Banks” — July 26, 2008.

Disclosure: at the time of publishing the only companies mentioned in this article that the author owned a position in where Wells Fargo and U.S. Bank.

Posted in Categories: Contributor, Economy, External Research, Stocks.

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