WASHINGTON - An Ohio bank cited this year for improper ties to a mortgage affiliate became the second bank to be closed in less than a week, as regulators pinned asset deterioration - including subprime mortgages - and a recent surge in withdrawals to its downfall.
Miami Valley Bank of Lakeview was closed Thursday afternoon by the state's bank regulator, which cited "unsafe and unsound conditions." The Federal Deposit Insurance Corp. was named receiver for the $86.7 million-asset bank, and Citizens Banking Co. of Sandusky assumed its $62 million of insured deposits at a 2% premium.
Like NetBank's collapse last week, Miami Valley's failure was related in part to problems in the subprime mortgage market. When it was closed the bank held on its books roughly $30 million of subprime loans, much of which had deteriorated in recent months, the FDIC said.
"Miami Valley experienced a significant deterioration in asset quality from loans that were acquired from two mortgage companies, and this included some subprime mortgage loans," said David Barr, an FDIC spokesman.
Though regulators did not say the bank experienced a run on deposits, it was clear that depositors had become increasingly concerned about the institution's health and had withdrawn funds rapidly this week.
"Liquidity became an issue and accelerated the problems at the bank," Mr. Barr said. "It is possible that rumors and word of mouth contributed to the sudden withdrawal of funds which exacerbated the bank's problems. The institution has been troubled for some time, and the withdrawals accelerated the closing."
Industry observers said the case fit the classic pattern of a bank run. "That statement is an excessively wordy, bureaucratic, and obfuscating way of saying there was a bank run," said Bert Ely, an independent analyst in Alexandria, Va.
Well before Miami Valley closed the agency clearly was already worried about it. The bank, its owner, and its former chairman were the subject of FDIC cease-and-desist orders in April that said the bank had bought "low-quality" assets improperly from MVB Mortgage Corp., a Southfield, Mich., affiliate. Penalties were ordered against Mary Ann Tomczyk, the bank's former chairman, and Kenneth E. Haggard, its owner.
An order against the bank cited it for violating the lending restrictions in the Federal Reserve Act meant to limit transactions between banks and affiliates. The order said the bank operated "in such a manner as to produce an inadequate level of capital protection for the kind and quality of assets held" and had engaged in "hazardous lending and lax collection practices, including the failure to provide adequate limits on the volume and quality of loans acquired through the bank's mortgage bankers."
The order against Miami Valley officials said that a continuation of unsafe practices would likely "cause insolvency or significant dissipation of the assets or earnings of the bank."
A source familiar with the situation said regulators are investigating whether the purchase of loans from affiliates complies with rules and regulations.
"The FDIC is looking at the relationship of the mortgage loans purchased from some brokers to see if any rules or regulations were violated," said the source, speaking on the condition of anonymity.
Since April, the bank's situation had continued to worsen. Its equity capital fell 63% in the year that ended June 30, to $5.4 million. The FDIC said it would retain all of Miami Valley's assets for later disposition. It estimated the failure would cost the Deposit Insurance Fund $3 million.
When it was closed Miami Valley had about $76 million of deposits, $14 million of which exceeded the deposit insurance limit.
The failure was the third by a bank this year. The $2.5 billion-asset NetBank was closed Sept. 28 by the Office of Thrift Supervision, which cited "early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies."
That failure came a little over a week after NetBank's plan to sell itself to EverBank Financial Corp. fell through. This week analysts predicted more failures tied to the housing crisis, because the crumbling mortgage industry has reshaped the banking market enough that healthy financial institutions are unlikely to want to purchase ailing ones.
Some lawmakers said they would look more closely at the failures.
"Any time a bank fails, it is cause for concern," Senate Banking Committee Chairman Chris Dodd, D-Conn., said in a press release.
"I have asked the regulators of these two banks, the FDIC and the OTS, to come up during the recess week to brief committee members and staff regarding these failures and provide an assessment as to whether they represent a broadening of the credit market contagion."
But regulators and some other lawmakers were quick to say the Miami Valley failure did not signal a pattern of bank closures on the horizon.
"I don't have any information that makes me think that these two failures are a harbinger of more failures," said Rep. Brad Miller, D-N.C., a member of the House Financial Services Committee. "I do think that the concern in the market for subprime mortgages does require Congress to reassure the marketplace by passing a reasonable set of regulations, and I hope to introduce that bill next week."
House Financial Services Committee Chairman Barney Frank, D-Mass., said he has "not seen any sign that we are on the verge of a bunch of bank failures."
Mr. Barr said that the FDIC did not "see this as a trend," despite two bank failures in less than a week.
"The FDIC will continue to closely monitor the health of our financial institutions," he said. "While it wouldn't be realistic to say that there will be absolutely no more failures, the vast majority of banks will be able to withstand any problems, because of their overall strong condition."
