National Bank of Commerce in Berkeley, Ill., was an anomaly among bank failures, given its decent credit quality.
Regulators seized the $431 million-asset bank late Friday not because of loan or liquidity trouble, but because it suffered such massive losses on its investments in Fannie Mae and Freddie Mac stock that it had negative capital levels.
It was the first failure of the year, the first to be attributed directly to the flailing government-sponsored enterprises, and the first that some observers can recall ever resulting from trouble with a securities portfolio.
"From our standpoint, it's a sound bank as far as deposits and loans," said Bill Sperling, the vice chairman, president, and chief executive officer at the $832 million-asset Republic Bank of Chicago in Oak Brook. The privately held Republic had the winning bid to buy National Bank of Commerce from the Federal Deposit Insurance Corp.
Its failure heightens concern about the fate of some other banking companies that had heavy securities losses, and raises questions about whether the Treasury Department, through its Troubled Asset Relief Program, would come to their rescue. The law that created Tarp requires Treasury to give strong consideration to investing in small banks that were well or adequately capitalized at June 30 but fell below those levels "as a result of the devaluation of the preferred government-sponsored enterprises stock."
The government seizure of Fannie and Freddie in September forced hundreds of banks and thrifts to write down the value of the preferred shares they held to virtually nothing.
The consequences were traumatic for some, and continue to linger painfully for others. Tarp funds helped prop up several companies with depleted capital, including the $625 million-asset OneUnited Bank in Boston and the $3.6 billion-asset Midwest Banc Holdings Inc. in Melrose Park, Ill.
In National Bank of Commerce's case, Tarp would not have been enough of a help, said Michael Iannaccone, the president of MDI Investments Inc. in Chicago. The bank would have been eligible for a maximum of $12 million, but needed at least $26 million to become well capitalized again, he said.
Fannie and Freddie losses indirectly figured into another failure — the $3.7 billion-asset PFF Bank and Trust in Pomona, Calif.
FBOP Corp. in Oak Park, Ill., had struck a deal in June to buy PFF for $30.5 million, but in the third quarter FBOP wrote down $936 million of its investment securities, with a significant amount of the drop believed to be on Fannie and Freddie stock. Suddenly undercapitalized, the $17 billion-asset company could not get regulators to approve the deal, observers said, and PFF, hemorrhaging from problem loans, could not survive on its own.
The privately held FBOP applied for Tarp funds in the fall but had not been approved as of last week. The company did not return calls from American Banker.
But Mr. Iannaccone said FBOP is unlikely to share the same fate as National Bank of Commerce; the Fannie and Freddie impairment charge equated to about 5% of FBOP's assets, compared with about 16% of National Bank of Commerce's assets. That is an unwise concentration, Mr. Iannaccone said.
"How did regulators allow them to do that?" he said. "They were clearly at risk having so much in equities."
Several observers said that National Bank of Commerce likely had no success finding the investors it needed to facilitate a recovery. "In today's environment, who's going to write that check?" asked Matthew Anderson, a partner at the research firm Foresight Analytics LLC in Oakland, Calif.
Mr. Anderson also cited its increasing reliance on brokered deposits as a red flag. Those made up 44% of its total in the third quarter, and the bank probably had been limited in the use and renewal of those deposits after becoming undercapitalized, causing a liquidity strain.
A spokesman for the Office of the Comptroller of the Currency confirmed that National Bank of Commerce had been closed because of its Fannie and Freddie writedown. He could not say when another bank had failed because of losses on its securities portfolio rather than its loan portfolio. "It's been a long time since there's been a case like that."
Only a few other companies had such large losses on investment securities in the third quarter that they became undercapitalized, according to a Foresight analysis of FDIC data.
At least two companies — the $2.1 billion-asset Gateway Financial Holdings Inc. in Virginia Beach and the $354 million-asset State of Franklin Bancshares Inc. in Johnson City, Tenn. — agreed to sell themselves in September after the plunging value of their Fannie and Freddie holdings depleted their capital.
OneUnited's total risk-based capital ratio fell to 3.67% at Sept. 30 after the company took a $54.8 million writedown on its Fannie and Freddie stock. (Banks are considered well capitalized if that ratio is 10% or higher.)
In December, OneUnited, which bills itself as the "first black-owned Internet bank," received $12 million in government capital.
Robert Patrick Cooper, OneUnited's senior counsel, said its shareholders pitched in enough capital — he would not specify the amount — to restore the bank to adequately capitalized early in the fourth quarter. With the Tarp funds it regained well-capitalized status.
OneUnited got the money despite getting slapped with an unusually critical cease-and-desist order from the FDIC and the Massachusetts Division of Banks in October. In addition to the more typical admonishment to improve underwriting standards, the order required it to seek reimbursement for any vehicles purchased on behalf of executives and to stop paying for a beachside home in Southern California that executives use when visiting the bank's West Coast operations.
Midwest Banc Holdings is another Tarp rescue. A $64.5 million impairment charge on Fannie and Freddie shares contributed heavily to its $159.7 million third-quarter loss, and analysts say the company might have been forced to sell itself if not for the $85.5 million in government capital it received.
James Giancola, Midwest's CEO, said that it likely would have applied for Tarp without such an explicit need and that it would have been nice to use the capital as a cushion, rather than to fill a gap. "It is an opportunity missed," Mr. Giancola said. "And we will probably look at raising more capital down the road."
The $452 million-asset Citizens Central Bancorp Inc. in Macomb, Ill., and the $4.3 billion-asset First National Bank Group Inc. in Edinburg, Tex., also fell below well capitalized after large securities losses.
It was unclear whether their losses came about specifically because of Fannie and Freddie, though.
It was also uncertain whether either has applied for Tarp funds. Neither company returned phone calls to discuss the issue.
After National Bank of Commerce wrote down its Fannie and Freddie holdings, its total risk-based capital ratio fell to minus 15.59% in the third quarter, the lowest of any financial institution in the country, said Chip MacDonald, a partner at the law firm Jones Day. Yet it was a conservative bank without any other issues.
"This was a bank that shouldn't have failed," Mr. MacDonald said. "In normal times, it wouldn't have failed."
Mr. MacDonald said Republic got "a heck of a good buy" in National Bank of Commerce, considering it paid no deposit premium.
Besides the branches and deposits, Republic took on 85% of the failed bank's $431 million in assets, at a discount of $44.9 million, according to the FDIC. That reflects what an unusual failure National Bank of Commerce was; generally buyers in such cases take little, if any, of the assets, Foresight's Mr. Anderson said.
Mr. Sperling said this is the first acquisition in Republic's 44 years and adds two branches, boosting its total to 12. "We're all excited about it," he said. "It's a great acquisition for us."
He also said the family-run bank remains well capitalized with this deal and aims to add heft with additional acquisitions, either through the FDIC or otherwise.
"We're interested in doing more," he said.