FDIC steps in at two more failed banks

1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California were taken over by the FDIC on Friday. They always wait until Friday night to do their business. This marks the first FDIC closure action since the FDIC closed the much bigger IndyMac.

Bad loans to developers and home builders in Arizona and Nevada led to the failure Friday of an Arizona company’s two banks, including First Heritage Bank in Newport Beach.

The Federal Deposit Insurance Corp. seized the banks late in the day and turned over operations to Mutual of Omaha Bank, part of the large Mutual of Omaha insurance company.

All depositors, including those with deposits in excess of the FDIC’s insurance limits, will have their accounts switched to Mutual of Omaha Bank and will be covered for all their funds, the federal agency said.

“Customers should just think of it as two banks merging,” said FDIC spokesman David Barr.

Ten banks and thrifts have failed in the last 18 months, mostly because of the collapse of real estate markets inflated by years of easy-money lending by mortgage originators. The largest specialist in so-called alt-A loans — made to borrowers whose risk profile fell between prime and subprime — was IndyMac Bank, which collapsed this month and is being operated by the FDIC.

First Heritage and First National of Nevada were owned by First National Bank Holding Co. of Scottsdale, Ariz.

First Heritage, established in 2005, was mainly a deposit-taking franchise, specializing in homeowners associations, property managers such as condominium companies and similar enterprises.

-LA Times, 26 Jul 2008

This sort of thing is going to make people a bit more panicked about where they put their money. At least the FDIC has a ready made solution here.

The last three bank failures demonstrate that hot regions like Arizona, Nevada and California should expect to see a lot of failed banks associated with construction loans.

I’ve added them to my list of Bankrupt Global Financial Institutions.

Update: 509 EDT 26 Jul 2008 – Past FDIC closures of this ilk demonstrate that insured depositors do not have to worry about losing money. Whether taxpayers have to eventually top up the FDIC’s resources is another question altogether. But, some previous articles from TheStreet.com point out the pitfalls and benefits. For instance, ING acquired NetBank’s assets when it failed. But it did NOT acquire the uninsured deposits.

NetBank’s Failure Is Proof That Ratings Matter, The Street.com, 1 Oct 2007
Losing Half a Million on NetBank’s Fall, TheStreet.com, 3 Oct 2007
Ohio Bank Fails, TheStreet.com, 4 Oct 2007
Bad Management Sinks Bank, TheStreet.com, 28 Jan 2008

When a merger partner is found, that’s the best case scenario. But, as the NetBank case shows, that’s not always a happy solution if yo have more than $100,000 tied up in a bank. When an IndyMac-style closure happens, uninsured depositors should be frightened as well. This link shows you who is protected and who isn’t.

Related articles
Two More Banks Fail, WSJ
Mutual of Omaha Bank to Acquire Deposits of Failed First National Bank, Market Watch
Regulators Close Two More National Banks, Washington Post