You kind of knew this was going to happen. Given the fact that AmTrust Financial, the holding company filed bankruptcy (see my story here) after a bit of asset stripping, the FDIC was forced to come in and seize the banking subsidiary which was woefully undercapitalized.
The FDIC press release says:
AmTrust Bank, Cleveland, Ohio, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with New York Community Bank, Westbury, New York, to assume all of the deposits of AmTrust Bank.
The 66 branches of AmTrust Bank will reopen during their normal business hours beginning tomorrow as branches of New York Community Bank. Depositors of AmTrust Bank will automatically become depositors of New York Community Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit coverage. Customers should continue to use their existing branches until New York Community Bank can fully integrate the deposit records of AmTrust Bank.
This evening and over the weekend, depositors of AmTrust Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of October 27, 2009, AmTrust Bank had total assets of approximately $12.0 billion and total deposits of approximately $8.0 billion. New York Community Bank did not pay a premium to assume all of the deposits of AmTrust Bank. In addition to assuming all of the deposits of the failed bank, New York Community Bank agreed to purchase approximately $9.0 billion in assets of AmTrust Bank. The FDIC will retain the remaining assets for later disposition.
The FDIC and New York Community Bank entered into a loss-share transaction on approximately $6.0 billion of AmTrust Bank’s assets. New York Community Bank will share in the losses on the asset pools covered under the loss-share agreement.
The asset stripping came when in recent weeks the bank transferred $7 million in money to PNC Financial, ironically the owner of former cross-town rival NCC. It’s a bit like owning a bank, but having so little trust in that bank that you need to deposit funds at the rival institution across the street. With this kind of thing happening, the FDIC was sure to step in – and they have. Notice how they were only able to flog off three-fourths of the asset base. Taxpayers will get stuck with the rest.
Just yesterday the local paper the Cleveland Plain Dealer predicted this outcome:
Attorneys for AmTrust Financial Corp. on Thursday talked candidly about AmTrust’s dismal financial condition and said they’re now planning for what would happen after AmTrust Bank is sold.
At the initial hearing of AmTrust Financial in U.S. Bankruptcy Court in Cleveland, attorneys asked for permission to pay AmTrust President and CEO Peter Goldberg $225 an hour during a transition period of at least 45 days. That is "roughly the equivalent" of what he was paid as AmTrust Bank’s CEO after he took a "voluntary substantial reduction in pay" earlier this year, according to his statement filed with the court.
Goldberg’s expertise would be needed to help the AmTrust and its employees, attorneys said, if the bank is taken over by regulators and sold to another bank.
Experts say that is increasingly likely after a financial report two weeks ago showed AmTrust Bank is nearing insolvency and AmTrust Financial and five of its subsidiaries filed for Chapter 11 protection Monday.
I have to re-iterate that this bank was woefully undercapitalized for months. Back when bankrupt NCC was sold to PNC in October, AmTrust was in jeopardy of seizure. But political concerns intervened to stop this as the FDIC shopped for buyers. None were forthcoming and the situation continued to deteriorate, Tier 1 capital falling to 4.95 percent. The regulators had set a February 2009 deadline for AmTrust to get its finances in order. But this deadline came and went without anyone in the national press noticing.
Eventually, the Treasury refused to give AmTrust any TARP funds because it was not considered viable unless it could raise an equal amount of funding from outside investors. So, between February and December, this bank was essentially a dead man walking, a Zombie bank, open for business but clearly undercapitalized. Now it has been seized.
How many other local and regional banks out there are in a similar state? 552 according to the FDIC. Is this why community banks are getting no love in this crisis? At a minimum, we know that insured deposits are safe as the FDIC has topped up its funding via a $800 billion line of credit and insurance premiums from insured banks.
Note: Publicly-traded AmTrust Financial Services, Inc. is not affiliated with either AmTrust Financial Corp. and AmTrust Bank which are the privately-held companies that failed.