17th Bank Failure Could Cost $104 Million: Why?

The Federal Deposit Insurance Corp. continued its recent “freaky Friday” streak last week, stepping in at Bradenton, Fla-based Freedom Bank, after the Commissioner of the Florida Office of Financial Regulation closed the bank on Friday after market close. All deposits of the failed bank will head over to Grand Rapids, Mich.-based Fifth Third Bank, the FDIC said. Freedom Bank is the nation’s 17th bank failure this year, and the latest small, community banking outfit to fail; it held total assets of $287 million, and total deposits of $254 million. Fifth Third agreed to assume all the bank’s deposits for a premium of 1.16 percent; in addition to assuming the failed bank’s deposits, Fifth Third will also purchase approximately $36 million of assets, the FDIC said. Nonetheless, the failure of this small bank will hit the FDIC’s deposit insurance fund to the tune of between an estimate $80 and $104 million. Which should beg the question of how a bank with total assets of just $287 million — and whose entire deposit base and $36 million in other assets were acquired — could end up costing so much. It’s a trend that has gone largely unnoticed in most of the financial press, but is not lost on those versed in mortgage banking. A look at the most recent call report data for Freedom Bank shows what likely did it in. Of the bank’s assets, $212 million were in the form of real estate loans — $57.9 million in C&D loans and roughly another $30 million in single-family loans (HEL/HELOCs, first liens), as well as significant exposure in the “nonfarm nonresidential” category ($64 million, in all). The “nonfarm nonresidential” category covers properties where repayment is principally derived from rents–meaning investment properties. Which means Freedom made a bunch of loans in Florida on residential real estate — whether to investors or otherwise — and also put a good chunk of deposits into the growing sinkhole that is construction and development loans. Look for the pattern to repeat itself throughout the rest of this year and into the next, in terms of banks that hit the FDIC’s wall. Write to Paul Jackson at [email protected].