Also This Week: Weak-Performing Strip Mall Will Lead To Boost in Loan Loss Reserves for Columbia Banking System; and Defaults Lead to Federal Lawsuit Against Capmark Finance
Colonial Bank in Montgomery, AL, was hit with a cease and desist order by the Federal Deposit Insurance Corp. (FDIC) and the Alabama State Banking Department.
Colonial agreed to address various financial condition and performance issues. Among other things, the order generally provides for the on-going management and oversight of the bank, an increase in the bank's capital levels, a reduction in the bank's level of "criticized assets," a reduction in concentrations of credit and improvement in the bank's earnings.
In particular, the cease and desist requires the bank to increase its Tier I leverage capital ratio to 8% from 5.45% as of March 31, and total risk based capital ratio to 12% by Sept. 30, from 10.78%.
"We are committed to working with the FDIC and State of Alabama to implement the actions required by the order," said Lewis Beville, Colonial's president and CEO.
Colonial BancGroup operates 353 branches in Florida, Alabama, Georgia, Nevada and Texas with over $26 billion in assets.
Fitch Ratings downgraded the ratings of the bank's parent company, The Colonial BancGroup, following the cease and desist. Given the regulatory action, Fitch said it believes the likelihood of Colonial BancGroup executing its $300 million pending transaction with the consortium of investors lead by Taylor Bean & Whitaker may be negatively impacted.
Apart from the cease and desist, escalating credit problems have continued to generate significant losses, further weakening the company's capital position and eroding the benefit of potential capital augmentations. The preponderance of credit concerns remains in CNB's residential real estate construction portfolio -- the majority of which resides in the troubled Florida market.
In the first quarter of this year, Colonial Bank's nonperforming assets jumped $300 million to $881 million. And income producing property assets has started to make up a bigger percentage of that total. CRE nonperforming assets grew to $114.5 million from $47.5 million.
Separately, Nexity Bank in Birmingham has also consented to the issuance of a cease and desist order by the Board of Governors of the Federal Reserve System and the Alabama State Banking Department
Within 30 days of the order, Nexity has submit an acceptable written plan to maintain sufficient capital. It is also barred from declaring or paying dividends or increasing its debt.
About 10% of Nexity Bank's assets are considered nonperforming. Just a little more than $4 million of the nonperforming total is commercial real estate related, with foreclosed real estate accounting for $3.6 million of that.
Weak-Performing Strip Mall Will Lead To Boost in Loan Loss Reserves for Columbia Banking System
Columbia Banking System Inc. in Tacoma, WA, expects to make a provision for loan losses of approximately $21 million for the second quarter of 2009. The comparatively high provision is due to the continued decline in real estate values and will increase the bank's quarterly losses.
One of the two primary contributors to Columbia's provision for loan losses is related to a single nonperforming commercial real estate construction loan. The project is a retail strip mall in the Puget Sound region, the bank said. Retail related businesses have been particularly hard hit by the recession; while construction is complete, the project has been unable to achieve full occupancy.
The other factor was attibuted to the continued decline in residential real estate values, particularly relating to residential land, lots and lot development loans.
"Our decision to increase our provision is a necessary step during the prolonged weakness in the for-sale housing industry," said Melanie Dressel, president and CEO of Columbia Banking System. "Our customers and the communities we serve continue to face unprecedented challenges in this difficult economy, resulting in negative trends in credit quality. Home values and residential land and lot developments have struggled to maintain values, which have steadily declined throughout 2008 and the first half of 2009. As always, we are aggressively managing our nonperforming assets and diligently addressing our credit challenges."
Dressel added that Columbia's loan portfolio is highly diverse, with less than 11% of the total portfolio in real estate construction-related loans, of which approximately 9% is in the for-sale housing segment.
Columbia expects to report that nonperforming assets will total $130 million to $140 million at June 30, compared with $121.7 million at March 31.
"We are continuing to work with our customers to resolve these issues as quickly as possible," Dressel said. "However, given the nature of these types of projects, it is unlikely they will be resolved in the immediate future. It is reasonable, therefore, to expect our provision for loan losses for the balance of the year to remain at elevated levels compared with historical periods. However, we are encouraged to see an increase in housing unit sales and other signs the economy is beginning to recover."
Defaults Lead to Federal Lawsuit Against Capmark Finance
The Department of Justice filed suit against California mortgage lender Capmark Finance Inc., charging that Capmark violated the False Claims Act by making false statements on applications for federal mortgage insurance covering residential nursing homes.
The lawsuit, filed in United States District Court in Los Angeles, relates to a federal program under which the U.S. Department of Housing and Urban Development (HUD) guarantees mortgage loans used to acquire health care facilities such as hospitals and nursing homes.
The United States alleges that Capmark made false statements in HUD applications to guarantee mortgage loans made to acquire the Canoga Care Center, a residential nursing home facility in Canoga Park, CA, and the Hudson Valley Care Center in Ghent, NY. After accepting Capmark's applications for mortgage insurance, HUD was forced to pay $25.9 million when both the Canoga Care Center and Hudson Valley Care Center defaulted on their loans. Pursuant to the False Claims Act, the United States is seeking treble damages and penalties.
Joyce Patterson, a spokesperson for Capmark Financial Group, has responded that the claims against Capmark Finance are "without merit" and the company intends to dispute them "vigorously."
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