Bank Failures and Real Estate Supply

Investors and Colleagues,

Last Friday, another three banks kicked the bucket…

At the end of last week, the FDIC announced that Integra Bank, Virginia Business Bank of Richmond, and Bank Meridian were officially insolvent and would be merged or taken over by the government.

Bank Meridian hit closest to home as the South Carolina bank was forced into a merger with SCBT Financial – another South Carolina bank. All together, these three banks represented about $2.5 billion in assets, and the total number of failed banks this year is now at 61.

A few generations ago, even one or two bank failures like this would have the potential to damage the entire financial system. If depositors lost their assets at one bank, consumers would be likely to pull their savings out of other financial institutions – igniting a run on the bank and sending the system into a state of chaos.

Today, of course, the FDIC protects depositors by ensuring the first $250,000 for each depositor. So as long as your savings account is below a quarter million, you can rest assured that a bank failure won’t result in you losing money.

Most people understand that the FDIC insures deposit accounts, but fail to realize what happens behind the scenes when a bank goes under.

The Proud New Owner of Real Estate
When a bank is taken over by the FDIC, depositors receive the full value of the assets in their accounts, and the FDIC actually takes over the assets of the bank. Sometimes the assets are able to be merged with another more healthy bank, but often these assets continue to sit on the FDIC’s balance sheet.

For banks who have made bad real estate loans, these assets actually represent property that has been foreclosed on.
Here’s an example… A southeastern developer might take out a $3 million dollar loan from Bank Meridian in South Carolina to purchase development property in Greenville, Nashville and Atlanta. Due to poor planning and a difficult economic environment, this developer goes out of business and the bank forecloses on the property.

Now a few quarters later, the bank is declared insolvent and is taken over by the FDIC. The FDIC pays the depositors cash and assumes ownership of the bank’s assets (including the developments in Greenville, Nashville and Atlanta).

The FDIC is now the proud owner of a few hundred acres of residential property. But of course this is not the position the government entity is supposed to be in. The FDIC’s assets are supposed to be held in cash so they have capital available to insure deposit accounts.

So what does the FDIC do with these developments? Well, the short answer is that they go looking for a buyer. Sometimes the assets are able to be merged with another bank, sometimes the real estate is sold to a private buyer, and sometimes the land is put up for sale by auction.

Today, the FDIC is sitting on a substantial amount of non-cash assets such as residential real estate developments. The number of bank failures over the past two years has been very high – and the longer it takes for our broad economy to recover, the more banks continue to fail.

Bank Failures Create Opportunity
Now no one wants to see banks continue to go under. But for us as investors, these bank failures actually translate to opportunity.

With the FDIC holding significant amounts of real estate (and needing more cash to cover deposit balances) there are some tremendous bargains available to opportunistic buyers.

At Ashford Capital, we are working directly with the FDIC to identify attractive properties and buy them at a significant discount. We only purchase properties in locations that we expect to rebound quickly – and this gives us a chance to sell the locations at a substantial profit for our investors.

Could we grab a few minutes to chat this week? I would love to give you details on some of the deals we are negotiating and help you grow your capital through one or two of these opportunities.

Wishing you every success,