2 More Bank Failures, Tally Hits 22 - Analyst Blog

Though the economy is showing signs of a gradual recovery, tumbling home prices, soaring loan defaults and rising unemployment continue to take toll on small banks. As a result, U.S. regulators on Friday shuttered two more banks in Nevada and Washington. This brings the total number of bank failures to 22 so far in 2010, compared to 140 in 2009, 25 in 2008 and 3 in 2007.

While we expect economic recovery to gain momentum soon, there remain lingering concerns in the banking industry. Failure of both residential and commercial real estate loans as a result of the credit crisis was the primary thing that wounded banks. As the industry tolerates bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures.

The failed banks were: Carson City, Nevada-based Carson River Community Bank with assets of $51.1 million and deposits of $50.0 million and Tacoma, Washington State-based Rainier Pacific Bank with assets of $717.8 million and deposits of $446.2 million as of Dec 31, 2009.

These bank failures will deal another blow to the Federal Deposit Insurance Corporation’s (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for these banks. The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in
assets.

When a bank fails, it reimburses customers for their deposits of up to $250,000 per account. The outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund. However, the FDIC has about $66 billion in cash and securities available in reserve to cover losses of bank failures. Also, the FDIC has access to the Treasury Department’s credit line of up to $500 billion.

The failure of Carson River Community Bank is expected to cost the deposit insurance fund about $7.9 million and Rainier Pacific Bank is likely to cost about $95.2 million.

Reno, Nevada-based Heritage Bank of Nevada will assume all of the deposits and about $38 million of assets of Carson River. Heritage Bank entered into a loss-share transaction with the FDIC on $28.5 million of Carson River’s assets.

Umpqua Bank of Roseburg, Oregon will assume all of the deposits and about $670.1 million of Rainier Pacific Bank’s assets. The FDIC and Umpqua Bank agreed to a loss-share agreement on $578.1 million of Rainier Pacific’s assets.

Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates bank failures to cost about $100 billion over the next three years.

The failure of Washington Mutual in 2008 was the largest in U.S. banking history. It was acquired by JPMorgan Chase (JPM). The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (FITB), U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks (STI), PNC Financial (PNC), BB&T Corporation (BBT) and Regions Financial (RF).