Though the economy is showing signs of a gradual recovery, bank failures continue as U.S. regulators on Friday closed down four more banks in California, Illinois, Texas and Florida. This brings the total number of bank failures to 20 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 reason 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 – La Jolla, California-based La Jolla Bank, FSB with assets of $3.6 billion and deposits of $2.8 billion, Oak Park, Illinois-based George Washington Savings Bank with assets of $412.8 million and deposits of $397 million, La Coste, Texas-based La Coste National Bank with assets of $53.9 million and deposits of $49.3 million and Marco Island, Florida-based Marco Community Bank with assets of $119.6 million and deposits of $117.1 million.
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 $21 billion in cash 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 La Jolla Bank, FSB is expected to cost the deposit insurance fund about $882.3 million, George Washington Savings Bank is expected to cost about $141.4 million, La Coste National Bank is expected to cost about $3.7 million and Marco Community Bank is estimated to cost about $38.1 million.
Pasadena, California-based OneWest Bank, FSB assumed all of the deposits of La Jolla Bank and agreed to purchase almost all of its assets. FirstMerit Bank, National Association of Akron, Ohio, assumed almost all of George Washington Savings Bank’s assets and deposits. Hondo, Texas-based Community National Bank agreed to buy the deposits and assets of La Coste National Bank. FDIC has entered into a purchase and assumption agreement with Mutual of Omaha Bank for Marco Community Bank.
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 JP Morgan 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).
Though current signals indicate that the economy may stabilize, we expect loan losses on the commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.
Read the full analyst report on “JPM”
Read the full analyst report on “FITB”
Read the full analyst report on “USB”
Read the full analyst report on “ZION”
Read the full analyst report on “STI”
Read the full analyst report on “PNC”
Read the full analyst report on “BBT”
Read the full analyst report on “RF”
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