Three more banks and two thrifts in U.S. fail, tally reaches 89 this year
The recession continues to weigh heavily on banks as U.S. regulators on Friday shuttered five more institutions in Missouri, Illinois, Iowa and Arizona. This takes the total number of failed federally insured banks this year to 89, compared to 25 in 2008 and 3 in 2007.
Among the failed institutions two were in Illinois – Oak Forest-based InBank, with $212 million in assets and $199 million in deposits, and Rolling Meadows-based Platinum Community Bank, with $346 million in assets and $305 million in deposits.
The other three were Kansas City, MO-based First Bank of Kansas City, with $16 million in assets and $15 million in deposits; Sioux City, IA-based Vantus Bank with $458 million in assets and $368 million in deposits and Flagstaff, AZ-based First State Bank, with $105 million in assets and $95 million in deposits.
Failure of these institutions represents another sizable impact on the Federal Deposit Insurance Corporation’s (FDIC) fund for protecting customer accounts, as it has been appointed receiver for these banks. The failure of First Bank of Kansas City is expected to cost the deposit insurance fund an estimated $6 million and InBank’s failure will cost the insurance fund $66 million. Also, failures of Platinum Community Bank and First State Bank are expected to cost about $114 million and $47 million, respectively.
The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets and when a bank fails, it reimburses customers for deposits of up to $250,000 per account. The outbreak of failing financial institutions has significantly stretched the regulator’s deposit insurance fund. At June 30, 2009, the fund corpus fell to $10.4 billion, the lowest since 1993, from $13.0 billion in the prior quarter.
De Soto, KS-based Great American Bank has agreed to acquire the deposits of First Bank of Kansas City.
Springfield, MO-based Great Southern Bank, a subsidiary of Great Southern Bancorp (GSBC), will acquire Vantus Bank’s deposits. The FDIC and Great Southern Bank agreed to share losses on about $338 million of Vantus Bank’s assets.
Chicago-based MB Financial Bank, a subsidiary of MB Financial (MBFI), will acquire almost all of the deposits of InBank. However, some brokered deposits will not be assumed by MB Financial Bank.
First State Bank’s deposits will be acquired by Tustin, CA-based Sunwest Bank.
However, the FDIC did not find a bank to acquire Platinum Community Bank’s branches or deposits. As a result, the FDIC will pay out insured deposits at Platinum Community Bank.
In the second quarter of 2009, the number of banks on the FDIC’s list of problem institutions grew to 416 from 305 in the first quarter. This is the highest number since the savings and loan crisis in 1994. Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates U.S. bank failures to cost $70 billion through 2013.
Last week, the FDIC allowed private investors to buy failed financial institutions. The FDIC’s board voted to reduce the cash that private equity funds must maintain in banks they acquire.
According to the FDIC Chairman, the agency has no immediate plans to borrow money from the government to replenish the deposit insurance fund. However, the FDIC may increase the fees for U.S. banks this year to strengthen the fund. The agency has already raised $5.6 billion through an added assessment.
On August 14, banking operations of Colonial BancGroup was seized by the FDIC. Colonial’s deposits and assets were sold to BB&T Corporation (BBT). Following this, Guaranty Bank failed on August 21. The FDIC sold all of Guaranty Bank’s deposits and $12 billion of the assets to BBVA Compass, the U.S. division of Spain’s second-largest bank Banco Bilbao Vizcaya Argentaria (BBV). Colonial is the largest and Guaranty the second-largest bank failure so far this year, and the 6th-largest and 10th-largest, respectively, in U.S. history. Guaranty was about half the size of Colonial Bank.
The failure of Washington Mutual last year is the largest bank failure in U.S. history. It was acquired by JPMorgan Chase (JPM). The other major acquirers of failed institutions during 2008 and 2009 include Fifth Third Bancorp (FITB), U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks (STI), PNC Financial (PNC) and Regions Financial (RF).
The failed banks are victims of recession and rising loan losses. As a result of the ongoing market turmoil, these institutions experienced massive capital erosion stemming from losses arising from significant exposure to collateralized mortgage obligations (CMOs), commercial real estate loans and other commercial and industrial loans. All these factors were responsible for a drag on profitability and write-downs. According to the FDIC, U.S. banks overall lost $3.7 billion in the second quarter of 2009, compared to a profit of $7.6 billion in the prior quarter.
The current year has been difficult for consumers to pay off debt as a result of high unemployment, falling home prices and declining personal wealth.
Though current signals indicate that the economy may be stabilizing, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.
The U.S. Treasury last week said that it wants the world’s banks to maintain stronger capital and liquidity standards by the end of next year to prevent a re-run of the global financial crisis from which the financial sector is gradually recovering. The Treasury would require banking institutions to focus more on higher-quality capital that will help them absorb big losses. Though this would somewhat limit the profitability of banks, a proper implementation would bring stability to the overall sector and hopefully address bank failures.
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