U.S. Bank Failures Zoom - Analyst Blog

Although the economy is showing signs of a gradual recovery with large financial institutions stabilizing, tumbling home prices, soaring loan defaults and rising unemployment continue to take their toll on small banks. As a result, U.S. regulators on Friday shuttered four more banks in Georgia, Florida and Arizona. This brings the total number of failed banks to 41 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 has primarily hurt 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: Cartersville, Georgia-based Unity National Bank with about $292.2 million in assets and $264.3 million in deposits, Carrollton, Georgia-based McIntosh Commercial Bank with about $362.9 million in assets and $343.3 million in deposits, Key West, Florida-based Key West Bank with $88 million in assets and $67.7 million in deposits and Phoenix, Arizona-based Desert Hills Bank with $496.6 million in assets and $426.5 million in deposits.

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.

When a bank fails, FDIC 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 arising from bank failures. Also, the FDIC has access to the Treasury Department’s credit line of up to $500 billion.

The four banks together would cost the FDIC’s Deposit Insurance Fund about $320.3 million. The FDIC and the acquiring institutions have agreed to share losses on $870.9 million of the failed banks’ assets.

Little Rock, Arkansas-based Bank of the Ozarks will assume the assets and deposits of Unity National Bank. The FDIC and Bank of the Ozarks have agreed to share losses on $206.1 million of Unity National’s assets.

West Point, Georgia-based CharterBank will assume all the assets and deposits of McIntosh Commercial Bank. The FDIC and CharterBank have agreed to share losses on $263.1 million of McIntosh Commercial’s assets.

Conway, Arkansas-based Centennial Bank will assume the assets and deposits of Key West Bank.

Westbury, New York-based New York Community Bank will assume the assets and deposits of Desert Hills Bank. The FDIC and New York Community Bank have agreed to share losses on $325.9 million of Desert Hills Bank’s loans and other assets.

In the fourth quarter of 2009, the number of banks on the FDIC’s list of problem institutions grew to 702 from 552 in the third quarter. This is the highest 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 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).

We expect loan losses on the commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.