Regulators shut down 7 more banks in California, Alabama, Florida, Georgia, Michigan and Illinois
The struggling economy continues to take its toll on banks as U.S. regulators on Friday shuttered 7 more firms. Among the failed banks, two were based in California and the others were in Alabama, Florida, Georgia, Michigan and Illinois. This takes the total number of bank failures to 140, compared to 25 in 2008 and 3 in 2007.
While the state of the economy is showing signs of recovery, there are lingering concerns related to the banking industry. As the industry tolerates bad loans that were 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: First Federal Bank of Santa Monica, California, with $6.1 billion in assets and $4.5 billion in deposits; Imperial Capital Bank of La Jolla, California, with about $4 billion in assets and $2.8 billion in deposits; Peoples First Community Bank of Panama City, Florida, with $1.8 billion in assets and $1.7 billion in deposits; New South Federal Savings Bank of Irondale, Alabama, with $1.5 billion in assets and $1.2 billion in deposits; Independent Bankers’ Bank of Springfield, Illinois, with $585.5 million in assets and $511.5 million in deposits; Atlanta-based RockBridge Commercial Bank, with $294 million in assets and $291.7 million in deposits; and Citizens State Bank of New Baltimore, Michigan, with $168.6 million in assets and $157.1 million in deposits.
These bank failures will deal another blow to the Federal Deposit Insurance Corporation’s (FDIC) fund 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 deposits of up to $250,000 per account. The outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund.
The failure of RockBridge Commercial Bank is expected to cost the deposit insurance fund about $124.2 million, Peoples First Community Bank is expected to cost about $556.7 million, Citizens State Bank is expected to cost about $76.6 million, New South Federal Savings Bank is expected to cost about $212.3 million, Independent Bankers’ Bank is expected to cost about $68.4 million, First Federal Bank is expected to cost about $146 million and Imperial Capital Bank is expected to cost about $619.2 million.
The FDIC was unable to find another institution to take over RockBridge Commercial Bank, and so will mail checks to retail depositors for insured funds.
Los Angeles-based City National Bank will assume all of Imperial Capital’s deposits and $3.3 billion in assets. OneWest Bank of Pasadena will assume all of the deposits and all of the assets of First Federal Bank.
Beal Bank, based in Plano, Texas, agreed to assume the assets and deposits of New South Federal Savings Bank. Hancock Bank, based in Gulfport, MS, will assume the deposits and about $1.6 billion of the loans of Peoples First Community Bank.
In the third quarter of 2009, the number of banks on the FDIC’s list of problem institutions grew to 552 from 416 in the second quarter. This is the highest since 1993. 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 four years. In order to replenish the depleting fund, the FDIC board recently mandated U.S. banks to pay fees for three years in advance.
Also, the regulators are considering requesting the healthy banks to bail out the government as soon as it is necessary to refill the deposit insurance fund. The FDIC also has access to the Treasury Department credit line of up to $500 billion.
The failure of Washington Mutual last year 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).
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 due to a significant exposure to collateralized mortgage obligations, commercial real estate loans and other commercial and industrial loans.
According to the FDIC, banks set aside $62.5 billion to cover deteriorating loans during the third quarter, down 7.1% from the prior quarter. Though current signals indicate that the economy may stabilize, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.
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