Regulators shut down 2 more banks in Kentucky and Indiana; tally hits 94 this year
U.S. regulators on Friday shuttered two more banks in Kentucky and Indiana as the recession continues to weigh heavily on banks. Both of the failed banks were run by Columbus, Indiana-based Irwin Financial Corporation. This takes the total number of failed federally insured banks this year to 94, compared to 25 in 2008 and 3 in 2007.
The failed banks were — Kentucky-based Irwin Union Bank FSB, with $493 million in assets and $441 million in deposits, and Columbus, Ind.-based Irwin Union Bank and Trust Company, with $2.7 billion in assets and $2.1 billion in deposits as of August 31, 2009. The banks operated a combined 27 branches in nine U.S. states.
Failure of these institutions represents another 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 these two banks is expected to cost the deposit insurance fund an estimated $850 million.
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 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.
Hamilton, Ohio-based First Financial Bank (FFBC) will assume all of the deposits of the two banks. So there will be no losses to any depositor. The FDIC and First Financial Bank reached a loss-share agreement covering about $2.5 billion of the two banks’ combined assets.
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 since the savings and loan crisis in 1994. Increasing loan losses on commercial real estate are expected to cause more bank failures in the next few years. The FDIC anticipates the bank failures to cost about $70 billion over the next five years.
Recently, the FDIC allowed private investors to buy failed financial institutions. The regulator’s board voted to reduce the cash that private equity funds must maintain in banks they acquire.
The FDIC is considering borrowing money from the government to replenish the deposit insurance fund as it has slipped to 0.22% of insured deposits, below the mandated minimum of 1.15%. The agency has already raised $5.6 billion through an added assessment.
The failure of Washington Mutual last year is the largest bank failure in U.S. 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), Regions Financial (RF) and MB Financial (MBFI).
The failed banks are the 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 a significant exposure to collateralized mortgage obligations, 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.
However, earlier this month, U.S. Treasury Secretary Timothy Geithner said that the government won’t provide additional funds to stabilize the financial markets and the government’s economic team has removed a $750 billion line item from the federal budget projections, since it is unlikely to be necessary.
Most of the taxpayer-provided money was provided to financial institutions, as these are the backbone of the economy and the primary victims of the recession. However, we continue to face further bank failures. We expect loan losses on 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 “RF”
Read the full analyst report on “MBFI”
Zacks Investment Research
