Regulators shut down 5 more banks in Georgia, Michigan, Minnesota, Missouri and California; tally hits 120 so far this year
U.S. regulators on Friday shuttered five more institutions in Georgia, Michigan, Minnesota, Missouri and California , as the recession continues to take its toll on banks. This takes the total number to 120, compared to 25 in 2008 and 3 in 2007.
As the industry has to tolerate bad loans that were made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more failures. However, the regulators are trying to avoid panic by seizing banks slowly. Also, the slow pace of seizing could be a strategy as it is hard to get buyers for so many failed banks.
The failed banks were — Georgia-based United Security Bank of Sparta with total assets of $157 million and total deposits of approximately $150 million, Michigan-based Home Federal Savings Bank of Detroit with total assets of $14.9 million and total deposits of approximately $12.8 million, Minnesota-based Prosperan Bank of Oakdale with total assets of $199.5 million and total deposits of approximately $175.6 million, Missouri-based Gateway Bank of St. Louis with total assets of $27.7 million and total deposits of approximately $27.9 million and California-based United Commercial Bank of San Francisco with total assets of $11.2 billion and total deposits of approximately $7.5 billion.
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 United Commercial Bank alone is expected to cost the federal deposit insurance fund approximately $1.4 billion. The other failures are expected to cost the deposit insurance fund a combined $132.7 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 financial institutions failing has significantly stretched the regulator’s deposit insurance fund.
At Jun 30, 2009, the fund corpus fell to $10.4 billion, the lowest since 1993, from $13.0 billion in the prior quarter. However, the FDIC has billions of loss reserves apart from the insurance fund and it can access a Treasury credit line of up to $500 billion.
The FDIC entered into a purchase and assumption agreement with Ameris Bank, Moultrie, Georgia, to assume all of the deposits of United Security Bank; Liberty Bank and Trust Company, New Orleans, Louisiana, to assume all of the deposits of Home Federal Savings Bank; Alerus Financial, National Association, Grand Forks, North Dakota, to assume all of the deposits of Prosperan Bank; Central Bank of Kansas City to assume all of the deposits of Gateway Bank of St. Louis; and East West Bank, Pasadena, California, to assume all of the deposits of United Commercial Bank.
In order to replenish the declining fund, the FDIC board recently proposed that approximately 8,100 insured U.S. banks and savings institutions should 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 replenish the deposit insurance fund, which has slipped to 0.22% of insured deposits, below the mandated minimum of 1.15%.
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 hundreds more bank failures in the next few years. The FDIC anticipates the bank failures to cost about $100 billion over the next four years.
The failure of Washington Mutual last year was the largest 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), 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. All these factors were responsible for a drag on profitability and write-downs.
According to the FDIC, the 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. Though there are some signs of economic recovery, 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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