Corus Bank Fails - 92 So Far in '09 - Analyst Blog

Regulators shut down 3 more banks including Corus; total failed banks in ’09 reach 92

Three more banks including Corus Bank NA, a subsidiary of Corus Bankshares (CORS), were shuttered by the U.S. regulators on Friday as the recession continues to take its toll on banks. This takes the total number of failed federally insured banks in this year to 92, compared to 25 in 2008 and 3 in 2007.

Based in Chicago, the Corus Bank was a major lender to condominium, office and hotel projects. Corus is one of the largest banks to fail this year, with about $7 billion in total assets, $7 billion in deposits and 11 branches.

Two other small banks were Lacey, WA-based Venture Bank, with $970 million in assets and $903 million in deposits and Woodbury, MN-based Brickwell Community Bank, with $72 million in assets and $63 million in deposits.

The 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 the receiver for these banks. The failure of these three banks is expected to cost the deposit insurance fund an estimated $2 billion. The failure of Corus alone is expected to cost about $1.7 billion.

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 Jun 30, 2009, the fund corpus fell to $10.4 billion, the lowest since 1993, from $13.0 billion in the prior quarter.

The FDIC sold all of the deposits and $3 billion of Corus’ assets to MB Financial Bank, a subsidiary of MB Financial (MBFI). Much of Corus’ assets are condominium loans backed by developments, and the FDIC is expected to sell them off within the next 30 days. This acquisition follows MB Financial’s takeover of the failed InBank of Oak Forest, Illinois, last week.

Raleigh, North Carolina-based First-Citizens Bank & Trust Company will assume all of the deposits and $874 million of the assets of Venture Bank. FDIC and First-Citizens Bank agreed to share losses on about $715 million of Venture Bank’s assets. The FDIC said it will retain the remaining assets for disposal later.

Brickwell’s $63 million deposits and all of its $72 million assets have been assumed by Mitchell, South Dakota-based CorTrust 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 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 $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 has no immediate plans to borrow money from the government to replenish the deposit insurance fund. However, it 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 were seized by the FDIC. Colonial’s deposits and assets were sold to BB&T Corporation (BBT). Following this, Guaranty Bank failed on Aug 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 sixth and tenth-largest, respectively, in the U.S. history.

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) and Regions Financial (RF).

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.

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.

However, on Thursday, 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.

But we think that although the economy is in a far better shape now than a year ago, there are persistent problems which need to be addressed by the government before shifting the strategy to growth. We believe that the U.S. economy will regain the growth momentum once these issues are resolved.

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.

Corus Bank Fails – 92 So Far in ’09 – Analyst Blog

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