More Bank Failures, Tally Hits 86 - Analyst Blog

The ongoing economic volatility has taken its toll on a few more banks last week. On Friday, three more were shuttered by U.S. regulators. These three banks were based in Florida, Georgia and New Mexico. The total number of bank failures goes up to 86 so far in 2010, compared to 140 in 2009, 25 in 2008 and 3 in 2007.

Although the economy is showing signs of a gradual recovery with the stabilization of large financial institutions, tumbling home prices, soaring loan defaults and a high unemployment rate continue to impact small banks. 

While we expect the overall 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 absorbs bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures. Economic threats related to the European debt crisis and BP (BP) oil spill further add to the concerns. The Federal Deposit Insurance Corporation (FDIC) expects bank failures to peak in the third quarter.

The failed banks are:

Englewood, Florida-based Peninsula Bank with total assets of $644.3 million and deposits of$580.1 million.
Savannah, Georgia-based First National Bank with about $252.5 million in total assets and $231.9 million in total deposits.
Albuquerque, New Mexico-based High Desert State Bank with total assets of $80.3 million and total deposits of $81.0 million. 
These bank failures will deal another blow to the Federal Deposit Insurance Corporation’s (FDIC) fund meant for protecting customer deposits, as it has been appointed receiver for these banks.

When a bank fails, the FDIC reimburses customers for their deposits of up to $250,000 per account. However, the outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund. The FDIC has about $66 billion in cash and securities in reserve to cover losses arising from bank failures. The receiver also has access to the Treasury Department’s credit line of up to $500 billion.

The three failed banks together would cost the FDIC about $284.6 million. Peninsula Bank is expected to cost the deposit insurance fund about $194.8 million, First National Bank will cost about $68.9 million and High Desert State Bank will cost about $20.9 million.

Miami, Florida-based Premier American Bank will acquire the deposits and nearly all the assets of Peninsula Bank. FDIC and Premier American Bank will share losses on $437.6 million of Peninsula Bank’s loans and other assets.

Savannah, Georgia-based The Savannah Bank National Association agreed to buy all the assets and deposits of First National Bank. FDIC will retain most of the assets of First National Bank for eventual sale.

Artesia, New Mexico-based First American Bank will assume the assets and deposits of High Desert State Bank. FDIC and First American Bank will share losses on $67.6 million of High Desert State Bank’s assets.

In the first quarter of 2010, the number of banks on the FDIC’s list of problem institutions grew to 775 from 702 in the fourth quarter of 2009. This is the highest since the savings and loan crisis in the early 1990s.
Following the worst part of the economic downturn, the banking industry’s profits soared during the first quarter of 2010. However, this was primarily led by the big banks, while small banks remained strained by deteriorating credit conditions.

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 $60 billion over the next four years.  

The failure of Washington Mutual in 2008 was the largest in the U.S. banking history. WaMu 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).