Bank failures continue unabated as the U.S. regulators closed down two more banks in Illinois and Washington last Friday. This brings the number of U.S. bank failures to 63 so far in 2011, preceded by 157 in 2010, 140 in 2009 and 25 in 2008.
While the financials of bigger banks have been stabilizing on the back of an economic recovery, many smaller banks are still struggling to survive. Nagging issues like rock-bottom home prices along with still-high loan defaults and unemployment levels continue to trouble such institutions.
Lingering effects of the financial crisis continue to weigh on many banks. It becomes a prerequisite for such banks to absorb bad loans offered during the credit explosion, making them susceptible to severe problems. The uncertain environment is aggravating the risk of bank failures.
The failed banks are:
- Shorewood, Illinois-based Bank of Shorewood, with total assets of about $110.7 million and total deposits of about $104.0 million as of June 30, 2011.
- Colfax, Washington-based Bank of Whitman, with about $548.6 millionin total assets and $515.7 million in total deposits as of June 30, 2011.
These bank failures represent another jolt to the deposit insurance fund (DIF), meant for protecting customer accounts, as it has been appointed receiver for the banks.
The Federal Deposit Insurance Corporation (FDIC) insures deposits in 7,575 banks and savings associations in the country as well as promotes the safety and soundness of these institutions. When a bank fails, the agency reimburses customer deposits of up to $250,000 per account.
Though the FDIC has managed to shore up its deposit insurance fund during the last few quarters, the ongoing bank failures have kept it under pressure. As of March 31, 2011, the fund remained in the red with a deficit of $1.0 billion, which was, however, substantially better than the deficit of $7.4 billion in the prior quarter.
The failure of Bank of Shorewood is expected to deal a blow of about $25.6 million to the FDIC, while Bank of Whitman will cost about $134.8 million.
Bloomington, Illinois-based Heartland Bank and Trust Company has agreed to assume the entire deposits and assets of Bank of Shorewood.
Tacoma, Washington-based Columbia State Bank has agreed to assume the entire deposits and $314.4 millionassets of Bank of Whitman. The remaining assets of the failed bank will be retained by the FDIC for later disposition.
The number of banks on FDIC’s list of problem institutions saw a marginal increase to 888 in the first quarter from 884 in the previous. This is the highest number since way back in March 31, 1993, when there were 928 problem institutions due to the then savings and loan crisis.
Increasing loan losses on commercial real estate could trigger hundreds of bank failures in the coming years. Going by the current rate of bank insolvencies, the DIF is likely to feel a $52 billion dent by 2014. However, considering the track record so far this year, the FDIC does not expect the number of bank failures in 2011 to surpass that of 2010.
With so many bank failures, consolidation has become the industry fashion. For almost all the failed banks, the FDIC enters into a purchase agreement with healthy institutions. When Washington Mutual collapsed in 2008 (branded as the largest bank failure in the U.S. history), it was acquired by JPMorgan Chase & Co. (JPM). The other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB) and BB&T Corporation (BBT).
