Bank Failures Continue

Three more U.S. banks failed; tally reaches 84 this year

Bank failures continue unabated as U.S. regulators on Friday closed down three more banks in California, Maryland and Minnesota. This takes the total number of failed federally insured banks this year to 84, compared to 25 in 2008 and 3 in 2007.

The failed banks were Ventura, California-based Affinity Bank, with about $1 billion in assets and $922 million in deposits; Baltimore-based Bradford Bank, with $452 million in assets and $383 million in deposits; and Forest Lake, Minnesota-based Mainstreet Bank, with $459 million in assets and $434 million in deposits.

Failure of these banks 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 Affinity Bank is expected to cost the deposit insurance fund an estimated $254 million; that of Bradford Bank about $97 million and that of Mainstreet Bank about $95 million.

The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets and 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.
 
San Diego-based Pacific Western Bank has agreed to acquire the deposits and assets of Affinity Bank. The FDIC and Pacific Western agreed to share losses on about $934 million of Affinity's loans and other assets.

Buffalo, New York-based Manufacturers and Traders Trust Company (M&T) has agreed to assume the deposits and assets of Bradford Bank. The FDIC will share losses on about $338 million of Bradford Bank's loans and other assets with M&T.

Stillwater, Minnesota-based Central Bank will acquire the deposits and assets of Mainstreet Bank. The FDIC will share losses on about $268 million of Mainstreet Bank's loans and other assets with Central 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 number since the savings and loan crisis in 1994. The FDIC anticipates U.S. bank failures to cost $70 billion through 2013.

According to the FDIC Chairman, the agency has no immediate plans to borrow money from the government to replenish the deposit insurance fund. However, the FDIC may impose an additional fee on U.S. banks this year to bolster the fund. The agency has already raised $5.6 billion through an added assessment.

In large, the failures are concentrated among newer companies. To address this issue, the FDIC said Friday that it is extending the term for maintaining higher capital levels for new banks to seven years from three years. During this period, the banks will face more frequent examinations.

Earlier this month, banking operations of Colonial BancGroup was seized by the FDIC. Colonial’s deposits and assets were sold to BB&T Corporation (BBT - Analyst Report). Following this, Guaranty Bank failed on August 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 - Snapshot Report). Colonial is the largest and Guaranty the second-largest bank failure so far this year, and the 6th-largest and 10th-largest, respectively, in U.S. history. Guaranty was about half the size of Colonial Bank.

The failure of Washington Mutual last year is the largest bank failure in U.S. history. It was acquired by JPMorgan Chase (JPM - Analyst Report). The other major acquirers of failed institutions during 2008 and 2009 include Fifth Third Bancorp (FITB - Analyst Report), U.S. Bancorp (USB - Analyst Report), Zions Bancorp (ZION - Analyst Report), SunTrust Banks (STI - Snapshot Report), PNC Financial (PNC - Snapshot Report) and Regions Financial (RF - Analyst Report).

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 arising from significant exposure to collateralized mortgage obligations (CMOs), 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.

Though current signals indicate that the economy may stabilize, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.