Bank Failure Tally Reaches 98

The recession continues to weigh heavily on banks as U.S. regulators on Friday shuttered three more banks in Michigan, Minnesota and Colorado. This takes the total number of failed federally insured banks this year to 98, compared to 25 in 2008 and 3 in 2007.

The failed banks were Warren, MI-based Warren Bank with about $538 million in assets and $501 million in deposits; Spring Grove, MN-based Jennings State Bank with total assets of $56 million and deposits of $52 million and Pueblo, CO-based Southern Colorado National Bank with about $40 million in total assets and $32 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 receiver for these banks. The failure of Warren Bank is expected to cost the deposit insurance fund an estimated $275 million, Jennings State Bank’s failure will cost about $12 million and the failure of Southern Colorado National Bank is expected to cost about $6.6 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 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.

The FDIC sold Warren Bank’s branches, deposits and about $83 million of assets to Huntington National Bank, the main subsidiary of Huntington Bancshares (HBAN - Analyst Report).

Central Bank of Stillwater, MN, agreed to assume Jennings State Bank's $52.4 million in deposits and the entire assets. FDIC and Central Bank agreed to share losses on about $37.7 million of Jennings State Bank's assets.
 
The FDIC sold Southern Colorado National Bank's deposits and almost all of its assets to Legacy Bank of Wiley, CO. The FDIC and Legacy Bank agreed to share losses on about $25.5 million of Southern Colorado National Bank's assets.

In order to replenish the declining fund, the FDIC may ask the U.S. banks to 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 $70 billion over the next five years.

The failure of Washington Mutual last year is the largest in the U.S. history. It was acquired by JP Morgan Chase (JPM - Analyst Report). The other major acquirers of failed institutions since 2008 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 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 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 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.