Bank Failures Zoom to 115

Regulators shut down 9 more banks, including California National Bank; total failed banks in '09 reach 115

Bank failures continue unabated as U.S. regulators on Friday closed down nine more banks, including California National Bank of Los Angeles. The failed banks were situated in California, Illinois, Texas and Arizona. This takes the total number to 115, compared to 25 in 2008 and 3 in 2007.

Besides California National Bank, the eight other banks were Bank USA N.A. of Phoenix, San Diego National Bank of San Diego, Pacific National Bank of San Francisco, Park National Bank of Chicago, Community Bank of Lemont in Lemont, Ill., North Houston Bank in Houston, Madisonville State Bank in Madisonville, Texas and Citizens National Bank of Teague, Texas.

The weak economy continues to weigh heavily on banks with a stream of loan defaults. As the industry has to tolerate bad loans that were made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more failures. However, the regulators are trying to avoid panic by seizing banks slowly. Also, the slow seizing could be a strategy as it is hard to get buyers for so many failed banks.

All the banks that failed in the latest round were divisions of privately held FBOP Corp., a bank holding company based in Oak Park., Illinois. The banks had combined assets of $19.4 billion and deposits of $15.4 billion at the end of September.

The nine banks had 153 offices, out of which California National Bank had 68 branches. California National Bank was the biggest of FBOP's banks, the nation's 101st largest with assets of $7.1 billion.

Failure of these institutions represents another 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 115 banks has cost the federal deposit insurance fund more than $25 billion so far this year.
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 financial institutions failing has significantly stretched the regulator's deposit insurance fund. As on June 30, 2009, the fund corpus fell to $10.4 billion, the lowest since 1993, from $13.0 billion in the prior quarter.

Minneapolis-based U.S. Bank, a division of U.S. Bancorp (USB), has agreed to assume the deposits and most of the assets of these nine banks. The FDIC and U.S. Bank agreed to share losses on about $14.4 billion of the combined purchased assets.

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 $100 billion over the next four years.

In order to replenish the declining fund, the FDIC board recently proposed that the U.S. banks should pay fees for three years in advance. Also, the regulators are considering requesting the healthy banks to bail out the government 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%.

The failure of Washington Mutual last year was the largest 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, Zions Bancorp (ZION), SunTrust Banks (STI), PNC Financial (PNC), BB&T Corporation (BBT) and Regions Financial (RF).

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 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, 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.

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Read the full analyst report on RF