U.S. Bank Failures Stretch to 81

Bank failures continue unabated as the U.S. regulators closed down three more banks in Mississippi, Illinois and Nebraska on Friday, pushing up the figure to 81 so far in 2010. This compares with a total number of bank failures of 140 in 2009, 25 in 2008 and only 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 tolerates bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures.

The failed banks are:

• Rosedale, Mississippi-based First National Bank with total assets of $60.4 million and deposits of $63.5 million.
• Arcola, Illinois-based Arcola Homestead Savings Bank with about $17.0 million in total assets and $18.1 million in total deposits.
• Lincoln, Nebraska-based TierOne Bank with total assets of $2.8 billion and total deposits of $2.2 billion.

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 $313.6 million. First National is expected to cost the deposit insurance fund about $12.6 million, Arcola Homestead will cost about $3.2 million and TierOne will cost about $297.8 million.

Fayette, Mississippi-based The Jefferson Bank will acquire the deposits and nearly all the assets of First National. FDIC and Jefferson will share losses on $43.5 million of First National's loans and other assets.

Sioux Falls, South Dakota-based Great Western Bank agreed to buy all the assets and deposits of TierOne Bank. FDIC and Great Western Bank will share losses on $1.9 billion of TierOne's loans and other assets.

However, the FDIC did not find a buyer for Arcola Homestead Savings Bank and has paid out the institution's insured deposits itself.

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 dreadful phase 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 $100 billion over the next three years.



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

We expect loan losses on the commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.

Read the full analyst report on JPM

Read the full analyst report on FITB

Read the full analyst report on USB

Read the full analyst report on ZION

Read the full analyst report on STI

Read the full analyst report on PNC

Read the full analyst report on BBT

Read the full analyst report on RF