Bank Failures Zoom to 38

The pace of bank failures accelerated markedly with the shuttering of five more banks by U.S. regulators last Friday. Out of the five failed banks, two were based in Georgia and one each in Florida, Kansas and Illinois. This brings the total number of bank failures to 38 so far in 2012, following 92 in 2011, 157 in 2010, 140 in 2009 and 25 in 2008.

While the financials of a few large banks continue to stabilize on the back of an economic recovery and increasing dependence on noninterest revenue sources, the industry is still on shaky ground. The sector presents a picture similar to that of 2011, with nagging issues like depressed home prices along with still-high loan defaults and unemployment levels troubling such institutions.

The lingering economic uncertainty and its effects also weigh on many banks. The need to absorb bad loans offered during the credit explosion has made these banks susceptible to severe problems.

The Failed Banks

• Naples, Florida-based The Royal Palm Bank of Florida, with total assets of about $87.0 million and total deposits of $85.1 million as of March 31, 2012.
• Buford, Georgia-based Georgia Trust Bank, with about $119.8 million in total assets and $117.4 million in total deposits as of March 31, 2012.
• Woodstock, Georgia-based First Cherokee State Bank, with about $222.7 million in total assets and $193.3 million in total deposits as of March 31, 2012.
• Leawood, Kansas-based Heartland Bank, with about $110.0 million in total assets and $102.6 million in total deposits as of March 31, 2012.
• Chicago, Illinois-based Second Federal Savings and Loan Association of Chicago, with about $199.1 million in total assets and $175.9 million in total deposits as of March 31, 2012.

The Acquirers

Naples, Florida-based First National Bank of the Gulf Coast has agreed to assume all the deposits and assets of The Royal Palm Bank of Florida.

Atlanta, Georgia-based Community & Southern Bank has agreed to assume all the deposits and approximately $111.5 million in assets of Georgia Trust Bank. It will also assume all the deposits and assets of First Cherokee State Bank. The FDIC and the acquirer agreed to share losses on $141.8 million of First Cherokee State Bank's assets.

Lees Summit, Missouri-based Metcalf Bank has agreed to assume all the deposits and assets of Heartland Bank. The FDIC and the acquirer agreed to share losses on $54.3 million of Heartland Bank's assets.

Hinsdale, Illinois-based Hinsdale Bank & Trust Company has agreed to assume all the deposits and approximately $14.2 million in assets of Second Federal. Hinsdale Bank & Trust Bank will pay a premium of $100,000 to assume all the deposits.

Impact on FDIC Fund

These bank failures represent another dent in the deposit insurance fund (DIF), meant for protecting customer accounts.

The FDIC insures deposits in 7,309 banks and savings associations in the country as well as promotes their safety and soundness. 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 over the last few quarters, the ongoing bank failures have kept it under pressure. However, as of March 31, 2012, the fund was in surplus for the fourth straight quarter.

Also, the balance increased to $15.3 billion as of March 31, 2012 from $11.8 billion at the end of 2011. The continued improvement in net worth of the fund is attributable to a moderate pace of bank failures and rising assessment revenue.

The failure of Second Federal is expected to be the most expensive for the FDIC at about $76.9 million. The other four banks — The Royal Palm Bank of Florida, Georgia Trust Bank, First Cherokee State Bank and Heartland Bank — will cost the FDIC about $13.5 million, $20.9 million, $36.9 million and $3.1 million, respectively.

From 2012 through 2016, bank failures are estimated to cost the FDIC about $12 billion.

Shrinking Problem Bank List

The number of banks on FDIC’s list of problem institutions saw a sharp decline for the fourth straight quarter to 772 in the January–March period from 813 in the preceding sequential period.

Increasing loan losses on commercial real estate could trigger many more bank failures in the upcoming years. However, considering the moderate pace of bank failures, the 2012 number is not expected to exceed the 2011 tally.

Consolidation to Continue

With so many bank failures, consolidation has become the industry trend. For most of the failed banks, the FDIC enters into a purchase agreement with healthy institutions.

When Washington Mutual collapsed in 2008 (the largest bank failure in the history of U.S.), it was acquired by JPMorgan Chase & Co. ( JPM - Analyst Report ) . Other major acquirers of failed institutions since 2008 include U.S. Bancorp ( USB - Analyst Report ) and BB&T Corporation ( BBT - Analyst Report ) .