Bank Failures Continue, Tally At 87

Zacks Investment Research
updated | Zacks.com

Bank failures continue with no end in sight. U.S. regulators closed down two more banks in Nebraska and Utah last Friday. This brings the total number of U.S. bank failures to 87 so far in 2011, following 157 in 2010, 140 in 2009 and 25 in 2008.

While the financials of a few large banks have been stabilizing on the back of an economic recovery, the industry is still on shaky ground. Nagging issues like rock-bottom home prices along with still-high loan defaults and unemployment levels continue to trouble such institutions.

Lingering effects of the financial crisis continue to weigh on many banks. The need to absorb bad loans offered during the credit explosion made these banks susceptible to severe problems.

Further, the repeated risk-taking of bailed out banks ultimately resulted in further threats to the system. Risky loans and market uncertainty aggravated the risk of bank failures even further.

The failed banks are:

  • Omaha, Nebraska-based Mid City Bank, Inc., with total assets of about $106.1 million and total deposits of about $105.5 million as of September 30, 2011.
  • Saint George, Utah-based SunFirst Bank, with about $198.1 million in total assets and $169.1 million in total deposits as of September 30, 2011.

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

The Federal Deposit Insurance Corporation (FDIC) insures deposits in 7,513 banks and savings associations in the country as well as promotes the safety and soundness of these institutions. When a bank fails, the agency reimburses customer deposits of up to $250,000 per account.

Though the FDIC has managed to increase its deposit insurance fund over the last few quarters, the ongoing bank failures have kept it under pressure. However, as of June 30, 2011, the fund recovered to $3.9 billion, substantially better than the deficit of $1.0 billion in the prior quarter. The positive fund balance seen for the first time in two years was aided by a moderate pace of bank failures and assessment revenue.

The failure of Mid City Bank, Inc.is expected to deal a blow of about $12.7 millionto the FDIC, while SunFirst Bank will cost about $49.7 million.

Purdum, Nebraska-based Purdum State Bank has agreed to assume all the deposits and assets of Mid City Bank, Inc.

Logan, Utah-based Cache Valley Bank has agreed to assume all the deposits and $177.3 million of assets of SunFirst Bank. The FDIC and Cache Valley Bankagreed to share losses on $128.9 million of SunFirst Bank’s assets.

The number of banks on FDIC’s list of problem institutions fell sharply to 865 in the second quarter from 888 in the preceding quarter. This represents the first sequential drop since 2006.

Increasing loan losses on commercial real estate could trigger hundreds of bank failures in the upcoming years. However, considering the course of failure so far this year, the FDIC does not expect the number of bank failures in 2011 to exceed the 2010 tally. From 2011 through 2015 bank failures are estimated to cost the FDIC about $19 billion.

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

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

 
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