U.S. Bank Failures Reach 99 In 2009

U.S. bank failures continue unabated as U.S. regulators on Friday closed down San Joaquin Bank of Bakersfield, CA. This takes the total number of failed federally insured banks to 99 in 2009, compared to 25 in 2008 and 3 in 2007.

As of September 29, San Joaquin Bank, a subsidiary of San Joaquin Bancorp, had about $775 million in assets, $631 million in deposits and 5 branches. The bank had not been included in a previous list of 89 institutions that were undercapitalized as of March 31. But its first quarter amended filing showed that there were additional loan charge-offs and a higher net loss.

As of June 30, San Joaquin Bank’s Tier 1 leverage ratio was 4.12% and the total risk-based capital ratio was 6.70%. Though the Tier 1 leverage ratio was above the minimum level of 4% considered adequately capitalized, its total risk-based capital ratio was well below the minimum level of 8%.

The failure of San Joaquin Bank represents another impact on the Federal Deposit Insurance Corporation’s (FDIC) fund for protecting customer accounts as it has been appointed receiver for the bank. The bank failure is expected to cost the deposit insurance fund an estimated $103 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 financial institution failures 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.

Ontario, California-based Citizens Business Bank, a subsidiary of CVB Financial (CVBF), will assume all of the deposits of San Joaquin Bank. So there will be no losses to any depositor.

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 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 was the largest in the 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 (USB), 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, 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.

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