Bank Failures Rise to 4 - Analyst Blog

Regulators shut down 3 more banks in Illinois, Minnesota and Utah pushing up U.S. bank failures to 4 so far this year. 

U.S. regulators on Friday shuttered three more banks in Illinois, Minnesota and Utah as the recession continues to take its toll on small banks. This brings the total number of bank failures to 4 so far in 2010, compared to 140 in 2009, 25 in 2008 and 3 in 2007. 

While the state of the economy is showing signs of recovery, there are lingering concerns about the banking industry. As the industry tolerates bad loans that were made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures. 

The failed banks were – Kaysville, Utah-based Barnes Banking Co. with $827.8 million in assets and $786.5 million in deposits, St. Stephen, Minnesota-based Stephen State Bank with $24.7 million in assets and $23.4 million in deposits and Antioch, Illinois-based Town Community Bank and Trust with $69.6 million in assets and $67.4 million in deposits. 

These bank failures will deal another blow to the Federal Deposit Insurance Corporation’s (FDIC) fund for protecting customer accounts, as it has been appointed receiver for these banks. 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 bank failures has significantly stretched the regulator’s deposit insurance fund. However, the FDIC has access to the Treasury Department credit line of up to $500 billion. 

The failure of Barnes Banking is expected to cost the deposit insurance fund about $271.3 million, St. Stephen State Bank is expected to cost about $7.2 million and the Town Community is estimated to cost about $17.8 million. 

First State Bank of St. Joseph, Minnesota will assume the assets and deposits of St. Stephen State Bank. First State and the FDIC are going to share the losses on $20.4 million of St. Stephen's loans and other assets. First American Bank, in Elk Grove Village, Illinois will assume the deposits and $67.6 million of Town Community Bank and Trust. However, no other bank agreed to assume the insured deposits of Barnes Banking. Thus, the FDIC has set up a temporary bridge bank, which will operate until Feb 12 to allow customers to transfer their accounts to other banks. 

Bank failures started this year with the failure of Bellingham, Washington-based Horizon Bank. Washington Federal Inc. (WFSL) will assume all of the deposits of Horizon Bank. 

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 U.S. banking 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). 

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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