Horizon Bank Fails, Tally Hits 119 - Analyst Blog

Following a lull in bank failures for the last week of August and the first week of September, U.S. regulators last Friday shuttered Bradenton, Florida-based Horizon Bank, pushing up U.S. bank failures to 119 so far in 2010. This compares with a total number of 140 bank failures in 2009, 25 in 2008 and just 3 in 2007.

 

While the bigger banks benefited greatly from the various programs launched by the government, many smaller banks are still weak. Tumbling home prices, soaring loan defaults and a high unemployment rate continue to take their toll on such institutions. Failure of both residential and commercial real estate loans as a result of the credit crisis has primarily hurt banks.



 

With the industry absorbing bad loans made during the credit explosion, the trouble in the banking system has worsened, increasing the possibility of more bank failures. Economic threats emanating from the European debt crisis, the impact of tighter regulations of the new financial reform law and weak economic growth data further add to the concerns.

 

Horizon Bank had total assets of about $187.8 million and total deposits of about $164.6 million as of June 30.

 

This recent failure represents another blow to the Federal Deposit Insurance Corporation (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for the bank. 


 

The FDIC insures deposits in 7,830 banks and savings associations in the country and promotes the safety and soundness of these institutions. When a bank fails, the FDIC reimburses customers for deposits of up to $250,000 per account.

 

Though the FDIC managed to shore up its deposit insurance fund during the last couple of quarters, the outbreak of bank failures has tested its limits. As of June 30, 2010, the fund remained in the red with a deficit of $15.2 billion.

 

The failed Horizon Bank is expected to cost the FDIC about $58.9 million.
 


 

Little Rock, Arkansas-based Bank of the Ozarks has assumed all of the deposits and assets of the failed bank. Bank of the Ozarks did not pay the FDIC a premium for the deposits of Horizon Bank. Additionally, the FDIC and Bank of the Ozarks have agreed to share losses on $150.4 million of Horizon Bank's assets.

 

In the second quarter of 2010, the number of banks on the FDIC's list of problem institutions grew to 829 from 775 in the previous quarter and 416 in the year-ago quarter. This is the highest since the savings and loan crisis in the early 1990s.

 

Banks that feature on the problem list are most likely to fail, though some may still scrape through. As of now, only about 13% of banks on the FDIC's problem list have actually failed. What is interesting is that this percentage is likely to change; though the problem list is growing at a slower pace, bank failures are accelerating.
 


 

Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC expects bank failures to cost about $60 billion over the next four years.
 


 

The failure of Washington Mutual in 2008 was the largest in U.S. banking history. It was acquired by JPMorgan Chase & Co. (JPM). The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (FITB), U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks Inc. (STI), PNC Financial Services Group Inc. (PNC), BB&T Corporation (BBT) and Regions Financial Corp. (RF).