2011 Bank Failures Start with 2 - Analyst Blog

U.S. regulators shuttered two more banks in Florida and Arizona last Friday, marking the first two of the expected high number of small bank failures in 2011. These two failures in 2011 so far compare with the total number of bank failures of 157 in 2010, 140 in 2009 and just 25 in 2008.

While the bigger banks benefited greatly from the various programs launched by the government, many smaller banks continue to struggle. Tumbling home prices, soaring loan defaults and a high unemployment rate continue to cast a shadow on such institutions. Failure of both residential and commercial real estate loans due to the credit crisis are the major culprits.

With the industry absorbing bad loans offered during the credit explosion, the banking system has been exposed to greater problems. This is increasing the possibility of bank failures even further.

The failed banks are:

• Orlando, Florida-based First Commercial Bank of Florida, with total assets of about $598.5 million and total deposits of about $529.6 million as of September 30, 2010.

• Scottsdale, Arizona-based Legacy Bank with about $150.6 million in total assets and $125.9 million in total deposits as of September 30, 2010.

These bank failures represent another blow to the Federal Deposit Insurance Corporation (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for these banks.

The FDIC insures deposits in 7,760 banks and savings associations in the country as well as promotes the safety and soundness of these institutions. When a bank collapses, the FDIC reimburses deposits of up to $250,000 per account.

Though the FDIC has managed to shore up its deposit insurance fund during the last few quarters, the outbreak of bank failures has tested its limits. As of September 30, 2010, the fund remained in the red with a deficit of $8 billion despite adding $7.2 billion during the quarter.

The failure of First Commercial Bank of Florida is expected to cost the FDIC about $78.0 million, and Legacy Bank will cost about $27.9 million.

Boca Raton, Florida-based First Southern Bank agreed to assume the assets and deposits of First Commercial Bank of Florida. Conjointly, FDIC and First Southern Bankwill share losses on $484.3 million of First Commercial Bank of Florida's assets.

St. Louis, Missouri-based Enterprise Bank & Trust has agreed to assume the assets and deposits of Legacy Bank. The FDIC and Enterprise Bank & Trusthave agreed to share losses on $119.8 million of Legacy Bank's assets.

In the third quarter of 2010, the number of banks on the FDIC's list of problem institutions grew to 860 from 829 in the previous quarter and 552 in the year-ago quarter. This is the highest since the savings and loan crisis in the early 1990s.

Banks with high exposure to the problem list are most likely to crash, though some may survive and pull out of the crisis. As of now, only less than a quarter of the banks on FDIC's problem list have actually failed. This ratio, however, is likely to change. While the list is increasing gradually, bank failures are snowballing.

Increasing loan losses on commercial real estate are expected to lead to hundreds of bank failures in the next few years. The FDIC expects bank failures to cost about $52 billion over the next three years.

The failure of Washington Mutual in 2008 was the largest in the U.S. banking history. It was acquired by JPMorgan Chase & Co. (JPM). The other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB) and BB&T Corporation (BBT).

 
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