The First Two Bank Failures of 2010

Jan.11.10 | About: Washington Federal, (WAFD)

U.S. regulators on Friday shuttered Horizon Bank of Bellingham, Washington, making it the first of the expected high number of small bank failures in 2010. Also, in California, the Bakersfield-based Kern Central Credit Union was seized by the National Credit Union Administration (NCUA). These two failures in 2010 so far, compare with the total number of bank failures of 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.

As of September 30, 2009, Horizon Bank had total assets of approximately $1.3 billion and total deposits of about $1.1 billion.

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.

The failure of Horizon Bank is expected to cost the FDIC's insurance fund a total of $539.1 million.

The FDIC has entered into a purchase and assumption agreement with Washington Federal Inc. (WFSL) to assume all of the deposits of Horizon Bank. The NCUA has signed an agreement with Self-Help Federal Credit Union of Durham, North Carolina, to assume the assets and liabilities of Kern Central Credit Union.

In the third quarter of 2009, the number of banks on the FDIC's list of problem institutions grew to 552 from 416 in the second quarter. This is the highest since 1993. 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 (NYSE:JPM). The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (FITB - Analyst Report), U.S. Bancorp (NYSE:USB), Zions Bancorp (NASDAQ:ZION), SunTrust Banks (NYSE:STI), PNC Financial (NYSE:PNC), BB&T Corporation (NYSE:BBT) and Regions Financial (NYSE: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.