Bank Failures Cross 150 for 2010

Includes: KBE, KRE, RKH
by: Zacks Investment Research

The U.S. regulators shuttered two more banks in Michigan and Pennsylvania on Friday. With the failure of these two banks, the tally has surpassed 150 this year. This brings the total number of bank failures to 151, compared to 140 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 struggling. 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 has primarily hurt banks.

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

The failed banks are:

  • Farmington Hills, Michigan-based Paramount Bank, with total assets of about $252.7 million and total deposits of about $213.6 million as of September 30, 2010.
  • Southampton, Pennsylvania-based Earthstar Bank, with about $112.6 million in total assets and $104.5 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 and 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 Paramount Bank and Earthstar Bank is expected to cost the FDIC about $90.2 million and $22.9 million, respectively.

Farmington Hills, Michigan-based Level One Bank has agreed to assume the assets and deposits of Paramount Bank. The FDIC and Level One Bank have agreed to share losses on $233.1 million of Paramount Bank's assets.

Huntingdon Valley, Pennsylvania-based Polonia Bank has agreed to assume the assets and deposits of Earthstar Bank, except certain certificates of deposit. The FDIC and Polonia Bank have agreed to share losses on $45.8 million of Earthstar 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 that feature on 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 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 more bank failures in the next few years. The FDIC expects bank failures to cost about $52 billion over the next four years.

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