83rd Bank Failure for 2010 - What's the Economic Impact?

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

U.S. regulators on Friday shuttered Reno, Nevada-based Nevada Security Bank, pushing up U.S. bank failures to 83 so far in 2010. This compares with a total number of 140 bank failures in 2009, 25 in 2008 and only 3 in 2007.

Although the economy is showing signs of a gradual recovery with the stabilization of large financial institutions, tumbling home prices, soaring loan defaults and a high unemployment rate continue to impact small banks.

While we expect the overall economic recovery to gain momentum soon, lingering concerns remain in the banking industry. Failure of both residential and commercial real estate loans as a result of the credit crisis has hurt banks. As the industry absorbs bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures.

Nevada Security Bank had total assets of about $480.3 million and total deposits of about $479.8 million. The recent failure represents another blow to the Federal Deposit Insurance Corporation’s (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for the bank.

When a bank fails, the FDIC reimburses customers for their 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 about $66 billion in cash and securities available in reserve to cover losses arising from bank failures. Also, the FDIC has access to the Treasury Department’s credit line of up to $500 billion. The failure of Nevada Security Bank is expected to cost the federal deposit insurance fund (DIF) about $80.9 million.

Roseburg, Oregon-based Umpqua Bank will assume all of the deposits and assets of Nevada Security Bank. The FDIC entered into a loss sharing agreement with Umpqua Bank for $368.2 million of Nevada Security Bank’s loans and other assets.

In the first quarter of 2010, the number of banks on the FDIC's list of problem institutions grew to 775 from 702 in the fourth quarter of 2009. This is the highest since the savings and loan crisis in the early 1990s.

Following the worst part of the economic downturn, the banking industry’s profits soared during the first quarter of 2010. However, this was primarily led by the big banks, while small banks remained strained by deteriorating credit conditions.

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 the U.S. banking history. WaMu was acquired by JPMorgan Chase (NYSE:JPM). The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (NASDAQ:FITB), 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). We expect loan losses on the commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.