Bank Failures Inch Higher - Analyst Blog

Regulators shut down 6 more banks including Cleveland, Ohio-based AmTrust Bank, the 4th largest this year; pushing up U.S. bank failures to 130 so far this year. Bank failures continue unabated as U.S. regulators on Friday shuttered six more banks, including AmTrust Bank of Cleveland, Ohio. The shutdown of AmTrust Bank is the fourth-largest U.S. bank failure this year. 

This takes the total number of bank failures to 130, compared to 25 in 2008 and 3 in 2007. While the state of the economy is showing signs of recovery, there are lingering concerns related to the banking industry. As the industry has to tolerate 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. 

AmTrust had assets of $12 billion and deposits of $8 billion. In addition to branches in Ohio, the bank had branches in Florida and the Phoenix area. Due to concerns on significantly low reserves against losses, the federal Office of Thrift Supervision put restrictions on AmTrust a year ago. 

The five other banks were -- The Buckhead Community Bank of Atlanta, Georgia with total assets of $874.0 million and total deposits of approximately $838.0 million, First Security National Bank of Norcross, Georgia with total assets of $128.0 million and total deposits of approximately $123.0 million, The Tattnall Bank of Reidsville, Georgia with total assets of $49.6 million and total deposits of approximately $47.3 million, Benchmark Bank of Aurora, Illinois with total assets of $170.0 million and total deposits of approximately $181.0 million and Greater Atlantic Bank of Reston, Virginia with total assets of $203.0 million and total deposits of approximately $179.0 million. 

These bank failures represent another sizable impact on the Federal Deposit Insurance Corporation’s (FDIC) fund for protecting customer accounts, as it has been appointed receiver for these banks. The failure of AmTrust Bank is expected to cost the deposit insurance fund about $2.0 billion, The Buckhead Community Bank is expected to cost about $241.4 million, First Security National Bank is expected to cost about $30.1 million, The Tattnall Bank is expected to cost about $13.9 million, Benchmark Bank is expected to cost about $64.0 million and Greater Atlantic Bank is expected to cost about $35 million. 

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. New York Community Bank, based in Westbury, New York, agreed to assume the deposits of AmTrust Bank and about $9 billion of its assets. 

State Bank and Trust Company, Macon, Georgia, will assume all of the deposits of The Buckhead Community Bank and First Security National Bank. HeritageBank of the South, Albany, Georgia, will assume all of the deposits of The Tattnall Bank; MB Financial Bank, National Association, Chicago Illinois, will assume all of the deposits of Benchmark Bank and Sonabank, McLean, Virginia, will assume all of the deposits of Greater Atlantic Bank. 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 four years. In order to replenish the depleting fund, the FDIC board recently mandated the U.S. banks to pay fees for three years in advance. 

Also, the regulators are considering requesting the healthy banks to bail out the government as soon as it is necessary to refill the deposit insurance fund. The FDIC also has access to the Treasury Department credit line of up to $500 billion. 

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

The failed banks are victims of recession and rising loan losses. As a result of the ongoing market turmoil, these institutions experienced massive capital erosion stemming from losses due to a significant exposure to collateralized mortgage obligations, commercial real estate loans and other commercial and industrial loans. 

All these factors were responsible for a drag on profitability and write-downs. According to the FDIC, banks set aside $62.5 billion to cover deteriorating loans during the third quarter, down 7.1% from the prior quarter. 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.
Read the full analyst report on "JPM"
Read the full analyst report on "FITB"
Read the full analyst report on "USB"
Read the full analyst report on "ZION"
Read the full analyst report on "STI"
Read the full analyst report on "PNC"
Read the full analyst report on "BBT"
Read the full analyst report on "RF"
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