USB US Bancorp

Following a week’s lull, U.S. regulators were back in action last week, shuttering three more banks.

Out of these three banks, two were based in Colorado and one in Illinois. These closures have pushed the number of failed U.S. banks to 51 so far in 2011.

Looking back, there were 157 bank failures in 2010, 140 in 2009 and 25 in 2008.

While the financials of bigger banks have been stabilizing on the back of an economic recovery, many smaller banks are still struggling to survive. Nagging issues like rock-bottom home prices along with still-high loan defaults and unemployment levels continue to trouble such institutions.

Lingering effects of the financial crisis continue to weigh on many banks. It becomes a prerequisite for such banks to absorb bad loans offered during the credit explosion, making them susceptible to severe problems. The uncertain environment is aggravating the risk of bank failures even further.

The failed banks are:

• Chicago, Illinois-based First Chicago Bank & Trust, with total assets of about $959.3 million and total deposits of about $887.5 million as of March 31, 2011.
• Castle Rock, Colorado-based Colorado Capital Bank, with about $717.5 million in total assets and $672.8 million in total deposits as of March 31, 2011.
• Windsor, Colorado-based Signature Bank, with about $66.7 million in total assets and $64.5 million in total deposits as of March 31, 2011.

These bank failures represent another jolt to the deposit insurance fund (DIF), meant for protecting customer accounts, as it has been appointed receiver for the banks.

The Federal Deposit Insurance Corporation (FDIC) insures deposits in 7,575 banks and savings associations in the country as well as promotes the safety and soundness of these institutions. When a bank fails, the agency reimburses customer 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 ongoing bank failures have kept it under pressure. As of March 31, 2011, the fund remained in the red with a deficit of $1.0 billion, though substantially better than the deficit of $7.4 billion in the prior quarter.

As the deficit significantly narrowed during the quarter and the fund is almost close to break-even, the agency expects to swing back to profits in the next quarter itself.

The failure of First Chicago Bank & Trust is expected to deal a blow of about $284.3 million to the FDIC, while Colorado Capital Bank and Signature Bank will cost about $283.8 million and $22.3 million, respectively.

Northbrook, Illinois-based Northbrook Bank & Trust Company has agreed to assume the entire deposits and assets of First Chicago Bank & Trust. The FDIC and Northbrook Bank & Trust Company have agreed to share losses on $699.8 million of First Chicago Bank & Trust's assets.

Raleigh, North Carolina-based First-Citizens Bank & Trust Company has agreed to assume the entire deposits and assets of Colorado Capital Bank. The FDIC and First-Citizens Bank & Trust Company have agreed to share losses on $580.0 million of Colorado Capital Bank's assets.

Julesburg, Colorado-based Points West Community Bank has agreed to assume all of the deposits and assets of Signature Bank.

The number of banks on FDIC’s list of problem institutions saw a marginal increase to 888 in the first quarter from 884 in the previous. This is the highest number since 928 problem institutions way back in March 31, 1993, due to the then savings and loan crisis.

Increasing loan losses on commercial real estate could trigger hundreds of bank failures in the coming years. Going by the current rate of bank insolvencies, the DIF is likely to feel a $52 billion dent by 2014. However, considering the failure track record so far this year, the FDIC does not expect the number of bank failures in 2011 to surpass that of 2010.

With so many bank failures, consolidation has become the industry fashion. For almost all of the failed banks, the FDIC enters into a purchase agreement with healthy institutions.

When Washington Mutual collapsed in 2008 (branded as the largest bank failure in the U.S. 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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