(JPM) U.S. FDIC Announces Two Bank Failures – Takes Count to 73 in 2011

After a week’s pause, U.S. regulators were back in action. The sector saw a couple of banks topple in Virginia and California last week. This brings the total number of U.S. bank failures to 73 so far in 2011, following 157 in 2010, 140 in 2009 and 25 in 2008.

While the financials of a few large banks have been stabilizing on the back of an economic recovery, the industry is 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. The obligation to absorb bad loans offered during the credit explosion made these banks susceptible to severe problems.

Further, according to a University of Michigan study released earlier this month, the U.S. banks that were sheltered by government bailout during the height of financial crisis took more credit risk afterward. It’s obvious that these banks had taken such a risky plunge to get higher and quicker returns to brush off the bailout burden at the earliest.

But this repeated risk-taking ultimate resulted in further threats to the system. Ultimately, risky loans and market uncertainty aggravated the risk of bank failures even further.

The failed banks are:

  • Norfolk, Virginia-based Bank of the Commonwealth, with total assets of about $985.1 million and total deposits of about $901.8 million as of June 30, 2011.
  • Nevada City, California-based Citizens Bank of Northern California, with about $288.8 million in total assets and $253.1 million in total deposits as of June 30, 2011.

These bank failures represent another jolt to the deposit insurance fund (DIF), meant for protecting customer accounts.

The Federal Deposit Insurance Corporation (FDIC) insures deposits in 7,513 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 increase its deposit insurance fund over the last few quarters, the ongoing bank failures have kept it under pressure. However, as of June 30, 2011, the fund recovered to post a surplus of $3.9 billion, substantially better than the deficit of $1.0 billion in the prior quarter. The positive fund balance seen for the first time in two years was aided by a moderate pace of bank failures and assessment revenue.

The failure of Bank of the Commonweal this expected to deal a blow of about $268.3 million to the FDIC, while Citizens Bank of Northern California will cost about $37.2 million.

Mount Olive, North Carolina-based Southern Bank and Trust Company has agreed to assume all of the deposits and $924.3 million in assets of Bank of the Commonwealth. The FDIC and Southern Bank and Trust Company agreed to share losses on $798.2 million of Bank of the Commonwealth’s assets.

Chico, California-based Tri Counties Bank has agreed to assume all of the assets and deposits of Citizens Bank of Northern California.

The number of banks on FDIC’s list of problem institutions fell sharply to 865 in the second quarter from 888 in the preceding quarter. This represents the first sequential drop since 2006.

Increasing loan losses on commercial real estate could trigger hundreds of bank failures in the upcoming years. However, considering the failure track so far this year, the FDIC does not expect the number of bank failures in 2011 to exceed the 2010 tally.

With so many bank failures, consolidation has become the industry fashion. For almost all 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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