(JPM) U.S. Bank Failures in 2011 Reach 90

U.S. regulators continue to shutter banks. Last Friday saw the closing down of one bank in Iowa and another in Louisiana. The twin closure takes the total number of U.S. bank failures to 90 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 on shaky ground. Nagging issues like depressed home prices along with still-high loan defaults and unemployment levels continue to trouble such institutions.

Lingering economic uncertainly and its effects also continue to weigh on many banks. The need to absorb bad loans offered during the credit explosion has made these banks susceptible to severe problems.

Further, the repeated risk-taking of bailed-out banks are further threats to the system. Risky loans and market uncertainty aggravated the risk of bank failures even further.

The failed banks are:

  • Johnston, Iowa-based Polk County Bank, with total assets of about $91.6 million and total deposits of about $82.0 million as of September 30, 2011.
  • Lacombe, Louisiana-based Central Progressive Bank, with about $383.1 million in total assets and $347.7 million in total deposits as of September 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 $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 Polk County Bank is expected to deal a blow of about $12.0 million to the FDIC, while Central Progressive Bank will cost about $58.1 million.

Grinnell, Iowa-based Grinnell State Bank has agreed to assume all the deposits and assets of Polk County Bank.

New Orleans, Louisiana-based First NBC Bank has agreed to assume all the deposits and $354.4 million of assets of Central Progressive Bank.

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 course of failure so far this year, the FDIC does not expect the number of bank failures in 2011 to exceed the 2010 tally. From 2011 through 2015 bank failures are estimated to cost the FDIC about $19 billion.

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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