Bank Failures by the NumbersA Look at Where and Why Institutions Are Failing in 2009
In all of 2008, 40 banking institutions failed - 25 banks and 15 credit unions.
So far in 2009, 77 institutions have either been closed or taken over by regulators, including 7 banks just this past weekend. The Federal Deposit Insurance Corporation (FDIC)'s troubled bank list, now at 305, has more than doubled from last year's total, when 117 banks were listed.
Which begs the questions: Where and why are all these institutions failing, and how many more closures will we see by year's end?
Failures by the Numbers
Analysis of this year's bank/credit union failures (see interactive map) reveals some interesting facts:
- Total Failed Banks: 69
- Total Failed Credit Unions: 8
- Top States For Failures:
- Georgia - 16 banks
- Illinois - 12 banks
- California - 8 banks, 3 credit unions
- Florida - 3 banks
- Largest Failure BankUnited, Coral Gables, FL., $12.8 billion in assets,
- Total Cost to FDIC Insurance Fund: $13.553 billion
All of the current failures are due to under capitalization or poor loan portfolio performance. The number of institutions closing due to the economic conditions, mortgage and other loan defaults is growing, especially in some of the areas hardest hit in the current recession, including Nevada, Arizona, Florida, California, Utah and Georgia, all of which had the highest foreclosure rates in the first half of 2009, according to RealtyTrac, a real estate research firm.
The top areas where institutions are failing (beyond those listed above) include Oregon, Nevada, Kansas, Colorado, North Carolina, Utah and Washington, all with two each. A total of 24 states have experienced bank and credit union failures, including Missouri, Michigan, Idaho, New Jersey, New York, Minnesota, Texas, Wyoming, South Dakota, Maryland and Nebraska.
Of the 8 credit unions that have failed in 2009, California has 3, and West Virginia, Kansas, Florida, Michigan and Alabama each host one. The two corporate credit unions that the NCUA assumed control of on March 20, U.S. Central FCU in Lenexa, KS and Western Corporate (WesCorp) FCU in San Dimas, CA had combined assets of $57 billion. The National Credit Union Administration (NCUA) is operating both under conservatorship status.
The NCUA did not report any impact to its insurance funds for the 8 credit unions that were either closed or taken over by so far in 2009. The largest cost to the FDIC insurance fund was the Bank United closing in May with an estimated cost of $4.9 billion. The second largest charge to the FDIC's DIF was the Silverton Bank, Atlanta, GA closing, which cost an estimated $1.3 billion.
The second largest bank to fail was the Silverton Bank, N.A., of Atlanta, GA with $4.1 billion in assets. Six of the next largest bank failures occurred in California, but the third largest bank to fail was New Frontier in Greeley, CO with $2 billion in deposits.
Studies of US banks show they have been charging off soured commercial mortgages at the fastest pace in nearly 20 years. The losses, if kept up at the same rate, could reach $30 billion by year's end. Losses by regional banks on their commercial real-estate loans will be among the most watched details, as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate.
The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the U.S.'s gross domestic product. But the recession and scarce credit are pushing more commercial developers and investors into default.
At the same time, property values continue to decline, and banks are required to record a loss on any troubled real-estate loans where the appraised value falls below the amount owed.
Christie Sciacca, a former FDIC regulator, recalls current FDIC Chairman Sheila Bair saying at one point earlier this year, "The crisis is over, and now it is just a matter of clean up." From Sciacca's perspective, "There is no abating of the problems [banking institutions] are facing." The crisis of liquidity and confidence may be over, but the clean up (read: more failures) will continue. Sciacca is now a director at the Secura Group, a division of LECG. "It would not surprise me if there were another 50 banks that fail this year," Sciacca says. "In fact, I would be very surprised if there were not."
To put the situation in historic perspective, though, Sciacca recalls back in the 1980s, during the savings & loan crisis, when there were 4 to 6 banks failing every week.
Locally, when institutions fail, there is impact on the community. "But systemically, the smaller failures won't have a big impact," Sciacca says. "I think there are still some decent sized institutions (over $10 billion) that may impact the system, but smaller banks -- the psychological impact is only at the local level."
In states and regions where there were big booms in real estate, construction and expansion in the last few years, that's where the pain will be felt the most, he says. "We're not going to see a failure due to [consumer] confidence," Sciacca adds. "I don't see that happening again. The public is not going to be spooked again."
The New Regulatory Order
Walter Mix, former commissioner of the California Department of Financial Institutions (DFI) and now a manager in risk management at LECG, says there will be a new emphasis of regulatory order because of the financial failures and the recession.
"We're starting to see many more regulatory orders presented to banks. They deal with everything from asset quality issues to management reviews," says Mix, who closed 26 banks on his own watch as the California DFI commissioner. The big underlying issue in this is the amount of deterioration happening still, he notes, "Anybody who has land loans or asset loans, we're starting to see more deterioration."
Mix sees the west coast as particularly stressed, "To put it in context, we have problem institutions from Arizona all the way up to Seattle." In California, recent reports show that the economy is not expected to improve anytime soon -- income and revenue will be down through 2010, and further deterioration and foreclosures are expected.
There is some good news though; as Mix thinks "The preponderance of the industry is in pretty good shape. But there is a significant minority of 300 banks out there facing problems in a down economy. They're facing very difficult times. The majority of these banks in trouble are community banks, so the system itself is stable, but the smaller banks with concentrations in real estate, in commercial real estate, are in trouble."
It will be up to state and federal regulators to determine what to do with these troubled institutions, he adds.
Actions for Institutions "On Edge"
For banking institutions that know they are at risk, Mix prescribes a series of actions that include:
- Take an independent look at the asset quality and franchise value of the institution.
- Take a close look at liquidity. "It's better to take the medicine now, rather than in a few months. Strong banks are beginning to sell assets which will have a downstream effect on pricing later on."
- If you're holding onto some bad mortgages, better to try to offload them now, "Because in a few months they will be in a tougher position when they try to sell these troubled assets.
- Take action on troubled credits now, rather than later.