When federal regulators from the Office of the Comptroller of the Currency swarmed into the United Americas Bank in Atlanta last Dec. 17, they executed a quiet but costly Friday night takeover. The bank was tapped out, with $242.3 million in assets and only $193.8 million in deposits as of Sept. 30.
The following Monday, the institution opened as a branch of State Bank & Trust Co., based in Macon, Ga. United Americas Bank was the 155th of 157 U.S. banks to fail in 2010, according to the Federal Deposit Insurance Corp. (FDIC), which was appointed receiver. The FDIC estimated the cost to its insurance fund from United Americas’ failure at $75.8 million. Last year’s bank closures were up 12% from the 140 that occurred in 2009.
“Usually it’s due to loans that have turned sour and there are excessive loan losses that deplete capital. Quite a bit of it has to do with losses from commercial real estate,” says Dean Debuck, a spokesman for the Office of the Comptroller of the currency in Washington, D.C.
The scenario has grown alarmingly familiar. When state regulators shut down the nation’s first failed bank of 2011, First Commercial Bank of Florida, in early January, it was no small operation. The nine shuttered branches reopened as part of First Southern Bank, based in Boca Raton, Fla. In the third quarter of 2010, First Commercial was already teetering with $598.5 million in assets and $529.6 million in deposits. The FDIC and First Southern Bank struck a deal to share the losses on $484.3 million of First Commercial’s assets, with the FDIC’s cost estimated at $78 million.
Fewer failures anticipated
The rate of collapse is expected to moderate this year, but predicting the failure rate of the nation’s lenders is an inexact science. “We look to see fewer bank failures than in 2010,” asserts FDIC spokesman Greg Hernandez. But he adds, “It’s too early. You don’t know how it’s going to shape up.”
He points out that for the most part, the failures occurred among smaller banks, although several behemoths have fallen. More than two-thirds of the institutions that failed in 2010 were community banks with assets of $1 billion or less.
“The string that ran through the failures mostly resulted from significant losses in commercial real estate loan portfolios as well as significant losses in acquisition, development and construction loan portfolios,” says Hernandez.
In 2008, as credit markets froze, large banks suffered residential loan losses after the housing market soured. But in 2009 and 2010, community banks took the hit as many commercial property owners tried in vain to refinance maturing loans, while new projects stalled and developers could not repay construction loans.
In 2009, the assets of failed banks totaled $169.7 billion, according to the FDIC, and in 2010, $92 billion. Although a greater number of banks failed last year, some institutions that collapsed in 2009 had significantly larger loan portfolios.
This year, banks still face strong headwinds. The number of institutions on the FDIC’s “Problem List” rose from 829 to 860 in late September 2010, the highest number in 18 years, according to the FDIC’s third-quarter 2010 banking profile. The assets of problem institutions dropped to $379.2 billion in the third quarter from $403.2 billion in the second quarter.
Still, the larger picture is encouraging. Banks’ year-over-year earnings improved for the fifth consecutive quarter in the third quarter of 2010, the FDIC reports. Quarterly net income for the 7,760 insured commercial banks and savings institutions added up to $14.5 billion — a huge increase over the $2 billion reported a year earlier.
“I would divide banks between the major players that we all know, the Wells Fargos of the world down to U.S. Bank, and everyone else. Clearly the major players have been able to hold onto their assets through the downturn,” observes Ed Padilla, CEO of Bloomington, Minn.-based mortgage banking giant NorthMarq Capital. “I would say [big] banks are quite healthy.”
And they have been highly profitable, he adds. “There hasn’t been the big commercial real estate collapse that we feared,” says Padilla. In 2008, even within the lending community the nation’s financial foundation appeared fragile. “We were all concerned that this maturity cycle was just going to wipe out commercial real estate and be a disaster for everybody. And largely, that has not happened. The special servicers haven’t had a fire sale on their defaulted $80 billion in loans. The banks have not been blowing out — with the exception that a lot of small banks have failed.”
Today, banks are increasing their lending. Third-quarter loan originations were 32% higher than in the third quarter of 2009, says Jamie Woodwell, vice president in the research and economics group at the Mortgage Bankers Association (MBA).
From the end of 2007 to the end of the third quarter of 2010, commercial and multifamily mortgage debt held by FDIC-insured banks with less than $1 billion in assets increased 7.2%, says Woodwell. Meanwhile, total loans and leases over that period declined by 7.4%
The nation’s banks have weathered rough seas, says FDIC’s Hernandez, but the worst may be over. “They’re showing resilient revenues and improving asset quality,” he notes. “It’s a slow process in the banking sector, but things are improving.”