Another One Down, Bank Failures Hit 16

U.S. regulators on Friday shuttered 1st American State Bank of Minnesota , in Hancock, pushing up U.S. bank failures to 16 so far in 2010. This compares to total number of bank failures of 140 in 2009, 25 in 2008 and only 3 in 2007.
 
While we expect economic recovery to gain momentum soon, there remain lingering concerns in the banking industry. Failure of both residential and commercial real estate loans as a result of the credit crisis was the primary reason that wounded banks. As the industry tolerates bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures. 

1st American State Bank of Minnesota had total assets of about $18.2 million and total deposits of about $16.3 million as of Dec 31, 2009.
 
The recent failure represents another impact on the Federal Deposit Insurance Corporation’s (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for the bank. The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. The outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund. However, the FDIC has access to the Treasury Department’s credit line of up to $500 billion.
 
The failure of 1st American State Bank of Minnesota is expected to cost the federal deposit insurance fund (DIF) about $3.1 million.
 
Minnesota-based Community Development Bank, FSB will assume all of the deposits and assets of 1st American State Bank of Minnesota. The FDIC entered into a loss sharing agreement with Community Development Bank, FSB on $11.7 million of 1st American’s assets.
 
Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates bank failures to cost about $100 billion over the next three years. The failure of Washington Mutual in 2008 was the largest in U.S. banking history. It was acquired by JP Morgan Chase (JPM). The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (FITB), U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks (STI), PNC Financial (PNC), BB&T Corporation (BBT) and Regions Financial (RF). Though current signals indicate that the economy may stabilize, we expect loan losses on the commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.