Bank Failures Continue to Plague Financial Sector

by Burke Speaker | September 2, 2010 4:38 pm

Bank Failures Continue to Plague Financial Sector

While the U.S. may appear to have steadied itself somewhat from the mortgage crisis, the wake of banking destruction shows little sign of abating, with more than 800 banks – mostly smaller lending institutions – now facing serious threats and risk of failure.

The government’s newest list of troubled banks shows 829 at risk, rising from 90 banks in 2008 and 416 last year. The list was released Tuesday by the Federal Deposit Insurance Corp. (FDIC) in its quarterly report card of the nation’s banking system.

The number of banks at risk rose by 53, which marks the smallest rise since the first quarter of 2009. In 2010, 118 banks have so far failed (45 closings happened in the last quarter). The list is at its highest number since 1993, although the pace of growth continued to slow, a minor consolation to the nation’s 7,830 banks.

While relatively few of the lenders on the list actually do fail, banks that end up on the government’s watch list are considered high risk and perhaps a target of acquisition. On average, just 13% of banks on the FDIC’s list have been seized and shut down by federal regulators.

Friday is the day of the week when the FDIC closes banks – which rush to fix them up over the weekend and sell off assets once in receivership. No banks failed last Friday, the first time since the weekend of July 4 that Wall Street hasn’t watched weekly closures occur. This news could just come at a good time, since the FDIC tends not to avoid closing banks on a holiday weekend – reopening a day late on Tuesday would be seen as adding to depositor anxieties, which the agency tries hard to minimize .

This means that it’s possible this could be the first two-week stretch without a bank closing since it was marked on the “holiday Friday” of Jan. 1, 2010.

It’s debatable as to whether this is a good sign, and by no means are we out of the woods yet. Bank failures could be slowing, but the year isn’t over. With the economy still suffering, the failure rate in 2010 could trump the 179 failures recorded in 1992, when the savings and loan crisis ended.

All in all, banks and other FDIC-insured institutions earned more than $21 billion in the last quarter – the highest in three years and a reversal of last year’s more than $4 billion loss. Big banks, clearly, are recapitalized, but it’s been a brutal year for small banks, and the numbers aren’t looking pretty.

Seacoast Banking Corp. of Florida (NASDAQ: SBCF[1]) stock is down -26.83% year-to-date against the Dow and NASDAQ. First Bancorp Inc. (NASDAQ: FNLC[2]) net income earnings in the second quarter, compared to the same period in 2009, were down $602,000 (-16%) and earnings per common share were down $0.06 (- 17.1%). Net income was $5.8 million, down $1.6 million (-22%) from the same period last year. Bancorp South Inc. (NYSE: BXS[3]) lost $2.10 (-14.32%) during the past month and is trading below its 20-day, 50-day and 200-day moving averages. It’s also down a whopping -43% year-to-date against the Dow and S&P. Wilshire Bancorp (NASDAQ: WIBC[4]) has seen its stock fall -40% since May, after rough year.

Most of the largest banks have recovered with help from the federal “too big to fail” bailout, with record-low borrowing rates from the Fed and raking in big profits from banking-service fees. And while they were given the money for the greater good of the economy, banks kept most – OK, pretty much all – for themselves, cutting off lending and instead using the money to steady their ships.

Not that people are looking for loans right now. Smaller and regional banks, on the flip side, rely heavily on loans for commercial property and other development projects. Because businesses have shut down at a rapid pace during the recession, loans and payments are drying up. And FDIC chairwoman Sheila Bair has already stated in the past that lending won’t increase until consumer confidence, and then business, increases. Talk about your Catch-22.

All of the 118 banks that have failed this year have been smaller or regional banks. Last year 140 banks shuttered, and most of them were small institutions. And many are still in a downward spiral from the mortgage and foreclosure problems, and looking for a way out of bad debt or loan loss reserves.

Consider the following: Pinnancle Financial Partners (NASDAQ: PNFP[5]) may be on the way to being bought out, as its earnings and stock reports floundered again in its last report. The bank lost $27.8 million in the second quarter. PNFP is down year-to-date nearly -38% against the Dow and NASDAQ – saying it hopes to continue to shed its bad loans to rebound. Other smaller banks are scrambling to avoid such a fate. With poorly performing loans, Wilmington Trust Corporation (NYSE: WL[6]) recently hired financial services executives from outside the bank and restructuring a key watchdog division, all in the name of reducing risk in the Delaware bank’s lending portfolio.

Still, with the KBW Bank Index down -55.86% from three years ago, the FDIC positively notes that two out of three banks reported higher profits compared to last year, mostly as fewer funds are being set aside to cover bad loans. Banks also reduced their quarterly loan-loss provisions to $40.3 billion, a drop of more than 40% from 2009.

While FDIC chief Bair said she expects this year’s bank failures to exceed last year’s closures, the total assets amount from 2010 failures will be lower. Another good sign that has helped the KBW Bank Index actually rise for the first time since 2007, up +6.72% year-to-date. The FDIC said it expects bank failures in the U.S. to cost the insurance fund around $100 billion through the year 2013. Banks are now mandated prepay about $45 billion in premiums to help replenish that fund.

With stocks this low, analysts point to Texas, Florida and even California as the small-bank rebound hot-spots for on-the-prowl investors. But in an economy still sputtering about, small banks are at the mercy of consumers and businesses that haven’t shown any reason to give them much hope.

As of this writing, Burke Speaker did not own a position in any of the stocks named here.

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Endnotes:
  1. SBCF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBCF
  2. FNLC: http://studio-5.financialcontent.com/investplace/quote?Symbol=FNLC
  3. BXS: http://studio-5.financialcontent.com/investplace/quote?Symbol=BXS
  4. WIBC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WIBC
  5. PNFP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PNFP
  6. WL: http://studio-5.financialcontent.com/investplace/quote?Symbol=WL
  7. Click here to get started now.: https://order.investorplace.com/index.jsp?sid=AD4258

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