Bank Failures Reach 23

U.S.regulators on Friday shuttered St. Charles, Illinois-based Valley Community Bank, pushing up the number of failed U.S. banks to 23 so far in 2011. This was preceded by 157 bank failures in 2010, 140 in 2009 and 25 in 2008.

While the lifesaving programs launched by the government worked in favor of the bigger banks, many smaller banks are still struggling to survive. Relentlessly plunging home prices, lofty loan defaults and a still high unemployment rate continue to cloud such institutions.

With the industry absorbing bad loans offered during the credit explosion, the banking system is vulnerable to some severe problems. This is aggravating the risk of bank failures even further.

Valley Community Bank had total assets of about $123.8 million and total deposits of about $124.2 million as of December 31, 2010.

This bank failure represents another jolt to the deposit insurance fund (DIF) meant for protecting customer accounts, as it has been appointed receiver for the bank. Valley Community Bank is expected to cost DIF about $3.1 million.

The Federal Deposit Insurance Corporation (FDIC) insures deposits in 7,757 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 customers deposits of up to $250,000 per account.

Though the FDIC has managed to shore up its DIF during the last few quarters, the outbreak of bank failures has tested its limits. As of December 31, 2010, the fund remained in the red with a deficit of $7.4 billion, slightly better than the deficit of $8.0 billion in the prior quarter. The agency expects the fund to be in the black later this year.

Mendota, Illinois-based First State Bank has agreed to assume all the assets and deposits of Valley Community Bank.

The number of banks on FDIC’s list of problem institutions grew to 884 in the fourth quarter of 2010 from 860 in the previous quarter. This is the highest number since the savings and loan crisis in the early 1990s. Now, the problem banks represent about 11.4% of the total number of institutions covered by the FDIC.

Increasing loan losses on commercial real estate are expected to result in hundreds of bank failures in the forthcoming years. Going by the current rate of bank insolvencies, the DIF is likely to feel a $100 billion pinch by 2013.

While the lists of problem and failed banks are stretching, fourth quarter consolidated profit from the FDIC-insured banks reached the second highest level since mid 2007. The consolidated profit of the FDIC-insured banks came in at $21.7 billion during the quarter, significantly better than the loss of $1.8 billion incurred a year earlier.

With so many bank failures, consolidation has become the industry fashion. The failure of Washington Mutual in 2008 was the largest in the U.S. banking 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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