Last Friday, U.S. regulators shuttered Olathe, Kansas-based First National Bank of Olathe, taking the number of failed banks thus far in 2011 to 64. This follows 157 bank failures in 2010, 140 in 2009 and 25 in 2008.
While the financials of bigger banks have been stabilizing on the back of an economic recovery, many smaller banks are still struggling to survive. Nagging issues like rock-bottom home prices along with still-high loan defaults and unemployment levels continue to trouble such institutions.
Lingering effects of the financial crisis continue to weigh on many banks. It becomes a prerequisite for such banks to absorb bad loans offered during the credit explosion, making them susceptible to severe problems. The uncertain environment is aggravating the risk of bank failures.
First National Bank of Olathe had total assets of about $538.1 million and total deposits of about $524.3 million as of June 30, 2011.
This failure represents another blow to deposit insurance fund (DIF), meant for protecting customer accounts.
The Federal Deposit Insurance Corporation (FDIC) insures deposits in 7,575 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 customer deposits of up to $250,000 per account.
Though the FDIC has managed to shore up its deposit insurance fund during the last few quarters, the ongoing bank failures have kept it under pressure. As of March 31, 2011, the fund remained in the red with a deficit of $1.0 billion, which was, however, substantially better than the deficit of $7.4 billion in the prior quarter.
The failure of First National Bank of Olathe is expected to cost the FDIC about $116.6 million.
Clayton, Missouri-based Enterprise Bank & Trust has agreed to assume the assets and deposits of First National Bank of Olathe. The FDIC and Enterprise Bank & Trust have agreed to share losses on $419.6 million of First National Bank of Olathe's assets.
The number of banks on FDIC’s list of problem institutions saw a marginal increase to 888 in the first quarter from 884 in the previous quarter. This is the highest number since way back in March 31, 1993, when there were 928 problem institutions due to the savings and loan crisis.
Increasing loan losses on commercial real estate could trigger hundreds of bank failures in the coming years. Going by the current rate of bank insolvencies, the DIF is likely to feel a $52 billion dent by 2014. However, considering the track record so far this year, the FDIC does not expect the number of bank failures in 2011 to surpass that of 2010.
With so many bank failures, consolidation has become the industry fashion. For almost all the failed banks, the FDIC enters into a purchase agreement with healthy institutions. When Washington Mutual collapsed in 2008 (branded as the largest bank failure in the U.S. 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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