Bank Failures Flatten, But News Still Not Good

The news is bad, but not as bad as it could be: According to Trepp, only four U.S. banks failed in June, which is the second-lowest rate in the last year.

The news is bad, but not as bad as it could be: According to Trepp, only four U.S. banks failed in June, which is the second-lowest rate in the last year. The report dampens its muted optimism quickly, however, as the ratings firm is keeping its eye on more than 1,000 banks – 250 of which are at very serious risk of failure. And what’s to blame for the problematic lenders? Mostly overexposure to commercial real estate. Across all four failed banks, a full 77 percent of the $119 million in bad loans can be traced back to CRE, with a remaining 21 percent of those bad loans were from nonperforming residential lending. The silver lining, if there is one, is that all of the failed banks had been on Trepp’s watch list for at least five quarters, giving ample time to anticipate problems.

But the remaining 1,000 or so banks that remain at elevated risk levels almost guarantees that there will be continuing closures in the upcoming months. Of the bottom 200 performers, 136 have been on the watch list for more than two years, and they are disproportionately small banks, with 92 percent controlling assets less than $1 billion.

In light of those numbers, the June failures were more distressed than average, and three of the four involved loss-sharing by the FDIC. While that loss-sharing was down from the 73 percent of assets in May and 67 percent in April, only 60 percent of acquired assets were covered. Additionally, all four of the failures occurred in the Southeast, with two in Georgia and one each in Florida and South Carolina. That area of the country remains a question mark, as Georgia leads the bank-failure rate with 14 year-to-date in 2011 and 66 since the current downturn started in 2007. Florida ranks second on that list, with six in 2011 and 51 since 2007.

Trepp’s watch list has proven to be accurate in the past, as approximately 96 percent of all bank failures since September 2007 have appeared on the list.