Saturday, June 27, 2009

Five Bank Failures: Most In One Day In Over A Decade

Since at least 1993, when the tail end of the massive S&L crisis was finally waning, we have not seen a failure wave the likes of which we are seeing now. Most of the S&L failures were tiny institutions.

Yesterday evening, the FDIC buried five banks, as this fairly comprehensive article states. Mid way into 2009, we have reached 45 failed banks, averaging approximately two per week and the FDIC deposit insurance fund, as we discussed a year ago, is nearly depleted (down to about $14 billion).
The FDIC estimates that the cost to the deposit insurance fund from the failure of Community Bank of West Georgia will be $85 million. [Neighborhood Community Bank's] failure will cost the fund $66.7 million. The failure of Horizon Bank is expected to cost the fund $33.5 million, while the closure of MetroPacific Bank will cost the fund about $29 million. Mirae Bank's failure will cost the fund $50 million.
As long time readers know, one of our favorite back of the envelope metrics for tracking the severity of this crisis is to measure losses as a percentage of reported assets. As mentioned in the same TILB from a year ago, losses were averaging 20% of assets in mid-2008. Let's look at how this week went. From the Yahoo! article linked above:
Community Bank of West Georgia had $199.4 million in assets and $182.5 million in deposits as of May 15. Neighborhood Community Bank had $221.6 million in assets and $191.3 million in deposits as of March 31. Horizon Bank had $87.6 million in assets and $69.4 million in deposits as of March 31. MetroPacific Bank had $80 million in assets and deposits of $73 million as of June 8. Mirae Bank had $456 million in assets and $362 million in deposits as of May 29.
Community Bank of West Georgia: $85mm of insured losses / $199.4 mm assets = 43%
Neighborhood Community Bank: $66.7 / $221.6 = 30%
Horizon Bank: $33.5 / $87.6 = 38%
Metropacific Bank: $29 / $80 = 36%
Mirae Bank: $50 / $456 = 11%

So, four of the banks were in the 30% or greater range and one - Mirae (the largest bank on the list) was an 11% loss. The four high loss banks were in-line with recent failures and Mirae is a very positive outlier. Mirae is such a big outlier in a trend that has been persistently worsening that we postulate Mirae would not have been forced to fail yet except the FDIC had an eager buyer lined up. In general, the FDIC is not failing banks until the bank will generate losses of 25-30% of assets. This means the failed banks are probably in a negative equity position of about 10-20% (call it 15%), then the FDIC makes up that hole plus a margin to return the bank to well capitalized and to compensate the buyer for risk of further deterioration.

As we have said so many times, there are probably many hundreds of banks (possibly into the thousands) that have an equity position somewhere between being adequately capitalized and the failure threshold of 15% negative equity. We at TILB expect the Failure Train is just now leaving the station.