FDIC’s Mountain Of Failed Bank Assets Grow As Five More Banks Collapse

July 30, 2010 –  Five more banking institutions collapsed this week in Oregon, Washington, Florida and Georgia.  Florida now leads the nation with 20 banking failures, followed by Illinois with 12.

All five of this week’s failed banks were acquired by other banking institutions under purchase and assumption agreements with the FDIC acting as receiver.  The total assets of the five failed banks totaled $1.9 billion and the total estimated loss to the Federal Deposit Insurance Corporation’s Deposit Insurance Fund was estimated at $334.7 million.

As has been the case with almost all recent banking failures, the FDIC entered into loss-share transactions on the assets of failed banks purchased by the acquiring banks.

Under a loss-share transaction, the FDIC agrees to absorb losses on up to 80% of a failed bank’s assets that are purchased by an acquiring bank.  The loss protection provides the incentive for private equity investors or other banks to purchase failed banks from the FDIC.

It will be some time before the results of the loss share programs can be evaluated, since certain assets are covered by loss share agreements for up to 10 years.  The cost of expected losses on a failed bank’s assets covered by a loss share transaction is included in the FDIC’s estimated cost of a banking failure.

The ultimate gain or loss by the FDIC on their long tailed obligation to absorb losses on failed bank assets is impossible to predict.  If property markets continue to decline in a poor economic environment, the eventual losses could far exceed the FDIC’s estimate.  As previously discussed in ProblemBankList, as of June 2010, the FDIC has entered into 167 loss sharing agreements and the amount of assets guaranteed against loss has ballooned to $176.7 billion, potentially putting the taxpayers at substantial risk.

In addition to the open ended risk of loss-share transactions, the FDIC’s mountain of failed bank assets that could not be sold, despite the use of loss-share transactions, continues to grow.  The FDIC is now holding a total of $39 billion in assets of failed banks that could not be sold and need to be disposed of.  The ultimate loss to the FDIC on these mostly nonperforming loan assets is unknown, but will likely be correlated to the performance of the economy and property markets.

Two of this week’s banking failures (LibertyBank and The Cowlitz Bank) resulted in the FDIC being forced to retain $547.8 million of poor quality loan assets that could not be sold to the acquiring banks.

This week’s five banking failures are as follows: (Please click on link for more detailed information.)

Northwest Bank and Trust, Georgia – Failure #104.  The closing of this $168 million asset bank resulted in a loss of $39.8 million.  Northwest was acquired by State Bank and Trust Company of Macon, Georgia.

Bayside Savings Bank, Florida – Failure #105.  Bayside was acquired by Centennial Bank which also acquired Coastal Community Bank of Florida which also failed today.    Bayside was this week’s smallest bank failure with $66.1 million in total assets and resulted in a loss to the FDIC DIF of $16.2 million.

Coastal Community Bank, Florida – Failure #106.   Coastal Bank was acquired by Centennial Bank which also acquired Bayside Savings Bank, which was also closed today.  Coastal Bank had $372.9 million in total assets and was the third oldest bank in Florida, having been established in 1906.  The loss to the FDIC is estimated at $94.5 million.

The Cowlitz Bank, Washington – Failure #107.  Cowlitz Bank was acquired by Heritage Bank, whose parent company, Heritage Financial Corp, still owes the US Treasury $24 million of unpaid TARP bailout loans.  The FDIC was forced to retain $199.8 million in poor quality assets that Heritage Bank did not purchase.  The loss on closing The Cowlitz Bank is estimated at $68.9 million.

LibertyBank, Oregon – Failure #108.  LibertyBank, with $768.2 million in total assets, was this week’s largest bank failure.  Home Federal Bank of Idaho acquired LibertyBank from the FDIC but only purchased $419.7 million of the failed bank’s assets, leaving the FDIC stuck with $348.5 million of low quality loan assets to be held for later disposition.  This is Home Federal’s second purchase of a failed bank in 2 years.  Home Federal lost almost $2 million in its latest quarter ending June 30.