Regulators Shut Down Seven Banks

Bank regulators Thursday shut down seven banks, bringing the total number of failed U.S. banks and savings and loans during 2009 to 52.

This was the largest number of bank failures in one week during the 2008-2009 banking crisis, exceeding the previous record of five bank failures set just last week.

All of the failed banks were included in TheStreet.com's recent list of 89 undercapitalized banks and thrifts. The same was true of all five banks that failed last week.

In an unusual twist, six of Thursday's seven failed banks were headquartered in Illinois, and all six were subsidiaries of holding companies privately controlled by the Campbell Group, through what FDIC spokesman David Barr described as "fairly complex layers of ownership."

All six of the failed Illinois banks followed similar business strategies, with heavy concentrations in collateralized mortgage obligations (CMOs), commercial real estate loans and other commercial and industrial loans. All six saw their capital wiped out from losses on the CMOs, some of which were in default, as well as loan losses.

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The Illinois Department of Financial and Professional Regulation's division of banking closed five of the failed Illinois banks. It then appointed the Federal Deposit Insurance Corp. as receiver. The FDIC arranged for other institutions to assume all the deposits and branches of the failed banks as listed below:

  • The John Warner Bank of Clinton, Ill. failed, and all three of its offices were to reopen Friday as branches of State Bank of Lincoln, of Lincoln, Ill.
  • First State Bank of Winchester, of Winchester, Ill. failed, and both its offices were set to reopen Monday as branches of The First National Bank of Beardstown, of Beardstown, Ill.
  • Rock River Bank of Oregon, Ill. failed, and its four offices were scheduled to reopen Monday as branches of The Harvard State Bank of Harvard, Ill.
  • Elizabeth State Bank of Elizabeth, Ill. failed, and its two offices were to reopen Monday as branches of Galena State Bank and Trust of Galena, Ill., a subsidiary of Heartland Financial, USA (HTLF).
  • Founders Bank of Worth, Ill. failed, and its 11 offices were to reopen Monday as branches of The PrivateBank and Trust Company of Chicago, Ill., a subsidiary of Privatebancorp (PVTB).

Meanwhile, the Office of the Comptroller of the Currency took over First National Bank of Danville, of Danville, Ill., citing "unsafe and unsound practices" leading to losses that "depleted most of its capital." The OCC appointed the FDIC receiver, and the FDIC arranged for First Financial Bank, NA of Terre Haute, Ind. to take over all of the failed institution's deposits and branches. All seven of the failed bank's offices were set to reopen Monday as branches of First Financial Bank, which is held by First Financial Corp ( THFF).

The six failed Illinois banks controlled by the Campbell Group had combined total assets of $1.4 billion. The acquiring institutions took over $1.2 billion in assets from the failed banks, with the FDIC retaining the remainder for later disposition. The FDIC agreed to share losses on $861 million of the acquired assets and estimated the cost to its insurance fund would be $267 million.

Millennium State Bank of Texas

Also Thursday, Texas state regulators shut down Millennium State Bank of Texas, of Dallas. The FDIC was appointed receiver and sold the failed institutions deposits and branches to State Bank of Texas, of Irving, Texas.

Millennium State Bank's asset quality declined rapidly over the past two quarters, with losses on commercial real estate and construction loans leading to a fourth-quarter net loss of $2.1 million and a first-quarter loss of $2.4 million. The bank was considered undercapitalized as of March 31, with a tier 1 leverage ratio of 3.15% and a total risk-based capital ratio of 5.70%. These ratios need to be at least 5% and 10%, respectively, for most institutions to be considered well-capitalized under regulatory capital guidelines.

Millennium State Bank had $118 million in total assets, nearly all of which was acquired by State Bank of Texas. The failed bank's lone office was scheduled to reopen Monday as a branch of State Bank of Texas.

The FDIC estimated the cost to its insurance fund from Millennium State Bank's failure would be $47 million.

Leading States for Bank Failures

Among U.S. states, Georgia still has the largest number of bank failures during 2008 and 2009, with 14. It's followed by Illinois with 13, California with 11, Illinois with seven, Florida with five and Nevada with four.

Large bank holding companies that have acquired failed institutions during 2008 and 2009 include J.P. Morgan Chase ( JPM), which acquired Washington Mutual, the largest-ever bank or thrift to fail in the U.S., SunTrust Banks ( STI), Regions Financial ( RF), Zions Bancorp ( ZION), Fifth Third Bancorp ( FITB), U.S. Bancorp ( USB) and BB&T Corp ( BBT).

Free Financial Strength Ratings for Banks and Thrifts

Depositors fared well this week, as all deposits of the seven failed banks, including any uninsured balances, were acquired by other institutions. Nevertheless, there's always a chance that the FDIC will fail to find a buyer for a failed institution, and when that happens, uninsured deposit balances are at risk.

This happened just last week when Community Bank of West Georgia failed.

Even if your personal deposits are under FDIC insurance limits, you or someone you know are probably associated with a business, organization or government entity (such as a school district) with large deposits of somebody else's money of in a local bank. In this environment, it is a very good idea to look into the health of your bank.

For depositors shopping for high-rate CDs through brokers, it is also important to consider the health of a bank or thrift, since attractive CD rates that are locked in can be lost when an institution fails, and you might have to wait several weeks to get your money back through your broker. During that time, you'll earn no interest.

TheStreet.com Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans. They are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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