Friday, February 25, 2011

This Week in Bank Failures

The U.S. banking system became legitimately profitable in the fourth quarter of 2010, but the financial condition of the industry is still bad news. It is a rare bank at this point that is profitable in an investment sense; most are bringing in enough money to keep going, but aren’t making the kind of profit that would draw capital away from other investments. One measure of this is the interest rates banks are paying on savings accounts — still averaging well below 1 percent, and more importantly, now well below the rate of inflation. Another sign of trouble: one of the reasons banks are becoming more profitable is that the amount of lending they are doing is falling. That strongly suggests that banks will be more successful in the current economic circumstances if they lend even less than they are lending now. Less lending, of course, means fewer jobs for bankers. But the worst news is that there is little sign of troubled banks returning to profitability. Instead, the financial condition of about one sixth of banks, already in poor condition at the beginning of 2010, just got worse as the year went along.

It is the perhaps the most challenging time for banks in the history of banking in the United States, as they go from crisis to malaise in a period in which the industry as a whole is overbuilt by about 25 percent and massive technological changes are on the horizon. Historically, it has been hard for a struggling business to get ahead in a declining industry, but if all the banks that are on the brink now fail over the next three years, this will be the largest episode of bank failures ever.

Now, the good news: banks have been closing branches. The pace of branch closings is slight, and some areas are being left without a banking office, but in most cases, a branch closing now means fewer that will have to be closed in distress or liquidation later. With the real estate lending business shrinking and banks losing their competitive position in it in the coming years, the financial justification for bank branches will mostly evaporate, so it won’t be a surprise if half of the bank branches in the United States close or move into supermarkets within the next seven years.

The FDIC is convinced that the number of bank failures will be lower this year than it was last year. It also says the total assets of failed banks will be lower, but that is an easy prediction to make if you are looking at the smaller and medium-sized banks. The troubled banks’ assets continue to shrink with every foreclosure and every loan that has to be written off.

The parade of Illinois bank failures continued at closing time tonight, with state banking regulators closing Valley Community Bank, on the western fringe of the Chicago metro area with five branches around St. Charles, Illinois. The bank had $124 million in deposits. Its assets had shrunk to an amount smaller than this.

The bank had worked out a deal with investors for additional capital in 2009, but the deal fell through. The extra money would not have been enough to save the bank anyway. The bank spent last year searching for investors without success.

Illinois-based First State Bank is taking over the deposits and purchasing the assets.