WASHINGTON — The lone failure over the last three weeks may have offered a respite from the usual series of collapses on Friday nights, but most observers caution against predictions that bank closures may be slowing.
The Sept. 10 closure of the $188 million-asset Horizon Bank in Bradenton, Fla. — the 119th this year — was the first since Aug. 20. But considering the weak economy and continued growth in both the Federal Deposit Insurance Corp.'s problem bank list and commercial real estate losses, the steady volume of FDIC takeovers is expected to continue.
"I wish I could say it was a turning point, but it doesn't look like one to me," said Mark Schmidt, a managing director at Promontory Financial Group and a former Atlanta regional director for the FDIC. "It's a very high probability that it's just a blip and things are going to resume and we'll probably get back close to the level we've been seeing throughout the year, which by my calculation looks like about 15 failures a month. There will be peaks and valleys throughout the rest of the year."
In the wake of the financial crisis, a week without a failure has been somewhat rare, and consecutive Fridays without a collapse were almost unthinkable. Before Aug. 27, there had been on average nearly four a week since the beginning of March.
"It raises the question of: Why the slowdown?" said Bert Ely, an independent consultant based in Alexandria, Va. "Three data points … doesn't make a trend. I'd be the first to admit that. But it's still puzzling."
Many say the slowdown is not symptomatic. They note that late August tends to be a time when regulators are short-staffed. (And Sept. 3 came just before Labor Day weekend.)
But perhaps a larger sign that failures will pick up again is the continued rise in the agency's troubled-bank list. The FDIC said the list had grown by 54 institutions, to 829, by the end of the second quarter, though the aggregate assets of banks on the list had fallen by 6% to $403 billion. Observers took this as a sign that several community banks are still slated for closure this year.
Jay Langan, the head of U.S. financial services mergers and acquisitions at Deloitte LLP, said there just are not a lot of buyers interested in saving small troubled banks from government seizure. "It's below the radar screen in terms of deals they look at. There have been a lot of banks in poor straits both operationally and financially for a while now. I don't think that's changed fundamentally. … I still think we have 18 months to two years of this to work out. There are a lot of banks on that list. All of them aren't going to fail, but … if you take six a week, that's a long pipeline."
Banks generally go on the problem list if they have a Camels rating of either "4" or "5," the worst possible scores. But some open community banks show even worse damage, reporting tangible equity ratios of 2% or less — qualifying them as "critically undercapitalized."
Walter Moeling, an Atlanta lawyer who has represented several institutions before their failures, said that, though "the frequency does" appear to be moderating, "if you look at the data and you look at the capital levels there are still banks chiming in at that under-2% level that's going to produce a failure. We're not seeing a real recovery."
Failures may be nearing their peak, however. FDIC officials have said repeatedly that, though they expect 2010's failures to exceed last year's total of 140, this year will probably be the crest of closures stemming from the crisis.
Some observers are sensing that a deceleration in failures has already arrived. "It's a low bar, but I think the number of failures is decreasing," said Kip Weissman, a partner at Luse Gorman. "The economy and the real estate market are stabilizing, albeit at a low level. There has been capital raising, and there haven't been a lot of securities impairments lately. I don't think anyone thinks we're not going to see more failures, but there's something of a slowdown."
Still, an FDIC spokesman said, "It is hard to read trends into a few-week period."
"We haven't changed anything in terms of our projections for failures," the spokesman said.
"We expect that the total number of bank failures will peak this year, surpassing last year's total of 140."