The pace of bank failures is likely to pick up soon as bad loans and mounting losses erode the capital of dozens of financial institutions.
"You should expect to see 100 to 150 banks fail before the end of the year," said Richard Bove, Lutz-based bank analyst for Ladenburg Thalmann. However, he said the problems are "not remotely close" to those that faced the banking system in 1990.
Nine banks have failed so far this year, most notably IndyMac Bank in California. This month, First Priority Bank in Bradenton became the first Florida bank to fail since 2004.
Whether or not Bove is right about the number of failures, it's clear that problems are growing. The Federal Deposit Insurance Corp. had 90 banks on its confidential problem bank list after the first quarter, up from 76 at year's end. The second-quarter number will be released Tuesday and is expected to be more than 100. However, the FDIC's list is by no means a complete list of banks that might be closed or merged out of business; IndyMac wasn't even on the list when the FDIC shut it down.
One sign of the problems is the plethora of advertisements for high-yielding money market accounts and CDs. When people know that a bank is having difficulty, deposits are hard to keep, said Benjamin Bishop Jr., chairman of Allen C. Ewing Co., a Jacksonville investment banking firm.
"The way they keep them is by paying a rate that's higher than the market. It's squeezing all the banks. On top of asset problems, that is making this a difficult period for banks," Bishop said.
Bove says that while some big banks have been the topic of negative news lately, the threat of closure is concentrated in small banks. That means any sharp uptick in failures may not be big enough to have any significant impact on the U.S. financial system.
"The 6,000 banks at the bottom of the industry don't have enough assets all together to equal one Citibank," he said. "If 150 banks fail and they knock $20-billion in assets out of the system, it doesn't matter."
In fact, Bove thinks big banks will benefit from the chaos and low share prices and emerge much stronger. "These stocks offer a once-in-a-generation opportunity to make money."
Others aren't so sanguine about the fate of big banks. On Monday, a former International Money Fund economist predicted that a large U.S. bank or investment bank will fail in the next few months.
"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," Kenneth Rogoff was quoted as saying in news reports from a financial conference in Singapore. Rogoff is now an economics professor at Harvard University.
Weiss Ratings in Jupiter has some big institutions on its list of weak U.S. banks, including HSBC Bank, Huntington Bank and Washington Mutual, all of which rate a D+ in Weiss' system. In Florida, Weiss gives a D+ to BankUnited in Coral Gables and a D to Bank Atlantic in Fort Lauderdale. Weiss' lowest rating is E-.
No banks headquartered in the immediate Tampa Bay area show up on the current lists of the weakest banks, but suffering institutions nearby include Freedom Bank in Bradenton (not to be confused with Freedom Bank in St. Petersburg) and Ocala National Bank in Ocala. Both banks took big losses last quarter. Since the end of last year, equity capital is down 48 percent at Freedom Bank and 37 percent at Ocala National, according to the most recent reports they filed with the FDIC.
An FDIC takeover is the most dramatic way of dealing with a weak bank. An alternative is a merger with a stronger bank. Naples-based First Florida Bank was merged into Synovus Bank of Tampa Bay this year.
Bank regulators are consistently mum about any banks that may be targeted for closure. But regulators and the FDIC traditionally step in on Friday afternoons to take advantage of the weekend to shut down a bank so it can be sold or reopened the following Monday under FDIC control. Three-day weekends — like this upcoming Labor Day — are especially desirable because of the extra time to put a bank in order.
The uncertainty in the industry makes it more important for customers to track the health of their banks and to keep deposits within the limits of FDIC insurance. That's generally $100,000 for individuals and $250,000 for retirement accounts, but the numbers can be increased through the use of joint accounts and trusts.
Many area community banks acknowledge that customers are more nervous about the industry. Some banks are taking extra steps to publicize their strength and explain the benefits and safety of their FDIC insurance coverage.
"We can expect to see more bank failures, but it's not a repeat of the savings and loan crisis," said Greg McBride, senior analyst for Bankrate.com in North Palm Beach.
"That outlook isn't a cause for concern for individual savers provided that their funds are fully protected by deposit insurance."
Helen Huntley can be reached at [email protected] or (727) 893-8230.