Regulators seize 2nd and 3rd bank failures of 2010

Updated 1h 17m ago | Comments 46 | Recommend 6
By Marcy Gordon, Associated Press

WASHINGTON — Regulators on Friday shut down two small banks in Illinois and Minnesota, the second and third bank failures of 2010 following 140 closures last year amid the weak economy and mounting loan defaults.

The Federal Deposit Insurance Corp. took over St. Stephen State Bank of St. Stephen, Minn., with $24.7 million in assets and $23.4 million in deposits, and Town Community Bank and Trust, based in Antioch, Ill., with $69.6 million in assets and $67.4 million in deposits.

First State Bank of St. Joseph, Minn., agreed to assume the assets and deposits of St. Stephen State Bank. First American Bank, based in Elk Grove Village, Ill., is buying the deposits and $67.6 million of the assets of Town Community Bank and Trust. The FDIC will retain the rest for sale.

In addition, the FDIC and First State Bank of St. Joseph agreed to share losses on $20.4 million of St. Stephen State Bank's loans and other assets. The agency and First American Bank agreed to share losses on $56.2 million of Town Community Bank and Trust's assets.

The failure of St. Stephen State Bank is expected to cost the federal insurance fund $7.2 million; that of Town Community, $17.8 million.

Last week a much larger institution, Horizon Bank in Bellingham, Wash., with $1.3 billion in assets, became the first bank to close this year. Its assets and deposits were purchased by Seattle-based Washington Federal Savings and Loan Association.

As the economy has soured, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have accelerated and sapped billions out of the federal deposit insurance fund. It fell into the red last year.

The 140 bank failures last year were the highest annual tally since 1992, at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion last year. The failures compare with 25 in 2008 and three in 2007.

The number of bank failures is expected to rise further this year. The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency last year mandated banks to prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government. Besides the fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks.

Banks have been especially hurt by failed real estate loans, both residential and commercial. Banks that had lent to seemingly solid businesses are suffering losses as buildings sit vacant. As development projects collapse, builders are defaulting on their loans.

If the economic recovery falters, defaults on the high-risk loans could spike. Many regional banks hold large concentrations of these loans. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.

This week, the FDIC moved to seek public input on a plan to link the insurance premiums levied on banks to the degree of risk-taking encouraged by their executive pay policies. The plan could involve both rewards and penalties for banks. The idea is for institutions deemed to be higher-risk to pay bigger insurance fees.

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