Only 3 banks failed in March 2011, making for the slowest monthly pace since December 2008, when three banks also failed, according to the Trepp U.S. Bank Failure Report. While the reasons for failure were varied, CRE loans represented the largest source of nonperforming loans.
For the group of three failed banks in March, commercial real estate (CRE) loans comprised $44 million (or 55%) of the total $80 million in nonperforming loans. Commercial mortgages made up $27 million or 34% of the total, while construction and land loans comprised $16 million (21%) of the total nonperforming pool.
The residential real estate loan category was second, with $29 million in nonperforming loans, or 36% of the total nonperforming balance.
The remainder was comprised of C&I loans ($3.3 million, 4% of the total) and consumer and other loans ($4.1million, 5% of the total).
The 3 failures occurred in Illinois, Wisconsin and Oklahoma all areas that have experienced other bank failures during 2011. With 40 closures since the start of the current cycle in late 2007, Illinois ranks 3rd among states with the highest counts of failed banks.
The Pace of Closures Outlook For the quarter, the total failed bank count was 26, the lowest quarterly count since 2Q 2009.
The quarterly count has slowed noticeably since 3Q 2010 (see chart below.)
The number of banks on the Watch List remains large, and banks are spending more time on the Watch List. While the pace of closures has slowed, distress at many banks remains high, and these banks will still be in a position of heightened risk until they either boost capital, improve performance, or both. Failure also remains a possibility for these banks.
This trend is underscored by the greater length on the Watch List for several banks that failed in 1Q 2011. For Watch List banks, the ideal situation would be to get performance and balance sheet issues under control quickly, so they can come off the List under their own power. The fact that time on the Watch List has stretched out for many banks is not a positive sign for them. Instead, we think it indicates that many of their problems are difficult to get under control and likely contributes to the likelihood of eventual failure.
The slower pace of closures does give these banks more time to grapple with their issues, but for the most-distressed banks, the likelihood of an ultimate failure remains high.
- The median time on the Watch List has lengthened to 5 quarters during 1Q 2011.
- Of the 26 failures during the quarter, 20 banks (77%) were on the Watch List for 4 or more quarters prior to failure
- A little under half (12 of 26) had been on the Watch List for 6 or more quarters.
- After accounting for the 1Q failures, there are 173 banks that have been on the Watch List for 6 or more quarters, including 68 that have been on the Watch List for 8 or more quarters (see chart below).
- Many of these banks are in search of capital to shore up their balance sheets and help absorb losses. Although liquidity has improved markedly from 2009 and 2010, it remains to be seen which banks will be successful in their efforts to raise capital and improve performance.
- We expect more failures during 2011. While the slower pace of closures gives banks more time to raise capital, it could also mean that the process will last longer than previously anticipated.