How Many More Failures?

I've always been a glass half-full kind of person, and the last three weeks have given me hope that we've turned the corner on bank and credit union failures.

Institutional failures have always been that 800-pound gorilla in the corner of everyone's boardroom. People don't like to talk about CAMEL ratings or the ratio of bad loans in their portfolios when they're not above the water line. Even regulators like the FDIC are reluctant to talk about a bank failure. And no wonder: We've seen a good number of failures both of big and small institutions since the economic tsunami hit the industry back in 2008.

Even now, the economic professor who predicted the downturn of 2008 says that more than 400 additional banks will likely fail. Nouriel Roubini, a New York University economics professor nicknamed "Dr. Doom," says that while the biggest banks have been shored up, of the 800-plus banks on the FDIC's troubled bank list, another 400 will bite the dust.

Other industry experts also see more bank failures, but not to the same extreme. Jerry Blanchard, a partner at Atlanta-based law firm Bryan Cave, says he expects another 20 to 30 banks to fail in Georgia by the end of the year. Blanchard says community banks in the sunbelt and several other pockets around the country will continue to feel the results of the decline in real estate values due to the collapse of residential home building.

I compare bank failures to thinning the herd. The weaker animals in the herd, the youngest or older ones, are taken down by illness, cold, starvation or the predators that are constantly circling the herd. Institutions that fail are part of the natural selection, with the strongest surviving, the weakest succumbing to the inevitable. My prediction for failures through the end of the year is 50, and most of these failures will be the community banks that had their loan portfolios heavy with residential and commercial building loans.

But other institutions in the country are weathering the storm, and there are some bright spots. Last week's FDIC Quarterly Banking Report shows that banks getting back on their feet, with FDIC-insured institutions reporting an aggregate profit of $21.6 billion in the second quarter of 2010. This is a $26 billion improvement from the $4.4 billion net loss the industry posted in the second quarter of 2009, and it is the highest quarterly earnings total since the third quarter of 2007, before all the economic troubles began.

It's also encouraging to see the National Credit Union Administration say it's going to put forth a merger registry by next month, where credit unions are going to be able to see which other credit unions are interested in merger opportunities, thus adding transparency to the now somewhat murky selection process. Any clearing of the air when it comes to mergers and troubled institutions is a good thing, in my estimation.

The industry's total number of failures for 2010 stands at 134 -- that is 119 banks and 15 credit unions. We're already fewer than 40 institutions away from 2009's total of 171 failures. I'm fairly sure we're going to surpass that number, by at least 15 or more.

But I'm hoping in my "glass half-full" way that the thinning of the herd is just what's necessary for the health of the industry.