Banks still getting sicker

The economy may have turned, but banks will be cleaning up after their lending mistakes for years. Several big banks may already be doomed to fail.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Colin Barr, senior writer

FDIC chief Sheila Bair has seen bank failures surge to their highest level in 17 years.
Guaranty's stock has sat out the bank rally.

NEW YORK (Fortune) -- The economy may have pulled out of its plunge, but you'd never know by a look at many big banks.

Even after a rousing market rally that spurred new capital into giant institutions such as Wells Fargo (WFC, Fortune 500) and Bank of America (BAC, Fortune 500), numerous large banks around the country are still struggling with deteriorating finances.

Two dozen banks with at least $5 billion in assets get the lowest one-star rating on's safety and soundness test, which is based on an assessment of regulatory filings for the quarter ended March 31.

More than half of those banks are ranked "troubled" or worse by research firm Bauer Financial, using the same data. Three of these banks, with a total of $45 billion in assets, have made public statements indicating they could soon collapse.

"There are some big ones in fairly dire straits," said Karen Dorway, director of research at Coral Gables, Fla.-based Bauer. "If you see some of these fail, it could add to the stress on local economies."

Many banks have had their capital eroded by losses, while their balance sheets remain bloated with billions of dollars in depreciating real estate investments and construction loans.

These banks have been setting aside more money for future losses, but in many cases the increases in loan loss reserves haven't kept up with the surge in nonperforming assets. That means profits could be pressured even at stronger institutions.

"We don't know when the losses are going to peak, and we don't know how long they're going to stay there," said Chris Whalen of Institutional Risk Analytics, which advises investors. "It's a pretty gruesome picture."

Meanwhile, efforts to remove troubled assets from bank balance sheets have stalled, as banks remain reluctant to sell at the low prices being offered by investors. That leaves banks trying to sell assets and lure in new funds from investors. On those counts, their records are decidedly mixed.

Over the past year, at least eight of the low-rated institutions have agreed with regulators to improve their banking practices. Banks including Pacific Capital Bank (PCBC), Westernbank Puerto Rico (WHI) and the former Lehman Brothers Bank -- now known as Aurora -- have set plans to strengthen their capital bases.

Others have been told to get more capital, but have failed to do so. Among them are condominium construction lender Corus Bankshares (CORS), based in Chicago; Colonial Bancgroup (CNB) of Montgomery, Ala., a troubled mortgage lender whose offices were recently raided by federal agents; and Guaranty Financial Group (GFG) of Austin, Texas.

Guaranty, with $13 billion in assets, said last month it expects to be taken over by regulators. A recent filing from Colonial, with $25 billion in assets, indicated "there is substantial doubt about Colonial's ability to continue as a going concern."

Corus, which has $7 billion in assets and has been told repeatedly to raise new funds, said Friday that "it is highly unlikely that it will be able to obtain additional outside capital that does not include the provision of substantial assistance by the FDIC or other Federal governmental authorities."

While problems at those banks are well known to investors -- a share of all three costs less than a dollar combined -- their failures could strain the federal deposit insurance fund and add to problems in deeply stressed real estate markets.

Corus, for instance, is the lender to 15 Florida condo projects worth at least $100 million each.

"Construction loans are going to be a big part of the challenge, because they're so complex," said Dorway.

The problems at troubled banks could slow the recovery for their healthier counterparts. So far this year, 69 banks have failed -- the most since 1992. The Federal Deposit Insurance Corp. has already imposed a one-time fee on member banks to shore up its deposit insurance fund and has said it may impose another later this year.

The FDIC's so-called problem bank list had 305 institutions -- with $220 billion in assets -- on it at the end of the first quarter. The agency has set aside $22 billion to cover failure-related costs this year. A law enacted this spring gives the FDIC access to up to $500 billion in Treasury credit though 2010.

Even so, the scale of the banking problem will surely test the agency's mettle. Veribanc, another bank rating agency, suggested as much this spring when it reported a raft of first-quarter rating downgrades and forecast 97 bank failures for the year.

"If the past quarter's trend continues, more than half of all banks could be downgraded during the remainder of 2009," Veribanc said. To top of page

Company Price Change % Change
Apple Inc 102.47 2.71 2.72%
Bank of America Corp... 16.60 0.34 2.09%
The Coca-Cola Co 40.68 -2.61 -6.03%
Regions Financial Co... 9.26 0.10 1.09%
Yahoo! Inc 40.18 0.90 2.29%
Data as of Oct 21
Index Last Change % Change
Dow 16,614.81 215.14 1.31%
Nasdaq 4,419.48 103.41 2.40%
S&P 500 1,941.28 37.27 1.96%
Treasuries 2.21 0.03 1.24%
Data as of 4:52am ET
More Galleries
Some Converse copycats cost big bucks A few bargain brands got swept up in Chuck Taylor's net, but others cost a pretty penny. More
Urban infrastructure gets a second life Railroad beds become parks, power plants become aquariums and slaughterhouses are now art centers as an industrial past turns people-centric. More
Boomtown moms From working mothers raising their kids in RVs to stay-at-home moms who spend their days organizing events for the Oil Wives club, meet the moms of North Dakota's oil boom. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.