Banks in Ill., Minn., Utah are shuttered

[February 04, 2010]  WASHINGTON (AP) -- Regulators shut down banks in Illinois, Minnesota and Utah on Friday, bringing to four the number of bank failures so far in 2010, following 140 closures last year amid the weak economy and mounting loan defaults.

The Federal Deposit Insurance Corp. took over Barnes Banking Co., based in Kaysville, Utah, with $827.8 million in assets and $786.5 million in deposits.

The agency also seized two smaller banks: 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.

For Barnes Banking Co., the FDIC set up a temporary "bridge bank," which will operate until Feb. 12 to allow customers access to their deposits and time to open accounts at other banks. It will be operated by Zions First National Bank, based in Salt Lake City, under a contract with the FDIC.

The state regulator, the Utah Department of Financial Institutions, said Friday that it had found Barnes Banking to be insolvent and not in a sound condition to transact business. The department and the Federal Reserve Bank of San Francisco had closely monitored Barnes and had ordered it to increase its capital to a safe level but the bank's efforts to do so were unsuccessful, the regulator said in a news release.

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 Barnes Banking is expected to cost the federal deposit insurance fund $271.3 million. That of St. Stephen State Bank is estimated to cost $7.2 million; that of Town Community, $17.8 million.

Last week, 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. 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 more of a risk to pay bigger insurance fees.

[Associated Press; By MARCY GORDON]

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