Federal Deposit Insurance Corp. Chairwoman Sheila Bair warned bankers to brace for higher insurance premiums as banks continue to fail and the the FDIC looks for ways to boost reserves to required minimums.

Addressing the Florida Bankers Association Thursday, Bair said 98 percent of banks that hold 99 percent of total bank assets are "well capitalized." But 10 FDIC-insured banks have failed this year, and Bair warned of more failures to come.

Defaults are rising across all types of loans, with residential mortgage loans accounting for the largest share of the increase in the second quarter, Bair said.

The Mortgage Bankers Association today said the delinquency rate for all residential mortgage loans stood at 6.41 percent at the end of the second quarter, compared with 6.35 percent in the first quarter and 5.12 percent a year ago on a seasonally adjusted basis (see Inman News story).

Bair said bankers "simply must accept that the credit downturn is far from over. It’s a tough slog, but there’s no easy way out."

Lenders face the greatest risk in areas with declining home prices and worsening economic conditions, according to a report released this week by First American CoreLogic (see story).

"The decline in house prices has created a self-reinforcing feedback loop where lower prices lead to more defaults and excess housing inventory, which in turn reduces demand and causes prices to fall further," First American CoreLogic’s third-quarter CoreMortgageRisk Monitor warned.

The FDIC, which insures more than 8,400 banks and savings associations, said last week its "problem list" of thinly capitalized banks has grown to 117 institutions, up from 90 at the end of March and the highest level since mid-2003.

The last time the FDIC saw more bank failures was 2002, when 11 banks went under. During the downturn of the early 1990s, 291 FDIC insured banks failed from 1991 to 1993.

Total assets of problem institutions increased from $26 billion to $78 billion, with $32 billion coming from Pasadena, Calif.-based IndyMac Bank FSB, which failed in July (see story).

After IndyMac Bank, the year’s second-biggest bank failure was of Bentonville, Ark.-based ANB Financial NA. ANB, which closed May 9, had $2.1 billion in assets and $1.8 billion in total deposits.

Mike Robinson, broker-owner of Exit Realty Northwest in Bentonville, said there were fears that when the FDIC took over ANB’s inventory of foreclosed properties "they would dump it on the market, and we would see a ripple effect on the marketplace."

But while the FDIC has begun disposing of homes ANB foreclosed on, "it seems like they are taking their time, and getting good appraisals or BPOs (broker price opinions) done, and pricing to the market and not just dumping inventory," Robinson said. "That is very encouraging."

While ANB’s failure has had an impact on the local housing market, it has not been entirely negative, Robinson said.

"We’ve seen some tightening of credit standards, tougher appraisals, they are much more conservative and paying more attention to the details of what they’re asking buyers to provide such as paycheck stubs and tax returns," Robinson said. "I don’t know that I can attribute it directly to ANB’s failure, but altogether I think it’s had an impact — and it’s a good impact, probably some loans were made that shouldn’t have been made."

In addition to disposing of real estate-owned properties, when the FDIC takes over a failed bank it can also engage in workouts with troubled borrowers in an attempt to prevent foreclosures.

Last month the FDIC announced a new program in which IndyMac Federal Bank FSB, the successor to IndyMac Bank, will modify thousands of loans to create more affordable debt-to-income ratios for borrowers.

Whether it’s selling repossessed homes or working on loan modifications with borrowers, the FDIC must maximize returns to protect its insurance fund, which recently fell below the 1.15 percent statutory minimum reserve ratio.

Next month, Bair said the FDIC board will consider a plan to restore the ratio within five years by increasing premium rates charged to participating banks and by shifting a greater share of any increase onto riskier institutions.

In the most recent failure, Alpharetta, Ga.-based Integrity Bank was closed down Aug. 29, with the bank’s five branch offices reopening this week as branches of Regions Bank. All Integrity Bank depositors automatically became Regions Bank customers with uninterrupted access to the full amount of their deposits, the FDIC said.

Regions Bank is paying a 1.012 percent premium for Integrity’s deposits and will purchase $34.4 million in assets. The FDIC will retain the bank’s remaining assets as receiver. Integrity Bank had $1.1 billion in assets and $974 million in deposits as of June 30.

Other FDIC-insured banks to fail so far this year are:

Columbian Bank and Trust Co. of Topeka, Kan., with total assets of $752 million and total deposits of $622 million, closed Aug. 22. Branch offices reopened the following Monday under the umbrella of Citizens Bank and Trust.

First Priority Bank of Bradenton, Fla., with total assets of $259 million and total deposits of $227 million, closed Aug. 1. Branch offices reopened the following Monday as SunTrust Bank branches.

First National Bank of Nevada of Reno, Nev., and First Heritage Bank NA of Newport Beach, Calif. (both owned by First National Bank Holding Co., Scottsdale, Ariz., and which together had total assets of $3.65 billion and deposits of $487 million), closed July 25. The two banks’ 28 offices reopened the following Monday as branches of Mutual of Omaha Bank.

First Integrity NA of Staples, Minn., with $54.7 million in total assets and $50.3 million in total deposits, closed May 30. The failed bank’s two offices reopened as branches of First International Bank and Trust of Watford City, N.D.

Hume Bank of Hume, Mo., with total assets of $18.7 million and total deposits of $13.6 million, closed March 7. The bank’s sole office reopened the following Monday as a branch of Security Bank of Rich Hill, Mo.

Douglass National Bank of Kansas City, Mo., with $58.5 million in total assets and $53.8 million in total deposits, was closed Jan. 25. The bank’s three offices reopened the following Monday as branches of Liberty Bank and Trust Co., New Orleans, La.


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