As we drive deeper into the second quarter of 2010, 57 banks have been closed throughout the United State during the calendar year by the Federal Deposit Insurance Corporation (FDIC) and the office of the comptroller of the currency. Assessing the US bank failure situation vis-à-vis 2009, considered the worst year for bank failures in decades, failures are almost twice that of 2009 – at this time in April 2009, 29 banks had shuttered their doors, Horizon Bank of Bellingham, WA was the 29th FDIC-insured institution to fail in 2009.

If we look at the hot spots of the situation, Illinois has the most failed banks in 2010, with a total of ten (10) institutions that have gone under this year alone. Florida is a close second with nine (9) bank failures in 2010. According to our research, bank failures have in significant part been due to construction and multifamily distressed assets.

Yesterday, the FDIC announced a torrent of bank closures in Illinois, which caused the state’s bank failure rate to spike to 10. The latest list of bank failures include Wheatland Bank, Peotone Bank and Trust Company, Lincoln Park Savings Bank, New Century Bank, Citizens Bank and Trust Company of Chicago, Broadway Bank, and Amcore Bank National Association. The FDIC is on pace to shatter the failed bank count of 140 set in 2009.

California banks reported a modest reduction in multifamily problems in the final quarter of 2009 over Q3 2009, but still reported nearly 80% more trouble overall than the same quarter in 2008. The final figures for the end of 2009 topped $1 Billion, up 80% from a year earlier. This figure includes multifamily loans that were reported as 30 days late, loans 90 days late, non-accrual, and multifamily REO.

Eleven banks in California reported multifamily loans that were 90 days late for a total of $87,686,000 in late loans, a more than 10-fold jump from the previous quarter. Most of this came from one bank, City National Bank in Los Angeles.

City National Bank has since amended their report having transferred a large portion of this debt to non-accrual status and at the same time booked in just under $30 Million in multifamily REO. The bank’s portfolio is struggling with a non-performing rate that tops 50%, an exceptionally high number. It’s important to note that City National Bank, with total assets topping $20 Billion is reporting more than adequate capital even while it deals with north of $600 Million in troubled real estate.

Only 27 California banks reported multifamily REO. First Regional Bank based in Los Angeles led the pack with more than $23 Million in multifamily REO  and a portfolio with 21% of loans non-current. First Regional reported low capital ratios and was subsequently closed by the FDIC on January 29th, 2010.

East West Bank in Pasadena had the second highest REO figures in California, for the asset class, with $13.3 Million and more than $34 Million in troubled multi-family loans in the pipeline. East West reports healthy capital ratios.

While it is encouraging to see that some banks are starting to take their medicine, it’s plain to see from the numbers that many lenders are refusing to take serious action on their non-performing notes. While California banks reported $81 Million in MF REO, late and non-accrual loans total more than 10X that, or $925 Million.

As 2010 plays out, a lineup of additional banks are set to fail. Many of those that survive will still have to shed massive amounts of distressed real estate. As we can see from the most recent FDIC (Federal Deposit Insurance Corporation) offering (banks closed a year ago) there is a significant lag time in bringing the failed bank’s assets to market.

US banks reported an increase in distressed mortgage and REO volume of nearly 10% over the previous quarter. Troubled real estate and distressed whole loans with banks now top $352 Billion, up from a little more than $320 Billion in the previous quarter.

Residential Real Estate Problems

As expected, residential real estate continued to be the dominant problem facing the nation’s banks in terms of dollar volume of distressed assets. For the first time, distressed loans and residential REO topped $200 Billion, up from $179.6 Billion in the previous quarter. Probably the most disturbing part of this trend is that the biggest increase came in the 90+ Day Late category, which jumped 22% in a single quarter. This suggests that problems are accelerating rather than abating.

Lenders only increased their residential REO balances by 1.6%, while non-accrual jumped 7.7%. Clearly there is a significant backup in processing foreclosures. It’s hard to see a way that this continued surge won’t result in a significant increase in available residential REO, and ultimately, lower home prices. It is important to point out that these figures are based on whole loan totals and not MBS, which encompasses the majority of residential mortgages. It would be reasonable, however, to assume that portfolio and securitized mortgages are experiencing similar trends.

Troubled Multifamily Property

Distressed multifamily balances continue to make up only a small fraction of the sea of bad loans and REO, but this past quarter the asset type saw the biggest increase in problems out of the four asset types that we track. Non-performing multifamily loan balances surged 23.3% last quarter while multifamily REO balances ballooned by 21.2%. So while distressed multifamily opportunities are rapidly increasing, the asset type still only comprises 3% of all real estate portfolio problems for America’s banks, 1,158 banks are reporting non-performing multifamily loans while 655 report multifamily REO. As of Q4 2009 banks are showing only $11.13 Billion in troubled multifamily loans, up from $9.19 Billion in the previous quarter.

Commercial Real Estate Distress

Banks started to book commercial real estate into REO at an increased pace at the end of 2009. Commercial REO balances jumped nearly 21% from the previous quarter. Non-performing (non-accrual) commercial real estate loans bumped up 15.4% while 90 Day Late loans dipped 7%, indicating that some lenders may be moving to take their CRE knocks sooner rather than later. A counter point to this is the fact that while banks are holding a little more than $7 Billion in commercial REO, their non-accrual CRE loans stand at $37.7 Billion, representing more than a 5-fold increase. Expect to see some of this move through the pipeline over the course of the year.

Construction Loans and Failed Projects

Construction loans make up 25% of our bank’s problems with a total bill of $89 Billion. This number only increased .4%. Construction REO jumped 14.4%, but late and non-accrual construction loans dropped .3% and 17.8% respectively. You could say, it would seem, that the one bright spot is that construction loan problems are abating. I’m hesitant to declare that, however, due to the fact that banks continue to whistle past the graveyard with non-performing construction loans.

Banks have made almost no progress in 3 quarters in reducing the level of construction loan non-accrual. Construction loans are usually fairly short term loans and banks haven’t been making them for a while, this accounts for the dwindling numbers. Not making construction loans is a double-edged sword, however, because while banks aren’t lending they have huge volumes of failed construction projects for sale. If developers can’t borrow, how can they buy?

Construction has been the leading cause of bank failures over the last 6 months. Expect to see many more who are failing to take meaningful action towards recovery on these projects. A lot of the bad construction loans are broken or failed condo projects, busted sub-divisions and the like. Well positioned developers could see a flood of opportunity this year.

Look for individual state and asset type reports over the next two weeks as we dive into BankProspector and pull out the data. Join our email newsletter, sign up for a Free State and US Bank Data account, or, start working on your own and sign up for BankProspector to access the distressed real estate data for each US bank directly.

The First National Bank of Georgia, located in Carrolton, GA, which had approximately $832.6 million in total assets and $757.9 million in total deposits was closed in late January 2010 by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC). Following the bank’s failure, depositors from its eleven branches became customers of Community & Southern Bank.

Community & Southern Bank paid the FDIC a 1.25 percent premium to assume all of the deposits of the failed Bank. The loss–share transaction between the FDIC and Community & Southern Bank is estimated to be worth approximately $607.4 million. The failure of First National Bank of Georgia represents the first bank failure in Georgia thus far in 2010. The cost to the Deposit Insurance Fund (DIF) is estimated at $260.4 million.

Distressed Pro’s BankProspector shows that First National Bank reported capital adequacy of 1% with nonaccrual real estate loans of $92 million, and an OREO balance of over $42 million. First National Bank of Georgia carried noncurrent distressed real estate loans at approximately 50% and 24% in their construction and multifamily loan portfolios respectively.

In late January, the Federal Deposit Insurance Corporation (FDIC), and California Department of Financial Institutions closed First Regional Bank of Los Angeles, CA. The 8 California branches of First Regional Bank will be transferred to First-Citizens Bank & Trust Company.

First Regional Bank, which recorded approximately $2.18 billion in total assets and $1.87 billion in total deposits by September 30, 2009. First-Citizens Bank & Trust Company agreed to purchase approximately $2.17 billion of First Regional Bank’s assets, while the FDIC retained the remaining assets for later disposition.

First Regional Bank is the first institution to fail in California in 2010 and the 14th FDIC-insured institution to fail in the nation.

Bank Prospector shows First Regional Bank had carried a leverage ratio of 6%, a nonaccrual balance of approximately $300 million, OREO of approximately $73 million, and noncurrent distressed totals of 17.13% of their portfolio. First Regional Bank collapsed under heavy pressure from construction multifamily, and residential loans, with approximately 45% of their residential loans being noncurrent. BankProspector captures ten (10) separate bank contacts that work at First Regional Bank.

The Federal Deposit Insurance Corporation (FDIC), in conjunction with the Georgia Department of Banking and Finance, continued its 2010 roll of shutting down banks with the January 29, 2010 closing of Community Bank and Trust of Cornelia, GA.

Following the closure, SCBT announced that its bank subsidiary would enter an $827.7 million purchase and assumption agreement to envelope Community Bank & Trust. The 36 branches of the full service Georgian Community Bank & Trust will reopen as branches of SCBT, N.A., but under the name Community Bank & Trust.

The FDIC estimates the cost associated with the bank failure to the Deposit Insurance Fund (DIF) will be $354.5 million. Community Bank & Trust is the second bank in Georgia, and the 13th FDIC-insured institution, to fail during 2010.

BankProspector shows Community Bank & Trust carries a 9% leverage ratio, $12 million in nonaccrual real estate loans, and over $40 million in OREO. Ballooning noncurrent loan portfolio percentages, especially in Construction and Multifamily asset types at 26% and 24% respectively, crippled Cornelia, GA Community Bank & Trust.

On Friday, January 29, 2010, the Washington Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC) closed American Marine Bank of Bainbridge Island, WA. This was following December 2009 attempts by American Marine Bank to improve its lending and management policies, and failed hopes that an investor would rescue the 61-year-old Washington state institution.

American Marine Bank, much like other banks in the region, has experienced defaults in real estate and participation loans since the economy’s real estate-fueled downturn began. With homebuilders and developers unable to provide debt service, American Marine Bank began to buckle as FDIC insurance premiums and costs increased. From the close of Q3 2008 to Q3 2009, the bank’s loan losses ballooned ten-fold from $1.8 million to over $18 million.

The 11 branches of American Marine Bank are in the process of being transitioned to Columbia State Bank.

The Federal Deposit Insure Corporation and Columbia State Bank entered into a loss-share transaction on $255.1 million of American Marine Bank’s assets. Columbia State Bank will share in the losses on the asset pools covered under the loss-share agreement. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be approximately $59 million. Columbia State Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. American Marine Bank is now the15th FDIC-insured banking institution to fail during 2010.

From the latest (Q3 2009) call reports, BankProspector reports American Marine Bank with leverage ratio of 4%, nonaccrual real estate loans over $25 million, and OREO balances over $7 million. American Marine Bank fell mainly due to their Construction and Multifamily portfolio, 35% and 16% of which was noncurrent.

On Friday, January 22, 2010, Premier American Bank, Miami, FL was closed by The State of Florida Office of Financial Regulation. Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver. All deposit accounts, excluding certain brokered deposits, have been transferred to Premier American Bank, N.A., Miami, FL, a newly chartered National Bank.

In addition to assuming all of the deposits of the failed bank, Premier American Bank, N.A. agreed to purchase essentially all of the assets.
The FDIC and Premier American Bank, N.A. entered into a loss-share transaction on $300 million of Premier American Bank’s assets. They will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers. However, as part of this transaction, the FDIC will acquire a cash participant instrument. This instrument serves as additional consideration for the transaction.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) for this failure will be $85 million. Premier American Bank is the fifth FDIC-insured institution to fail in the nation this year, and the first in Florida.

Distressed Pro’s BankProspector shows that Premier American Bank reported capital adequacy of 2% with nonaccrual real estate loans of $88 million, an OREO balance over $3 million, and non-current real estate loans at approximately 32%, the majority of which are in multifamily and construction.

Premier American Bank Miami, FL Cause of Death: Multifamily and Construction Loan Complications.

Following the bank’s failure, FDIC sold four of the Miami-based branches, as well as $326 million in deposits and some of its assets to Bond Street Holdings, a Naples-based company, and now parent company to Premier American Bank, N.A.. Dan Healy, the Executive Chairman of Bond Street Holdings noted that the real estate crisis in Florida has made it hard for many banks to lend significantly to small businesses, but stated, “I think it’s a profitable place.”

Multifamily loan problems increased significantly but multifamily REO increased only modestly. Over all banks saw a 24.6% increase in multifamily problems but figures are still dwarfed by the other three categories (commercial, construction, and residential).

Bank owned multifamily balances only increased 6.9% to about $1.6B at the end of Q2. The modest increase could be an indication that lenders are holding out hope for the successful workout of troubled loans.

Nonaccrual balances, loans that are not expected to be repaid according to terms, jumped up 27.9% to more than $6B. Again a relatively modest number all things considered.

Multifamily loans reported as 90 days late increased dramatically, by more than 50%. The small balance though of $649MM means multifamily is likely the least of many lender’s problems.

The total distressed multifamily whole loan and REO (bank owned property) figures stand at about $8.3B. While this figure is a small piece of the total distressed real estate market it represents a big opportunity for the savvy multifamily broker or investor.