With the addition of four more bank closures this past Friday night, the YTD number of bank failures now stands at 29, which already exceeds 2008’s total of 25 and is the highest annual total since 1993, at the end of the last era of failed banks. All signs are that the number of bank failures will continue to grow in the months ahead, a prospect that is already affecting the D&O insurance marketplace, even for smaller community banks. 


The four banks that closed this past week were: American Southern Bank of Kennesaw, Georgia, which prior to its closure had assets of $112.3 million (for further details about its closing, refer here); Michigan Heritage Bank in Farmington Hills, Michigan, which previously had assets of $184.6 million (refer here); First Bank of Beverly Hills in Calabasas, California, which previously had assets of $1.5 billion (refer here); and First Bank of Idaho in Ketchum, Idaho, which has assets of $488.9 million (refer here). 



Although the assets of three of the banks were sold to other financial institutions, the FDIC was unable to find a buyer for First Bank of Beverly Hills, forcing the FDIC to assume the financial institutions assets. 



The closure of American Southern Bank adds to the growing list of failed banks in Georgia, which, as I noted at length here, leads the nation in number of bank failures. With the addition of American Southern, there have been ten bank failures in Georgia since January 1, 2008, including five already in 2009. California is a close second behind Georgia in number of failed banks, and the failure of First Bank of Beverly Hills brings the number of California bank closures since January 1, 2008 to nine. 



But the overall geographic distribution of the latest four banks to fail, and indeed of the banks closed so far in 2009, highlights the fact that the bank woes are not concentrated in any one geographic area. Rather, the banking troubles seem to be distributed around the country. Banks have failed in 16 different states already this year, sprinkled across the national map. The FDIC’s complete list of failed banks since October 1, 2000 can be found here



These latest four closures also highlight the fact that the banking woes are not limited just to the largest banks; to the contrary, the bank failures increasingly seem to involve the smaller community banks. Three of the four most recently closed banks had assets below $500 million, and many of the other banks closed this year also were similarly smaller banks.



One generally accepted definition of a community bank is a banking institution with assets below $1.0 billion (refer here). By this definition, 25 of the 29 banking institutions that have failed this year are community banks, as only four the failed banks had assets over $1 billion. Indeed, most of the failed banks are very small; only seven of the 29 banks that have failed in 2009 had assets over $500 million. 



For many years, and even throughout the recent financial turmoil, community banks have been viewed as relatively safe. Their lack of involvement both in commercial lending and in subprime loans seemingly spared them the most significant problems that have characterized the current crisis – until now. The growing problems in residential real estate and rising unemployment levels are raising problems even in the community banking sector, as the bank closures described above demonstrate. Based on the 2009 bank closures, the community banking sector may now have become the leading edge for problems in the banking sector. 



Unfortunately, all signs are that these difficulties will continue in the months ahead. In the FDIC’s most recent Quarterly Banking Profile (as of December 31, 2008), the FDIC counted 252 institutions with assets of $159 billion on its “Problem List,” up from 171 institutions with $116 billion in assets at the end of the third quarter of 2008. (The FDIC does not identify the problem banks by name.) With unemployment growing and the number of troubled loans increasing, the number of banks on the “Problem List” undoubtedly will have grown when the FDIC releases its Quarterly Banking Profile for the first quarter of 2009 in a few weeks. And the bank closures are likely to continue to accumulate. 



The D&O insurance marketplace for the community banking sector had been a placid, quiet area where many insurers were willing to offer broad terms at low prices. However, as a result of the recent deterioration in the sector, the D&O insurance marketplace has very recently begun to change. There are still a number of carriers active in this space, but a number of players have recently started to take more conservative positions, even nonrenewing insureds in certain geographic areas or with certain characteristics. 



More restrictive terms that had largely disappeared, such as the regulatory exclusion, are suddenly reappearing in coverage proposals for some accounts. And banks that have been declined by several carriers may find they can only place their coverage at significantly increased premiums. The D&O insurance marketplace for community banks is placid no more. 



Perhaps the most noteworthy thing about these changes is how quickly they have taken place. This heretofore quiet corner of the D&O marketplace has very quickly become characterized by rapid chance. Although I have been and remain skeptical of some of the predictions about when we may see a hard insurance market, the speed of the changes in community banking sector represents the type and velocity of change that can occur in a market turn. It is still premature to say definitively that we are headed into a hard market anytime soon, even just for community banks, but there is some evidence to suggest that a harder market could well lie ahead.