Regulators shut banks in Maryland, Minnesota; 83 failures this year

Regulators on Friday shut down small banks in Maryland and Minnesota, pushing to 83 the number of bank failures this year amid the soured economy and rising loan defaults.

The Federal Deposit Insurance Corp. took over Baltimore-based Bradford Bank, with about $452 million in assets and $383 million in deposits. It also seized Mainstreet Bank, based in Forest Lake, Minn., with assets of $459 million and deposits of $434 million.

Manufacturers and Traders Trust, based in Buffalo, N.Y., has agreed to assume the deposits and assets of Bradford Bank. The nine branches of Bradford Bank will reopen Saturday as offices of M&T.

Central Bank, based in Stillwater, Minn., is assuming the deposits and assets of Mainstreet Bank, whose eight branches will reopen Saturday as offices of Central Bank.

In addition, the FDIC agreed to share with M&T losses on about $338 million of Bradford Bank's loans and other assets, and struck a similar agreement with Central Bank for around $268 million of Mainstreet Bank's.

The failure of Bradford Bank is expected to cost the deposit insurance fund an estimated $97 million; that of Mainstreet Bank about $95 million, the FDIC said.

Hundreds more banks are expected to fail in the next few years largely because of souring loans for commercial real estate. The number of banks on the FDIC's confidential "problem list" jumped to 416 at the end of June from 305 in the first quarter. That's the highest number since June 1994, during the savings-and-loan crisis.

Last week, Guaranty Bank became the second-largest U.S. bank to fail this year after the big Texas lender was shut down and most of its operations sold at a loss of billions of dollars for the government to a major Spanish bank. The failure, the 10th-largest in U.S. history, is expected to cost the insurance fund an estimated $3 billion.

The sale of most of Austin-based Guaranty's operations to the U.S. division of Banco Bilbao Vizcaya Argentaria, Spain's No. 2 bank, market the first time a foreign bank has bought a failed American bank during the current financial crisis.

The insurance fund has been so depleted by the epidemic of collapsing financial institutions that some analysts have warned it could sink into the red by the end of this year. The fund fell 20% to $10.4 billion at the end of June, the FDIC reported Thursday.

That's its lowest point since 1992, at the height of the S&L crisis. The agency estimates bank failures will cost the fund around $70 billion through 2013.

U.S. banks overall lost $3.7 billion in the second quarter, compared with a profit of $7.6 billion in January-March, according to the FDIC. Surging levels of soured loans at banks dragged down profits in the April-June period.

FDIC Chairman Sheila Bair said Thursday there were no immediate plans to borrow money from the government to replenish the insurance fund by tapping the agency's $500 billion credit line with the Treasury. The FDIC may, however, impose an additional fee on U.S. banks this year to bolster the fund, atop the estimated $5.6 billion from a new emergency premium that took effect June 30.

The FDIC is fully backed by the government, which means depositors' money is guaranteed up to $250,000 per account. And the agency still has billions in loss reserves — including $21.6 billion in cash — apart from the insurance fund.

This week, the FDIC opened the door wider for private investors to buy failed financial institutions. The FDIC's board voted Wednesday to reduce the cash that private equity funds must maintain in banks they acquire.

Private equity funds have been criticized as excessive risk-takers. But with fewer healthy banks willing to buy ailing institutions, the banking crisis has softened the FDIC's resistance to private buyers.