5 banks safe from the storm

By Jon Markman

Ten U.S. banks have gone belly-up so far this year, yet the concept still seems vaguely distant. Unless you had money in the five-branch Integrity Bank of Alpharetta, Ga., or the nine-branch Columbian Bank of Topeka, Kan., or the eight other institutions in small towns with as much as $1 billion in deposits each, the announcements likely have slipped under your radar this summer.

Yet this is not something you should ignore, as if it is happening to some other poor fool. The banking system today is so interconnected -- and so many more banks are vulnerable -- that tens of thousands of Americans are likely to become victims of bank failures over the next year.

The list of troubled banks will likely reach into the hundreds and lead to half a trillion dollars in government and insurer costs, according to research by Chris Whalen, a veteran bank analyst at Institutional Risk Analytics, an independent firm. And all that money will come from taxpayers, customers at stronger banks and foreign buyers of U.S. debt, who aren't likely to continue to be so compliant that they hand it over without protest or a demand for something extra in return.

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David Kotok, the head of institutional firm Cumberland Advisors, agreed with that assessment in an analysis for clients this week, concluding that "stock market complacency about the financials hitting a bottom in mid-July is about to be sorely tested as we enter autumn."

There are plenty of ways to lose here, including two biggies: either by losing a portion of your own deposits or by investing in the banks themselves. In a moment, I'll give you suggestions on how to cope, including a short list of banks expected to be much safer than most.

But first let me note that it's impossible to know exactly how many banks will fail because the U.S. Office of Thrift Supervision and the Federal Deposit Insurance Corp., which are responsible for closing and rescuing insolvent banks, have been so secretive. The FDIC regularly announces how many troubled banks it is watching, but to avoid a panic, it won't reveal their names.

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Yet even that list is misleading. For example, IndyMac Bancorp (IDMC, news, msgs) in Southern California wasn't on the FDIC list of 90 problem banks in the first quarter, even though it was ultimately a $32 billion failure. So in three months it went from being a nonproblem to being the second-largest bank failure in history.

The trouble at banks stems from losses in real-estate, auto and credit card lending that are worsening every day as U.S. job losses mount, inflation rises and income levels shrink amid a widening recession. Realized loan losses at banks nationwide have risen to the stunning level of 1.3% of assets so far, but analyst Whalen's research suggests we're on target for at least a 2% annualized loss rate nationwide -- which was the level in the early 1990s, when more than 800 regional banks and thrifts went under because of bad real-estate loans.

Big institutions such as National City (NCC, news, msgs), based in Cleveland, and Washington Mutual (WM, news, msgs) in Seattle are already at 3% losses, and the examples of greater-than-expected losses continue to pile up. On Tuesday, First Horizon National (FHN, news, msgs) of Tennessee announced that its write-offs would be $100 million, or 20%, larger than the $485 million loss it had previously estimated. The company blamed more-extensive loan reviews and statistical analyses for the difference, as well as deteriorating collateral values of land and lots.

"Economic conditions continue to stress certain borrower segments," the company said in a news release.

Continued: Surviving the crash

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