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More bank failures are coming

Get ready for another wave of bank failures.

FDIC problem bank list at an 18-year high

A report issued Thursday by a bank ratings firm says 271 financial institutions with more than $130 billion in assets are “at extreme risk of failing this year.”

The report, issued by Highline Financial, rates banks based on an assessment of their capital, earnings power, liquidity, and asset quality. The 271 banks on its extreme-risk list have received Highline’s lowest rating three quarters in a row, the Austin, Texas, firm said.

Two-thirds of the banks on the list are small, with less than $250 million in assets. These banks have been dropping like flies for years as competitors bulk up and technology makes it tougher for tiny banks to compete.

But the list also includes two giant institutions, with assets of $10 billion or more. The report doesn’t name any of the troubled banks.

The watch list is new, Highline said, but CEO Terry Waters says his ratings have shown some predictive power. A look back to the start of the financial crisis shows that three-quarters of failed banks received the lowest rating for three straight quarters, Waters said.

Since the start of 2008, 247 banks with $616 billion of assets have failed, including 82 this year. Regulators have said they expect failures this year to beat last year’s toll of 140.

Highline’s watchlist isn’t the only sign of banking industry stress. The FDIC said last month that one in 10 banks is in trouble. The government said last week that 97 banks failed to make dividend payments due last month under the Troubled Asset Relief Program.

Missed TARP dividend payments are on the rise: SNL Financial says 74 banks missed their payments in February and 55 in November.

Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette, says many of these banks won’t survive. He points to a Moody’s survey of preferred dividend deferrals in the 1980s and early 1990s that shows most ended up either restructuring the investments or filing for bankruptcy.

“We can expect many of these 97 banks that are not yet in bankruptcy or receivership to eventually land there,” he said.

Update: Earlier I mistakenly called Terry Waters Terry Moore. My apologies for the error.