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Last Friday, U.S. regulators shuttered two more banks in Florida and Illinois, taking the number of failed banks thus far in 2012 to 49. This follows 92 bank failures in 2011, 157 in 2010 and 140 in 2009.

While the financials of a few large banks are stabilizing on the back of an economic recovery and increasing dependence on noninterest revenue sources, the industry is still on uncertain ground. The picture that emerges from the sector is not unlike 2011, with nagging issues like depressed home prices, still-high loan defaults and unemployment levels troubling these institutions.
 
The lingering economic uncertainty and its ill effects weigh on many a bank. The need to absorb bad loans offered during the credit explosion has made these banks susceptible to myriad problems.

The Failed Banks

  • Lutz, Florida-based Heritage Bank of Florida, with total assets of about $225.5 million and total deposits of $223.3 million as of September 30, 2012.
  • Princeton, Illinois-based Citizens First National Bank, with about $924.0 million in total assets and $869.4 million in total deposits as of September 30, 2012.

The Acquirers

Conway, Arkansas-based Centennial Bank has agreed to assume all of the deposits and $193.7 million assets of Heritage Bank of Florida.

Bloomington, Illinois-based Heartland Bank and Trust Company has agreed to assume all of the deposits and assets of Citizens First National Bank.

Impact on FDIC Fund

These bank failures represents a further dent in the deposit insurance fund (DIF), meant for protecting customer accounts.

The FDIC insures deposits in 7,246 banks and savings associations in the country as well as promotes their safety and soundness. When a bank fails, the agency reimburses customer deposits of up to $250,000 per account.

Though the FDIC has managed to shore up its deposit insurance fund over the last few quarters, the long spate of bank failures have kept it under pressure. However, as of June 30, 2012, the fund rose for the fifth straight quarter.

Also, the balance increased to $22.7 billion as of June 30, 2012 from $15.3 billion at the end of 2011. The continued improvement in the net worth of the fund is attributable to a slackening pace of bank failures and rising assessment revenue.

The failure of Heritage Bank of Florida will cost the FDIC about $65.5 million, while Citizens First National Bank will cost about $45.2 million. From 2012 through 2016, bank failures are estimated to cost the FDIC about $10 billion.

Shrinking Problem Bank List

The number of banks on FDIC’s list of problem institutions saw a sharp decline for the fifth straight quarter to 732 in the April-June period from 772 in the sequentially preceding period.

Increasing loan losses on commercial real estate could trigger many more bank failures in the upcoming years. However, considering the moderate pace of bank failures, the 2012 number is not expected to exceed the 2011 tally.

Consolidation to Continue

With so many bank failures, consolidation has become the industry trend. For most of the failed banks, the FDIC enters into a purchase agreement with healthy institutions.

When Washington Mutual collapsed in 2008 (the largest bank failure in the U.S. history), it was acquired by JPMorgan Chase & Co. (JPM - Analyst Report). Other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB - Analyst Report) and BB&T Corporation (BBT - Analyst Report).

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