In its quarterly report on the banks, issued on Tuesday, the Federal Deposit Insurance Corporation (FDIC) said that the deposit insurance fund used to protect customer accounts dropped by $18.6 billion during the third quarter of 2009 to a deficit of $8.2 billion, while banks earned only $2.8 billion as loan defaults continued to hurt bank balance sheets. The agency said that the decline in the insurance fund was due primarily to an additional $21.7 billion set aside by the FDIC during the quarter for additional bank failures.

While the state of the economy is showing signs of recovery, there are lingering concerns related to the banking industry. As the industry has to tolerate bad loans that were made during the credit explosion, the trouble in the banking system goes even deeper Incorporatedreasing the possibility of more bank failures.

In the third quarter of 2009, the number of banks on the FDIC’s list of problem institutions grew to 552 from 416 in the second quarter. This is the highest since 1993. Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates bank failures to cost about $100 billion over the next four years.

In order to replenish the depleting fund, the FDIC board recently mandated the U.S. banks to pay fees for three years in advance. Also, the regulators are considering requesting the healthy banks to bail out the government as soon as it is necessary to replenish the deposit insurance fund. The FDIC also has access to the Treasury Department credit line of up to $500 billion.

The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. The outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund.

Most of the taxpayer-provided money was provided to financial institutions through the Troubled Asset Relief Program (TARP) as these are the backbone of the economy, and they were the primary victims of the recession. However, we continue to see more bank failures, with the tally reaching 124 so far this year. During the third quarter alone, 50 institutions failed, bringing the total number of failures in the first nine months of 2009 to 95.

The failure of Washington Mutual last year was the largest in U.S. banking history. It was acquired by JP Morgan Chase (JPM). The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (FITB), U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks (STI), PNC Financial (PNC), BB&T Corporation (BBT) and Regions Financial (RF).

According to the FDIC, banks set aside $62.5 billion to cover deteriorating loans during the third quarter, down 7.1% from the prior quarter. Though current signals indicate that the economy may stabilize, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.

Zacks Investment Research

1. (JPM) United States Bank Failure Tally Reaches 120 in 2009Regulators shut down 5 more banks in Georgia, Michigan, Minnesota, Missouri and California; tally hits...
2. ($USB) U.S. Bank Failures Zoom to 115 in 2009Regulators shut down 9 more banks Incorporatedluding California National Bank; total failed banks in ’09...
3. ($JPM) Bank Failures Pass 100 for the YearRegulators shut down 7 more banks in FL, WI, GA, MN and IL; total failed...
4. (CVBF) FDIC Makes it 99 U.S. Bank Failures Reach in 2009U.S. bank failures continue unabated as U.S. regulators on Friday closed down San Joaquin Bank...
5. ($FITB) Fifth Third Bancorp Eyes Federal Deposit Insurance Corporation DealsFifth Third Bancorp (FITB) is planning to acquire banks with the assistance of the Federal...
6. ($JPM) Will the Federal Deposit Insurance Corporation Borrow From Banks?About a year ago, during the height of the crisis, the government started bailing out...

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