Last Friday, U.S. regulators shuttered Cocoa Beach, Florida-based Coastal Bank, taking the number of failed banks thus far in 2011 to 40. This follows 157 bank failures in 2010, 140 in 2009 and 25 in 2008.

While the financials of bigger banks have been stabilizing on the back of an economic recovery, many smaller banks are still struggling to survive. Nagging issues like rock-bottom home prices along with still-high loan defaults and unemployment levels continue to trouble such institutions.

Lingering effects of the financial crisis continue to weigh on many banks. It becomes a prerequisite for such banks to absorb bad loans offered during the credit explosion, making them susceptible to some severe problems. The uncertain environment is aggravating the risk of bank failures even further.

Coastal Bank had total assets of about $129.4 million and total deposits of about $123.9 million as of March 31, 2011.

This failure represents another blow to the Federal Deposit Insurance Corporation (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for these banks.

The Federal Deposit Insurance Corporation (FDIC) insures deposits in 7,657 banks and savings associations in the country as well as promotes the safety and soundness of these institutions. When a bank fails, the agency reimburses customers deposits of up to $250,000 per account.

Though the FDIC has managed to shore up its DIF over the past few quarters, the outbreak of bank failures has tested its limits. As of December 31, 2010, the fund remained in the red with a deficit of $7.4 billion, slightly better than the deficit of $8.0 billion in the prior quarter. The agency expects the fund to swing back to a surplus later this year.

The failure of Coastal Bank is expected to cost the FDIC about $13.4 million.

Miami, Florida-based Premier American Bank, National Association has agreed to assume the assets and deposits of Coastal Bank. The FDIC and Premier American Bank, N.A. have agreed to share losses on $108.2 million of Coastal Bank’s assets.

The number of banks on FDIC’s list of problem institutions increased to 884 in the fourth quarter of 2010 from 860 in the previous quarter. This is the highest number since the savings and loan crisis in the early 1990s.

Increasing loan losses on commercial real estate could trigger hundreds of bank failures in the coming years. Going by the current rate of bank insolvencies, the DIF is likely to feel a $52 billion dent by 2014. However, the pace of bank failures has been slow so far this year.

With so many bank failures, consolidation has become the industry norm. The failure of Washington Mutual in 2008 was the largest in the U.S. banking history. It was acquired by JPMorgan Chase & Co. (JPM). The other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB) and BB&T Corporation (BBT).

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