State regulators closed Heritage Community Bank of Glenwood, Ill. and Security Savings Bank of Henderson, Nev. Friday, bringing the total number of U.S. banking institutions closed during 2009 to 16.

The Federal Deposit Insurance Corp. was appointed receiver and arranged for other institutions to acquire all of the failed banks' deposits, including uninsured balances and CD deposits made through brokers.

Both failed institutions were included in TheStreet.com's updated list of undercapitalized banks, which is the second list in our recent article focusing on undercapitalized savings and loans.

Please see TheStreet.com's Bank Failure Map for an interactive summary of all previous bank and S&L failures during 2008 and 2009.

The FDIC also announced amendments to the restoration plan for its deposit insurance fund, including an extra 20-basis point assessment on deposits, in addition to deposit insurance premiums already being collected. The assessments will be charged on Sept. 30.

When the FDIC released its Quarterly Banking Profile Thursday, it announced that its deposit insurance fund totaled $18.9 billion as of Dec. 31, a decline of $15.7 billion during the fourth quarter, as the agency handled twelve bank failures.

The agency also announced a combined net loss of $26.2 billion for the bank and S&L industry during the fourth quarter of 2008.

Heritage Community Bank

Heritage Community Bank had total assets of $233 million and total deposits of $219 million. MB Financial Bank of Chicago (a subsidiary of MB Financial ( MBFI)) agreed to assume all of the closed institution's deposits and most of its assets for a discount of $14.5 million. Heritage Community's four offices were to reopen as branches of MB Financial on Saturday.

While the Illinois Department of Financial Professional Regulation had not yet issued a press release Friday night on the failure of Heritage Community Bank, the institution was significantly undercapitalized per regulatory guidelines, with a tier 1 leverage ratio of 2.04% and a total risk-based capital ratio of 3.29% as of Dec. 31. These ratios need to be at least 5% and 10%, respectively, for an institution to be considered well-capitalized.

TheStreet.com Ratings had assigned Heritage Community Bank an E (Very Weak) financial strength rating in September, downgrading the institution from the D- (Weak) rating assigned in December 2007.

Heritage Community reported net losses of $21 million during 2008 as loan losses mounted, primarily in the institution's construction loan portfolio.

The FDIC estimated that the cost to its insurance fund would be $41.6 million. As part of its agreement with MB Financial, the FDIC agreed to "share in the losses on approximately $181 million in assets covered under the agreement."

Security Savings Bank

Security Savings Bank had total assets of $238 million and total deposits of $175 million as of Dec. 31. The FDIC arranged for Bank of Nevada of Las Vegas (held by Western Alliance Bancorp ( WAL)) to acquire all of the failed bank's deposits, along with $111 million in assets. Security Savings Bank's two offices were set to reopen Monday as Bank of Nevada branches.

In its press release announcing its takeover of Security Savings, the Nevada Financial Institutions Division didn't provide any specific reasons for the failure, but Security Savings was critically undercapitalized per regulatory guidelines, with a tier 1 leverage ratio of just 1.91% and a total risk-based capital ratio of 4.84% as of Dec. 31.

TheStreet.com Ratings had assigned Security Savings Bank an E (Very Weak) financial strength rating in December, based on Sep. 30 data, when the institution was still considered well-capitalized. This was a downgrade from an E+ rating the previous quarter. Before that, the institution had received a D- (Weak) rating in December 2007.

Like so many failed banks in states at the forefront of the real estate boom-and-bust cycle, Security Savings was overwhelmed by loan losses concentrated in its construction lending portfolio.

The FDIC retained approximately $127 million of the failed bank's remaining assets for later disposition and estimated the cost to its insurance fund would be $59.1 million.

Ratings

The two bank closings this week turned out well for depositors, because the FDIC was able to find banks willing to acquire all deposits, including uninsured balances and brokered CDs.

However, in many other bank and S&L failures during 2008 and 2009, this was not the case. Sometimes uninsured deposits were not acquired, and depositors with these balances became creditors to the FDIC receiverships, waiting for the agency to pay "dividends" on some of their uninsured funds.

In some instances, CD deposits made through brokers were not acquired, meaning that customers had to wait for their brokers to collect their balances (no longer earning interest) from the FDIC. These depositors would then need to find new parking places for their cash, quite possibly at lower rates than those their brokers had locked in previously.

As a depositor, you should know that even if your personal deposits are under FDIC insurance limits, you or someone you know is probably associated with a business, organization or government entity (such as a school district) that has large deposits of somebody else's money in a local bank. In this environment, it is a very good idea to look into the health of your bank.

TheStreet.com Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans which are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.
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Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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