WASHINGTON - The Federal Deposit Insurance Corp. said Thursday that its bank fund's reserves grew for the first time in nearly two years, but hours later it announced the failure of a small Illinois bank.

The Bank Insurance Fund's third-quarter reserves rose 2 basis points from the previous quarter, to 1.36% of insured deposits. That was good news, considering the reserve ratio had dwindled for six consecutive quarters.

The Savings Association Insurance Fund also rose 2 basis points, to 1.45% of insured thrift deposits.

FDIC officials attributed the uptick in the bank fund to a $423 million reduction in reserves for anticipated failures. (Some banks the agency thought would close have been turned around.) The agency declined to say how many institutions had been thought near failure.

But reserves in the fourth quarter will be depleted by the failure of $91.7 million-asset National State Bank of Metropolis, which was founded in 1900 and is the seventh insured institution to go under this year. The Office of the Comptroller of the Currency said it shut the NSB Bancorp unit Thursday afternoon because its credit card processing operation for merchants had suffered high losses.

"These losses and subsequent provisions to absorb additional losses depleted capital and threatened the bank's liquidity," the OCC and the FDIC said in a joint press release.

Banterra Bank of Marion bought $23.7 million of National State's assets and all of its $67 million of insured deposits for a premium of about $2 million. Banterra was expected to reopen the Metropolis bank as a branch today. The FDIC said it did not know how much the failure would cost the bank fund.

The failure only compounded concerns about the funds' vulnerability. The FDIC has said recently that it is worried about the declines in reserve ratios because of the rapid growth of insured brokered deposits. Agency officials said these deposits grew 17.8% during the third quarter; and two-thirds of the increase was caused by Merrill Lynch & Co.'s movement of funds from uninsured cash management accounts to insured accounts in banks it owns.

Bankers have worried that the fund could drop below the minimum reserve ratio of 1.25% required by law, which would force all banks to pay deposit insurance premiums for the first time in four years.

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