Number of troubled banks grows as overall industry profits

By Alan Zibel
Associated Press / May 21, 2010

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WASHINGTON — The number of troubled banks kept growing last quarter, even as the industry as a whole had its best quarter in two years.

The Federal Deposit Insurance Corp. said yesterday that the number of banks on its problem list, which is confidential, grew to 775 in the January-March period, from 702 in the previous quarter.

Overall, though, banks posted net income of $18 billion, up from $5.6 billion a year earlier.

“The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility,’’ FDIC chairman Sheila Bair acknowledged. But, she added, “The trends continue to move in the right direction.’’

The largest banks showed the most improvement. A majority of institutions posted gains in net income.

The FDIC’s deposit insurance fund, which fell into the red last fall, posted its first improvement in two years. Its deficit shrank by $145 million to $20.7 billion.

The amount of money that banks set aside to cover future losses fell nearly 17 percent from a year earlier. Losses taken on loans that banks don’t expect to be repaid were up 38 percent from a year earlier. But those losses were down slightly from the fourth quarter of last year.

The FDIC expects US bank failures to cost the insurance fund about $100 billion through 2013. The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to help replenish the fund.

Agency officials said they are getting higher bids and more bidders at auctions for failed banks. Banks have also been able to raise money in recent weeks to strengthen their balance sheets or make acquisitions.

Delinquencies on commercial real estate loans remain a source of trouble. That’s especially true at smaller and mid-size banks. And a further decline in home prices, expected by many analysts, would cause more losses for banks.

Last year, 140 federally insured institutions failed and were shut down by regulators. It was the highest annual number since 1992, during the peak of the savings and loan crisis. Last year’s failures extended a string of collapses that began in 2008, triggered by loan defaults in the financial crisis.

The pace of bank collapses this year exceeds last year’s. So far, 72 banks have failed in 2010. As a result of those failures and bank mergers, the number of FDIC-insured institutions fell to 7,932 in the first quarter.

That’s the first decline below 8,000 in the history of the FDIC, which was created in 1933. However, depositors’ money — insured up to $250,000 per account — isn’t at risk. The FDIC is backed by the government.