More banks are troubled even as industry recovers

BankiingThe 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 Thursday that the number of banks on its confidential “problem” list grew to 775 from 702 in the January-March period. But banks overall posted net income of $18 billion. That was up from $5.6 billion in the same quarter 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. But a majority of institutions posted gains in net income.

In another sign of health, 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 dipped 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 U.S. bank failures to cost the insurance fund around $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 noted that 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-sized banks. And a further decline in home prices, expected by many analysts, would cause more losses for banks.

“Another leg down in housing could extend the period for which the credit distress persists,” said Richard Brown, the FDIC’s top economist. “That’s a legitimate concern.”

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 dip 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.

A change in accounting rules forced banks to bring assets packaged into securities onto their balance sheets. That boosted the value of loans on banks’ books by nearly $249 billion, up nearly 2 percent from the fourth quarter of last year. Without the accounting change, however, loan volume would have declined.

Source: The Associated Press.