FDIC Problem Bank Increase Puts Over 10% Of Banks At Risk Of Failure

August 31, 2010 – The latest FDIC Quarterly Banking Profile shows a 7% increase in the number of Problem Banks to 829 at June 30, 2010, up from 775 at March 31, 2010.   The number of problem banks is now at its highest level since March 1993 when there were 928.  More than 10% of all US banks are now classified as problem banks at risk of failure.  The FDIC insures deposits at 7,932 banks with total assets of $13.2 trillion.

The number of banking failures this year now totals 118 and is on track to double the 140 banking failures of 2009.   According to FDIC Chairman Sheila Bair, “Without question, the industry still faces challenges. Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high”.

Despite the challenges, Ms. Bair noted that “This is the best quarterly profit for the banking sector in almost three years.  Nearly two of every three banks are reporting better year-over-year earnings”.  Earnings, however, remain well below historical norms and 20% of all banks reported a loss for the quarter, compared to 29% in the previous year.

The banking industry may be showing signs of improvement but with over 10% of all banks on the Problem Bank List, the banking industry is far from a full recovery, especially if the economy continues to weaken.  Banks classified as “problem banks” generally have a weak capital position and a high likelihood of failure, especially if economic conditions worsen.

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Problem Bank Assets Decrease

Problem Bank assets decreased by $28 billion to $403 billion from $431 billion in the previous quarter.  Although larger banks have been reporting profit increases and have increased their capital positions, smaller and midsized banking institutions remain under duress as indicated by the increase in problem banks.  The average assets of the 829 problem banks is $486 million, suggesting that the problem bank list contains very few large institutions.

assets-of-problem-banksBanking Income Shows Tentative Rebound

The latest quarterly banking industry profits totaled $21.6 billion, a slight increase from the previous quarter.  The increased earnings, however, were the result of a reduction in loss provisions.   According to the FDIC, “The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While quarterly provisions remained high, at $40.3 billion, they were $27.1 billion (40.2 percent) lower than a year earlier”.  In addition, the coverage ratio for noncurrent loans is still dramatically below historical norms.

q-net-incomeearnings-factorsThe banking industry’s total reserves declined by $11.8 billion as larger banks reduced their loss provisions.  The ratio of reserves to total loans fell to 3.4% from 3.5% during the quarter but is still the second highest ratio in 63 years.

reserve-ratiosNoncurrent Loans Decrease

Asset quality trends showed improvement with the amount of noncurrent loans and leases  (past due 90 days or more) decreasing for the first time since the first quarter of 2006.  During the quarter banks charged off $49 billion in uncollectible loans, a slight decrease of $214 million from a year ago.

noncurrent-loansFDIC Deposit Insurance Fund (DIF) At Negative $15.2 Billion

The FDIC DIF improved slightly in the quarter to negative $15.2 billion from $20.7 billion due to increased assessments on insured banking deposits and a reduction in the contingent loss reserve to $27.5 billion from $40.7 billion.  The contingent loss reserve covers the cost of expected failures, indicating that the FDIC expects failed banking losses to decrease.

The DIF fund had been strengthened by a special FDIC assessment of $46 billion on the banking industry at the end of 2009.   The FDIC presently has liquid  resources of $44 billion, a decline from $63 billion at the end of the first quarter.  Liquid resources of the FDIC Insurance Fund represent a small fraction of total FDIC insured deposits of $5.5 trillion.

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