First Drop in Number of Problem U.S. Banks Since 2006

The number of banks on the government’s list of institutions most at risk for failure fell in the second quarter, the first drop since before the financial crisis began.

Twenty-three lenders came off the list of so-called problem banks during the second quarter, bringing the total to 865, according to data released Tuesday by the Federal Deposit Insurance Corporation. Not all of the troubled lenders will inevitably fail, but the F.D.I.C. considers them most at risk, making the quarterly update one of the clearest measures of the banking industry’s health.

It was the first decrease in the number of problem banks since the third quarter of 2006. 

The report also contained other signs of improvement. There were 48 bank failures in the first half of 2011, far fewer than the 86 failures in the first six months of 2010. Last year’s total of 157 collapsed banks was the highest level since the last severe recession in the early 1990s.

 And the F.D.I.C. insurance fund that protects the nation’s depositors showed a surplus for the first time in two years. It stood at $3.9 billion, compared to a negative $1 billion balance at the end of the first quarter.

Still, the magnitude of problem banks — roughly one of every nine lenders — remains relatively high. And the number could rise again if the economy suffers another downturn — a prospect that seems increasingly likely amid all the grim data that has surfaced in the weeks since the list was compiled at the end of the June.

Martin J. Gruenberg, the acting F.D.I.C. chairman, played down that risk in some of his first public remarks since being nominated to run the agency in June.

“Banks have continued to make gradual but steady progress from the financial turmoil and severe recession that unfolded from 2007 and 2009,” Mr. Gruenberg said in a statement.

Beyond the drop in problem lenders, there were other signs that the industry is getting back on its feet. The nation’s 7,513 banks and savings institutions reported a total profit of $28.8 billion in the second quarter, up nearly 38 percent from a year ago and the eighth straight quarter that earnings have increased. Bank losses are also easing and loan balances grew for the first time since the second quarter of 2008. Bank losses continued to ease, while loan balances rose — albeit slightly — for the first time since the second quarter of 2008.

Much of the uptick in lending could be attributed to loans made to businesses as well as other financial institutions. Real estate lending continued to be very weak.

Total revenue fell for the second quarter in a row. Fee income declined as a result of more stringent regulations curbing overdraft charges and other penalty fees, while interest income was lower because of an increase of funds in low-yielding accounts at Federal Reserve banks. The pressure on revenue could get ratcheted up in the second half of the year if lending margins collapse in light of Fed’s recent pledge to keep interest rates near zero for the next two years.

Meanwhile, the recent market turbulence stemming from the debt crises in Europe and the United States continues to weigh on the industry. Deposits increased by almost 3 percent during the second quarter, with the bulk of the cash flooding accounts at the nation’s largest banks.

“Recent events have reminded us that the U.S. economy and U.S. banks still face serious challenges ahead,” Mr. Gruenberg said in a statement. “The F.D.I.C. will remain alert to the challenges going forward.”

Article source: http://www.nytimes.com/2011/08/24/business/first-drop-in-number-of-problem-banks-since-2006.html?partner=rss&emc=rss