A lull in loan defaults this spring enabled the nation’s banks to post their biggest quarterly industry profit in nearly three years, the Federal Deposit Insurance Corp. reported Tuesday.
But despite improved financial conditions that particularly helped big banks, small banks continued to fail in high numbers as a result of tanking commercial real estate projects, pushing the agency’s “problem-bank list” to the highest level since 1993.
FDIC Chairwoman Sheila C. Bair hailed the $21.6 billion increase in aggregate bank earnings in the second quarter, noting the stark contrast with the industry’s $4.4 billion net loss a year ago.
“Nearly two out of every three banks are reporting better year-over-year earnings” owing to nearly a year’s growth in the economy and declining losses on bad loans, she said.
While that leaves most banks in a better position to increase lending to small businesses and other clients, she said, a significant number of community banks continue to suffer from the aftereffects of the worst financial crisis and recession since the 1930s.
The FDIC added 54 small banks to its “problem list,” bringing the total to 829. That was the highest number since March 31, 1993, when 928 institutions were on the problem list in the fallout from the savings-and-loan crisis.
“Without a question, the industry still faces challenges,” Mrs. Bair said. “Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high.”
The cost of closing down a handful of banks each week and paying off depositors has created a $20.7 billion deficit in the bank insurance fund. But Mrs. Bair said she expects to have enough cash on hand from increased insurance premiums and liquidation of banks’ assets to pay for further bank closures.
“All costs of the FDIC are borne by the industry, not taxpayers,” noted James Chessen, chief economist at the American Bankers Association, adding that “the increase in the number of banks on the list of troubled institutions is not surprising, given some parts of the country are still mired in the recession.”
But the strengthened position of the majority of banks frees them to contribute more to growth in the economy, he said.
“Problem loans are down, allowing banks to put losses behind them and look for new lending opportunities,” he said. Still, demand for new loans from consumers and businesses remains depressed because of the recession and efforts to pay down past debts.
“Businesses are still reluctant to take on new debt without having hard evidence that consumers are willing to buy their products,” Mr. Chessen said. Banks, for their part, also remain cautious because of the uncertain economic outlook, he said.
Banks reported improvement in delinquencies on a wide variety of loans in the spring, after years of mounting defaults that were the principal cause of the financial and banking crisis that precipitated the recession.
Delinquencies on residential mortgages ticked down for the first time in years in the spring quarter, while late payments and charge-offs on credit cards have posted several months of decline.
The improvement reflects both the efforts of consumers to better manage their finances and bank moves to cut off credit to people and businesses with the poorest credit, analysts said.
The changes have likely been painful for many consumers, as they have tried to cut back on spending and save more while coping at the same time with the increased difficulty and expense of getting and maintaining credit, said Standard & Poor’s credit analyst Kelly Luo.
But some economists worry that the improvements seen this spring could be short-lived, as the economy has significantly weakened since then, while growth in employment has stalled. Credit card defaults, in particular, are closely tied to the rate of unemployment, which remains close to 10 percent.
Noticeably absent from the improving trend also has been the commercial real estate sector, which remains in a deep recession that has been dragging down many community banks.
“Small banks continue to have more exposure to commercial real estate, with 40 percent of their bank loans tied up in that sector,” said Mark Vitner, economist with Wells Fargo Securities. “We believe problems at this level have been consistently understated.”
While sales and leases of commercial property picked up some in the spring, the relatively good economic conditions at the time failed to prevent further rises in loan delinquencies, he said.
“The largest immediate issues with commercial real estate continue to be the overhang of commercial real estate loans coming due over the next few years and the large number of development projects that have been partially completed and continue to weigh on community bank portfolios,” he said.
• Patrice Hill can be reached at phill@washingtontimes.com.
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