Wednesday, February 24, 2010

List of problem banks grows

WASHINGTON — The number of U.S. banks considered troubled jumped to more than 700 last quarter even as the industry squeezed out a small profit in a recovering economy.
Loan losses and bank failures are likely to continue to haunt the industry as regional banks succumb to soured commercial real estate loans.

The snapshot for October-December 2009 issued Tuesday by the Federal Deposit Insurance Corp. offered a tale of two banking sectors. On the one hand, big banks have been gradually recovering, many of them with help from federal bailout money. On the other, small and mid-size institutions continue to suffer distress that likely will persist for years.

Regional banks are especially vulnerable to losses on loans for commercial real estate, such as stores and office complexes. These loans make up a disproportionate share of their business. Losses are growing as buildings sit vacant and builders default on their loans.

Such defaults could escalate the wave of bank failures that numbered 45 in the fourth quarter and totaled 140 last year, the highest annual total since 1992, at the peak of the savings-and-loan crisis. This year, 20 banks have failed, and FDIC Chairman Sheila Bair said that pace likely will pick up.

Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report by the Congressional Oversight Panel, which monitors the government’s efforts to stabilize the financial system.

The report also said that on nearly half of all commercial real estate loans, the borrowers owe more than the property is worth, and the biggest loan losses are expected for 2011 and beyond.

The FDIC said banks essentially broke even in the fourth quarter. They earned $914 million, compared with a $37.8 billion loss in the fourth quarter of 2008, at the height of the financial crisis. Still, nearly one in every three banks reported a net loss for the latest quarter.

Signs of improvement

Most of the improvement in earnings was because of the largest banks. Yet for the first time in three years, more than half of the 8,000 or so federally insured banks and thrifts reported higher income, compared with the year-earlier quarter.

“Consistent with a recovering economy, we saw signs of improvement in industry performance” in the fourth quarter, FDIC Chairman Sheila Bair said at a news conference. She noted, though, that a recovery in the banking industry usually lags behind an economic rebound.

“It’s not that this was a strong quarter,” Bair said. “It’s simply that everything was so bad a year ago.”

The increase in the number of banks on the FDIC’s confidential “problem” list, from 552 in the third quarter to 702 last quarter, “points to a likely rise in the number of failures,” Bair said. The combined assets of the 702 banks were $402.8 billion, up from $345.9 billion for problem banks in the third quarter.

Loan charge-offs, the debt that banks don’t expect to be repaid, vaulted to $53 billion from $38.6 billion in the fourth quarter of 2008.

Investor Report: REITsBank failures accelerate