FDIC: More Sick Banks but Sector Is Recovering

The number of problem banks in the U.S. reached its highest totals since 1992 in the second quarter, but the Federal Deposit Insurance Corp. (FDIC) also reported Tuesday on signs that the banking industry is making positive strides toward getting back to functioning normally. While the number of problem banks and bank failures are increasing, the agency also said the number of bank loans 90 days or more past due has declined for the first time in four years.

The FDIC reported that its "problem bank list" grew to 829, up from 775 banks last quarter. FDIC chair Sheila Bair (pictured, right) said the agency expects the number of failed banks this year to exceed last year's total, with failures peaking in the third quarter. Already 118 banks have failed in 2010; there were 140 bank failures in 2009.

Assets of Problem Banks Decreased

However, the increased number of failures wasn't all bad news.

"While the number of banks that will fail this year will be higher than last year, it is generally speaking smaller-sized institutions," said Diane Ellis, an associate director with the FDIC during a morning press conference. "The way this crisis has unfolded is that the largest institutions were sort of hit first and smaller institutions later, and that's the way the failures are playing out as well."

Even though bank failures have increased, the assets of the "problem" institutions have decreased -- a positive sign. During the second quarter, assets of institutions on the FDIC "problem bank list" dropped to $403 billion from $431 billion in the first quarter.

FDIC chairman Bair said that the agency has enough money to cover the increased number of bank failures, reporting its insurance fund increased by $5.5 billion during the quarter.

"Best Quarterly Profit...in Almost Three Years"

In addition to the good news about the number of past-due loans declining, which helped decrease loan losses at banks, the FDIC also reported that earnings at FDIC-insured institutions increased some $21.6 billion in the second quarter. As loan losses declined, banks didn't have to place as much money in reserve, which helped their overall profits.

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"This is the best quarterly profit for the banking sector in almost three years," said Bair. "Nearly two out of every three banks are reporting better year-over-year earnings."

While she acknowledged the industry still faces challenges, Bair said that if economic conditions remained positive, many institutions could maintain profitability and hopefully increase lending.

"The banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction, putting banks in a stronger position to lend," said Bair.