FDIC: 'Problem' Banks at 775

WASHINGTON—A total of 775 banks, or one-tenth of all U.S. banks, were on the Federal Deposit Insurance Corp.'s list of "problem" institutions in the first quarter, as bad loans in the commercial real-estate market weighed on bank balance sheets.

Poor loan performance in other sectors also continued to hurt banks, with the total number of loans at least three months past due climbing for the 16th consecutive quarter, FDIC officials said in a briefing on Thursday.

"The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility," FDIC Chairman Sheila Bair said.

There were 702 on the FDIC's "problem" bank list at the end of 2009 and 252 at the end of 2008.

FDIC officials said they expected the number of failed banks to peak this year after climbing steadily over the past three years. Regulators have shut 72 banks so far this year, more than double the number closed by this time last year. Ms. Bair said regulators were preparing for a steady pace of additional closures through the end of the year. A total of 237 banks have failed since the beginning of 2008.

The failures continue to strain the FDIC's fund to protect consumer deposits, although officials signaled they were confident they had enough cash on hand to deal with the expected spate of failures, without having to assess new fees on the banking industry. The agency's deposit insurance fund stood at negative-$20.7 billion at the end of the first quarter, a slight improvement from the end of 2009.

"We have the necessary industry-funded resources to complete the cleanup," Ms. Bair said, in a reference to the fees that the agency assesses on banks for insuring their deposits.

Banks, squeezed by problem loans and the continued recession, responded by reducing their lending. The industry's total loan balances grew by 3% during the quarter, but the increase was due to accounting changes that required banks to bring securitized assets back onto their balance sheets. Without taking into account these accounting changes, lending would have declined for the seventh straight quarter, as banks cut back across most major lending categories.

"There is a lot of credit distress still in the mortgage-portfolio area," FDIC Chief Economist Richard Brown said at the FDIC briefing.

FDIC officials said they saw some signs for optimism. The total $18 billion, first-quarter profit reported by U.S. banks and thrifts was the highest since the first three months of 2008 and more than triple the profit recorded in the first quarter of last year. More than half of insured banks reported growth in net income during the quarter—the highest level in more than three years—and firms set aside less money to reserve for future losses.

The FDIC data suggested that the largest U.S. banks were faring better than their smaller rivals. The former enjoyed the largest year-over-year increase in earnings and saw the biggest reduction in loan-loss reserves, or the money they must set aside to account for future, expected losses on loans. Ms. Bair said the rate of decline in lending by larger banks also slowed in each of the past two quarters.