FDIC: Banks Improve, "Problem Institutions" Continue to Increase

While the condition of commercial banks continues to improve overall, the number of "problems institutions" also continues to grow, in both absolute and percentage terms, according to the FDIC's latest report on the banking industry. The FDIC's Quarterly Banking Profile, dated November 23, 2010 and reporting figures through September 30, 2010, showed that the FDIC now rates 860 banks as problem institutions, up 829 at the end of the second quarter.

The increased numbers of problem banks stands in contrast to the overall tenor of the report. Tthe FDIC said that during the thing quarter the banking industry was characterized by "resilient revenues and improving asset quality." Year over year earnings improved for the fifth consecutive quarter. Indeed almost two out of three institutions reported higher net income than a year earlier.

Other signs are also positive. Quarterly provisions for loan losses were at the lowest quarterly amount since the fourth quarter of 2008, net charge-offs were lower than both the previous quarter and the year-earlier quarter, and industry assets continued to improve.

However, within this good news, some evidence of continuing difficulties also emerged. One in five banks continues to be unprofitable. The 860 institutions reported as problem institutions represent more than 11 percent of all 7,780 insured institutions. In other words, the FDIC ranks about one our of nine of all banks in the country as problem institutions.

(The FDIC considers a bank a "problem institution" if it is ranked as either a "4" or a "5" on the agency's 1 to 5 scale of supervisory concern. Problem institutions are "those institutions with financial, operational, or managerial weaknesses that threaten their continued financial viability." The FDIC does not publish the names of the banks it considers to be problem institutions.)

The 860 problem institutions at the end of the third quarter represent an increase of 308 problem institutions during the twelve months since September 30, 2009, or about 56%. This increase is all the more noteworthy given that 172 banks closed during that period and so fell off of the problem list.

The number of problem institutions at the end of the third quarter is the largest number of problem institutions since March 31, 1993, when there were 928.

Read the FDIC: Banks Improve, "Problem Institutions" Continue to Increase in its entirety at the D&O Diary, a blog by Kevin LaCroix.