FDIC: Banking Sector Improves, Problem Banks Persist

FDIC: Banking Sector Improves, Problem Banks Persist

The improvement in the banking sector continued in the first quarter of 2013, according to the FDIC's Quarterly Banking Profile for the first quarter of 2013, which the agency released on May 29, 2013. A copy of the Quarterly Banking Profile can be found here. Overall the industry reported aggregate first quarter net income of $40.3 billion, which represents a 15.8% increase in aggregate net income compared to the first quarter of 2012. More than half of the reporting institutions reported year-over-year increases in their quarterly earnings and the number of unprofitable banks dropped to 8.4% of reporting institutions, down from 10.6% in last year's first quarter.

The agency's May 29, 2013 press release about the Quarterly Banking Profile quotes FDIC Chariman Martin J. Gruenberg as saying that "Today's report shows further progress in the recovery that has been underway in the banking industry for more than three years. We saw improvement in asset quality indicators over the quarter [and] a continued increase in the number of profitable institutions."

Gruenberg also noted that there were "further declines" in the number of problem banks and bank failures during the quarter. The number of "problem institutions" did indeed decline again in the first quarter of 2013. (A "problem institution" is an insured depositary institution that is ranked either a "4" or "5" on the agency's 1-to-5 scale of risk and supervisory concern. The agency does not release the names of the banks on the "problem" list.)

During the quarter, the number of problem institutions declined, from 651 at the end of 2012 to 612 at the end of the first quarter of 2013. The number of problem institutions has declined significantly from the end of 2010, when there were 884 problem institutions. The FDIC reports that the decline in the number of problem institutions in the first quarter of 2013 represents the eighth consecutive quarter in which the number of problem institutions declined. The aggregate assets that the problem institutions represent also decline during the quarter, from $233 billion at the end of 2012, compared to $213 billion at the end of the first quarter. (By way of comparison, the equivalent figure at the end of 2009 was $402 billion.)

Though the number of problem institutions has declined, so too has the number of banking institutions. The number of reporting institutions declined from 7,083 at the end of 2012 to 7,019 at the end of the first quarter. And so while the number of problem institutions is declining, the percentage of problem institutions remains stubbornly high. The 612 problem institutions at the end of the first quarter represents 8.7% of all reporting institutions (down slightly from 9.1% at the end of 2012). And so while the banking sector overall is improving, a troublingly large number of banks continue to struggle to recover.

One of the more noteworthy effects of the crisis that banking sector has been through over the last several years has been the dramatic shrinkage in the number of banks. At the end of 2007, there were 8,534 banking institutions, meaning that between December 31, 2007 and March 31, 2013, 1,515 banks went out of existence, representing a decline of over 17%. Yet despite that substantial decrease (resulting from closures, mergers and so on), there are still 612 problem institutions in the industry, as of March 31, 2013.

If there is some good news here about the persistently high number of problem institutions, it is that the numbers of bank that actually are failing finally seems to be declining. There were only four bank closures in the first quarter of 2013, the smallest quarterly number since the second quarter of 2008, when two banks failed. Year to date, there have been 13 failures in 2013, compared to 24 during the same period in 2012. 51 banks total failed in 2012. Overall, 478 banks have failed since January 1, 2008.

The banking industry as a whole remains on the road to recovery. However, the problems from the credit crisis continue to haunt the industry. The number of problem institutions, though improving both in absolute numbers and in percentage terms, persists at an elevated level.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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