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-sized institutions continue to suffer distress that will likely persist in the coming years.
Regional banks are especially vulnerable to losses on loans for commercial real estate, like 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. That was the highest annual total since 1992, at the peak of the savings-and-loan crisis. So far this year, 20 banks have failed. FDIC Chairman Sheila Bair said that pace likely will pick up this year.
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.
Most of the improvement in earnings was due to the largest banks. Yet for the first time in three years, more than half 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.
Troubled loans continued to increase. 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.
Consumers and businesses have cut spending in the weak economy. And banks have tightened their lending standards.
"Banks are increasing their capital levels, and the industry continues to set aside strong reserves to cover problem loans created by the high levels of unemployment and business failures," James Chessen, chief economist of the American Bankers Association, said in a statement.
He said U.S. banks overall have set aside reserves against potential losses of about $1.7 trillion. Chessen, like FDIC officials, stressed that 95 percent of banks are considered by regulators to be well-capitalized.
Bank failures pushed the FDIC's deposit insurance fund into the red last year. It was $20.9 billion in deficit as of Dec. 31, the agency reported — $12.6 billion deeper than the deficit three months earlier.
Bair said the fund is expected to bottom out this year. The FDIC expects further bank failures to cost the fund around $100 billion through 2013.
The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to help replenish the insurance fund.
The FDIC's reserves of cash and securities set aside to cover losses from failures jumped to $66 billion as of Dec. 31 from $23 billion at the end of September. Depositors' money — insured up to $250,000 per account — isn't at risk. The FDIC is backed by the government.
For all of 2009, banks earned $12.5 billion, up from $4.5 billion in 2008. Last year's earnings represented a return on assets of 0.09 percent, up from 0.03 percent in 2008.