WASHINGTON — The number of banks on the Federal Deposit Insurance Corp.’s “problem” list grew over the summer, even as the industry posted solid net income and fewer loans soured.
The number of troubled banks rose to 860 in the July-September quarter from 829 in the previous quarter. That’s the most since 1993.
The FDIC also said banks earned $14.5 billion during the third quarter. That was a decrease from the previous quarter’s $21.4 billion but well above the $2 billion banks earned a year earlier.
The troubled banks were on the small side on average, holding $379.2 billion in assets. That’s down from $403.2 billion in the April-June quarter.
FDIC Chairman Sheila Bair said she remained “cautiously optimistic” about the industry as banks work through bad loans made during the real-estate bubble.
“The industry has come a long way in cleaning up balance sheets, building capital and adjusting to changes in the financial markets and the economy,” Bair said. But she said “the adjustments are not over, and this is no time for complacency.”
The strong earnings were reported as banks set aside less money for future loan losses than at any time since the October-December quarter of 2007, before the financial crisis. Fewer borrowers were behind on payments for credit cards and construction loans.
Bair said banks’ solid profits in the past three quarters were the result of stable revenue and lower provisions for loan losses. At some point, she said, “the industry must begin to grow its revenues, and loan growth will be an essential ingredient.”
Banks constricted lending more modestly in the third quarter, reducing total loans and leases by $6.8 billion. The reduction was small compared to the second quarter, when loan balances fell by $106.6 billion.
James Chessen, chief economist for the Washington-based American Bankers Association, said the report shows “strong industrywide improvement and the continuing buildup of underlying strength.”
“Today’s report reaffirms that the banking industry is indeed regaining its footing in spite of the still-fragile economy,” Chessen said.
Bair, whose agency is working with other regulators to develop guidance for banks dealing with problem mortgages, said claims that banks mishandled foreclosure documents have “raised new questions about contingent liabilities.”
“If these issues are not addressed promptly, the resulting slowdown in resolving problem mortgages could delay the recovery of U.S. housing markets,” she said.
Bank of America, Ally Financial Inc. and JPMorganChase & Co. temporarily halted foreclosures to investigate whether employees acted improperly when validating foreclosure documents. Attorneys general in all 50 states opened an investigation last month into whether banks and loan servicers used faulty documents to seize homes.
The FDIC insured deposits at 7,760 lenders with $13.4 trillion in assets at the end of the third quarter. The insurance fund is used to reimburse customers for deposits of as much as $250,000 when a bank fails.
Information for this article was contributed by Daniel Wagner of The Associated Press and Meera Louis of Bloomberg News.
Business, Pages 27 on 11/24/2010