FDIC: Problem Bank List Over 300

The FDIC says the number of lenders on the "problem bank" list rose to 305, up from 252 in the last quarter of 2008. This is the highest level of troubled institutions since 1994.

"Banks are making good efforts to deal with the challenges they're facing, but today's report says that we're not out of the woods yet," says FDIC Chairman Sheila Bair. "As I see it, we're now in the cleanup phase for the banking industry. It will take some more time. But in the end, we'll have a stronger banking industry that's better able to meet the demand for credit as the economy recovers."

Banks seen as troubled by their regulators usually are faced with financial, operational or management problems that make them less stable. Usually banks that are placed on the list are considered most likely to fail, although few do. On average only 13 percent of the banks on the list actually fail. Banking regulators do not list the names on the list out of fear that depositors at those institutions may cause depositors to withdraw their money from them.

The FDIC gives the amount of assets controlled by those institutions. In the first quarter, that number shot up to $220 billion, up from $159 billion as of the end of 2008.

The increase in asset size for troubled banks may be attributable to the addition of BankUnited, a Coral Gables, FL lender that closed last Thursday and was sold to a group of private equity investors.

So far this year 36 banks have failed, including BankUnited. More financial institutions are expected to fail this year as many continue to deal with increased loan losses due to the ongoing recession. Though even if more do fail, it doesn't come close to the savings and loan crisis 20 years ago, when more than 1,900 financial institutions closed between 1987 and 1991 -- with 1989 seeing the most failures, 534.

Former FDIC Chairman William Isaac notes, "I am not surprised by the increase in the problem bank list from 220 banks to around 300 during the past quarter. The problem bank list is a lagging indicator, and it normally continues to climb for roughly 18 months following the end of a recession. Even at 300 banks, the problem bank list is quite modest compared to its level during the 1980s and early 1990s. It stood at 1,500 banks at the end of 1991." Isaac is now the Chairman of the LECG Global Financial Services, a consulting firm serving the banking industry.

Wholesale banking expert Nancy Atkinson also sees the number of troubled banks increasing. "Unfortunately, I do expect that the number of troubled banks will continue to grow throughout the rest of this year. Credit issues cannot be addressed and 'fixed' in a matter of months," says Atkinson, Aite Group's senior analyst. There is a ripple effect within the financial industry whenever credit becomes a problem due to securitization or syndication of loans, she adds. "It takes some time for credit to be unwound and to know the impact to all downstream banks. Further, even as consumer confidence seems to be increasing, there is a cautious optimism that will lead to slow increases in purchases and building of credit," she explains. Credit evaluation and extension will be restructured within financial institutions, and roles for all banks will change. "The number of troubled banks could easily reach three times the current amount by early next year," Atkinson warns.

Should an institution fail, the FDIC insures individual accounts up to $250,000 for single accounts.

The FDIC's Deposit Insurance Fund has taken a hit with the value of its fund fell in the first three months $4.3 billion, leaving slightly over $13 billion in the fund. The FDIC announced last week a one-time assessment fee on all domestic banks, which is expected to raise $5.6 billion for the fund. Bair didn't rule out another assessment later in the year to raise more money, as she expects the fund to continue to decline this year.

Bair adds the FDIC did not plan on tapping its credit line to the Treasury Department. It was recently increased from $100 billion to as much as $500 billion through 2010.

Despite setting aside $61 billion for future loan losses, the FDIC said banks collectively reported a net profit of $7.6 billion, compared to a loss of $26.2 billion in the fourth quarter of 2008.

Regulators warn loan deterioration remain their chief concern for the banking industry, particularly in areas like commercial real estate and loans made to businesses. The percentage of loans and leases where borrowers were behind on payments climbed from 2.95% a quarter ago to 3.76% in the first quarter, representing its highest level since 1991.