Banks report small profit, but problems persist

WASHINGTON --- 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.

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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. But small and midsized 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. 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, Bair said at a news conference. She noted, though, that a recovery in the banking industry usually lags behind an economic rebound.

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.