About 12 percent of U.S. banks at risk of failing in 1Q

WASHINGTON — Nearly 12 percent of all federally insured banks were at risk of failing in the first three months of 2011, the highest level in 18 years.

That proportion is about the same as in the October-December quarter last year.

The FDIC added only four banks to its list in the January-March quarter, raising the total to 888 from 884. Banks on the list are deemed by examiners to have very low capital cushions again risk.

In the January-March period, the industry reported its highest earnings, $29 billion, since before the financial crisis hit more than three years ago.

But only a small fraction of the 7,574 federally insured banks — the 1.4 percent with assets exceeding $10 billion — drove the bulk of the earnings growth. They accounted for about $24.4 billion of the industry's earnings last quarter.

These are the largest banks, such as Bank of America, Citigroup, JPMorgan Chase & Co. and Wells Fargo & Co. Most of these banks have recovered with help from federal bailout money and record-low borrowing rates.

By contrast, most of the banks that have struggled or failed have been small or regional institutions. These banks depend heavily on loans for commercial property and development — sectors that have suffered huge losses. As companies shut down during the recession, they vacated shopping malls and office buildings financed by those loans.

Washington state mirrors the national trends: The state's banking industry reported $9 million in earnings, the first time it's netted a profit since the second quarter of 2008.

But small banks in Washington are faring worse than Washington banks with more than $100 million in assets. About one-quarter of the larger banks were unprofitable in the first quarter. By contrast, 36 percent of small banks were unprofitable.

Nationwide, the amount that banks set aside for possible losses on loans fell by more than half last quarter, to $20.7 billion from $51.6 billion in the year-earlier quarter. But many banks pulled in less revenue in the January-March period than they did a year earlier.

And overall net revenue declined 3.2 percent to $5.5 billion. It was just the second time in 27 years that the industry has reported less revenue than in the year-earlier quarter. As with the increased earnings, the drop in revenue was concentrated among the banks with more than $10 billion in assets.

FDIC Chairman Sheila Bair said some of the revenue decline was likely due to new rules that limit banks' charges for overdrafts on checking accounts. Banks are now barred, for example, from automatically enrolling customers in checking overdraft programs, which often charge $35 or more per violation.

Bair said the financial overhaul enacted last year wasn't the root cause of the decline in revenue. "I think it's a broader problem with the economy," she said.

Speaking to reporters, Bair said, "While the industry as a whole shows signs of improvement, many institutions are still struggling."

Forty-three banks have failed so far this year, though the pace has slowed from last year, when 157 banks failed. That was the most in a year since 1992, at the height of the savings and loan crisis.

Only one bank has failed in Washington state so far this year, compared with six banks at this time last year. The FDIC estimates the failure of Burlington-based Summit Bank, announced Friday, will cost the deposit insurance fund $15.7 million.

Bair will step down as FDIC chairman in early July, ending a five-year term in which she helped craft the government's response to the 2008 financial crisis. On her watch, the number of problem banks jumped more than 17 fold, from 50 banks totaling $6 billion in assets in June 2006 to 888 banks with $397 billion in assets.

Last year's 157 bank failures nationwide cost the deposit insurance fund an estimated $21 billion. But in the January-March quarter, fewer failures allowed the FDIC's deposit insurance fund, which fell into the red in 2009, to strengthen.

The fund's deficit narrowed to about $1 billion from $7.4 billion in the October-December period. Bair said the agency expects the fund to turn positive in the current April-June quarter.

Bair said banks may set aside less money for potential losses in the coming months, giving a boost to their earnings. Still, she said most institutions have already realized such gains.

"We're approaching a critical point in the credit cycle, where banks are starting to compete more aggressively for quality loan customers," she said. "So we may face the risk of the pendulum swinging too far back in the other direction, with banks having incentives to substantially relax lending standards in the pursuit of scarce loans."

The FDIC is backed by the government, and its deposits are guaranteed up to $250,000 per account. Apart from its deposit insurance fund, the agency also has tens of billions in loss reserves.

Seattle Times reporter Sanjay Bhatt contributed Washington state information to this story.