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Big banks prosper but smaller lenders’ struggles deepen

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First-quarter profits tripled for the nation’s banking industry as big banks recovered their footing, the government reported Thursday.

But the news was not all good for the industry. Troubles at smaller lenders swelled the number of problem banks to nearly 10% of all institutions, according to the report by the Federal Deposit Insurance Corp.

The agency said that 775 institutions — most of them community banks — were on its list of troubled banks as of March 31, up from 702 at year-end.

That was the most since 1,066 in 1992, as the savings and loan crisis played out. The number peaked at 2,165 in 1987, but there were about twice as many U.S. banks and thrifts then, an FDIC spokesman said.

Names on the list are kept confidential to keep from spooking depositors while regulators work with the problem banks to clean up soured loan portfolios and to raise capital. “The vast majority of troubled banks do not fail,” FDIC Chairwoman Sheila Bair said in announcing the quarterly industry results Thursday morning.

Last year 140 banks failed, and 72 have gone under in 2010.

The total assets of problem banks increased to $431 billion from $403 billion, or an average of $556 million per bank, the FDIC said. By contrast, the largest banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. — each have more than $1 trillion in assets.

Taken as a whole, the banking industry is looking stronger. Government-insured banks and thrifts reported $18 billion in first-quarter profits, up from $5.6 billion a year earlier and the highest total in two years.

The largest year-over-year improvements occurred at the biggest banks, but 52.2% of the nation’s 7,932 insured institutions reported net income growth.

Bair noted that overall lending has yet to pick up, a result of lower demand for business loans and still drum-tight lending standards at most banks.

But provisions for loan losses were down, the balance sheet of the deposit insurance fund improved slightly, and these days there are more bidders and higher bids at failed-bank auctions — which means lower losses for the FDIC when it negotiates loss-sharing deals with acquiring banks.

And banks in need of fresh capital to bolster their reserves have been more successful in recent months at finding investors.

“The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility,” Bair said, but she added: “The trends continue to move in the right direction.”

In reporting its tale of two sectors, the FDIC said large banks have worked through many of the losses on mortgages and mortgage-linked securities that triggered the near meltdown of the financial system in 2008.

The losses at the small banks, mostly on construction loans and commercial mortgages, have built up as a result of the troubled economy, Bair said.

In a question-and-answer session, FDIC officials said they had not changed their estimate of $100 billion in losses the fund is expected to incur in the latest round of bank failures. But they said they might consider lowering that estimate in the future.

scott.reckard@latimes.com

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