fdicThe banking industry had a “positive quarter” in the third quarter of 2014, according to the FDIC”s latest Quarterly Banking Profile. Banks continue to improve and are performing  better than during the same period a year ago. In the aggregate during the quarter, banks reported income growth based on growing revenue rather than just lower loan-loss provisions. However, the challenges of operating in a low interest rate environment continue. And even six years after the height of the financial crisis a significant number of problem institutions remain. The FDIC’s Quarterly Banking Profile for the third quarter of 2014 can be found here. The FDIC’s November 25, 2014 press release about the publication can be found here.


According to the FDIC, almost two thirds of all reporting institutions reported year-over-year growth in quarterly earnings during the third quarter. The proportion of banks that were unprofitable during the quarter fell to 6.4 percent from 8.7 percent a year earlier. In the aggregate, total loan balances increased and noninterest income was higher. Asset quality indicators also continued to improve as banks charged off $2.4 billion less from a year earlier and as noncurrent loans flee by 5.3 percent during the quarter.


The FDIC’s Chairman is quoted in the agency’s press release as saying that despite the continued improvement there are “challenges ahead.” Among other things, margins remain under pressure due to the low interest rate environment, which in turn is motivating institutions to extend asset maturities, creating vulnerabilities due to interest rate risk. Many banks, the Chairman also noted, are “increasing higher-risk loans to commercial borrowers.” All of these concerns, the Chairman noted, are “matters of ongoing supervisory attention.”


In addition, despite the positive news and the passage of six full years since the peak of the financial crisis, a significant number of problem institutions remain. According to the latest report, there are still 329 “problem institutions” on the agency’s list. (A “problem institution” is a bank that the FDIC ranks as a 4 or a 5 on its scale of financial stability. The agency does not release the names of the banks its regards as problem institutions.)


To be sure, the number of problem institutions has continued to decline. The third quarter of 2014, when the number of problem banks decreased to 329 from 354 at the end of the year’s second quarter (a decline of 7%), represents the 14th consecutive quarter that the number and assets of problem institutions has declined. The number of problem banks is now 63 percent below the post-crisis high of 888 at the end of the first quarter of 2011 and the number of problem banks at the end of the third quarter of 2014 is the lowest number of problem institutions since the end of the third quarter of 2009, when there were 305.


However, it is important to keep in mind that the number of banks overall is also declining, as banks fail or merge out of existence and as few new banks emerge. As recently as the end of 2007, there were 8,534 institutions reporting to the FDIC. At the end of the third quarter 2014, the number of reporting institutions was down to 6,589, representing a decline of over 1,945 (a decline of over 22%). While the banking sectors as a whole is improving, the number of problem institutions isn’t necessarily decreasing because the problem banks are getting better; in many cases, the problem banks simply no longer exist due to closures or mergers.


So, while the absolute number of problem institutions is down, because the overall number of reporting institutions is also declining, the percentage of problem banks remains surprisingly high given that we are now six full years past the peak of the financial crisis. As of the end of the third quarter, fully 5% of all banks continue to be ranked as “problem institutions.”


And indeed while the number of bank failures also continues to decline, banks are continuing to fail. The quarterly banking profile notes that there were only two bank failures during the third quarter, three others have failed so far during the fourth quarter, and 17 total have failed so far this year (albeit only five so far during the year’s second half). To be sure, the industry is on track for fewer bank failures this year than last year (when there were 24) – yet the problem institutions persist as do the bank failures, even as the number of failures continues to decline.


Though the number of bank failures is indeed declining, as the bank closures continue to come in, the period during which the FDIC will continue to be filing new failed bank lawsuits will also extend out into the future. As of the latest report on the agency’s website, the agency has already filed a total of 102 failed bank lawsuits, with 18 filed this year alone (although none since September). The agency’s website notes that it has authorized lawsuits in connection with 146 failed banks, suggesting that there are many more lawsuits yet to be filed. As the banks continue to fail, the number of authorized and filed lawsuits seems likely to continue to increase for some time to come.


The quarterly banking profile contains a wealth in interesting information. Among other things, the report details the distribution of U.S. banking institutions by size. Interesting, it turns out that 89.6 of all U.S. banks have assets less than $1 billion. Only 113 banks, representing 1.7 percent of all institutions, have assets greater than $10 billion. The problem of “too big to fail” is a serious issue, but there may also be problems in our banking industry owing to the sheer number of banks, particularly small banks. (For my prior discussion of a possible “too small to succeed” issue, refer here.)