WASHINGTON — Bank profits rose substantially in the first quarter and institutions reported their best quarterly results since the second quarter of 2007, the Federal Deposit Insurance Corp. said Tuesday, even as the number of problem banks in the U.S. continues to rise.

“The trend is good. We’re going in the right direction. But let’s not declare victory yet, because there are still a lot of credit-quality problems out there, and loan demand is weak because a lot of people are trying to de-leverage,” said Bert Ely, president of research firm Ely & Co.

Banks insured by the FDIC reported profits of $29 billion in the quarter ended March 31, a 67 percent increase from the first quarter of 2010. It is the seventh consecutive quarter that industry earnings have registered year-over-year gains, the agency said.

But the number of problem banks – those with low capital levels – grew to 888 in the first quarter, up marginally from 884 in the prior quarter, the agency said, but still stuck at high levels.

The FDIC’s “problem list” has grown as a result of the financial crisis that shook the economy to the brink in 2008. The tally stood at 860 in the third quarter of 2010 and at 829 in the second quarter. The institutions on the troubled list are not disclosed by name.

Bank analyst Ely said that even though the growth of the problem bank list has slowed in recent months, it still represents roughly 12 percent of the 7,574 insured U.S. banks. Problem banks have assets of $397 billion, the FDIC reports. Ely added that most banks on the problem list will not fail.

Advertisement

Bank operating revenue was $5.5 billion, 3.2 percent lower than a year ago. However, the agency noted that the decline was concentrated among the largest institutions, with 60 percent of banks reporting year-over-year hikes in net operating revenue.

Of the 10 largest institutions – which together hold more than half of all insured institution assets – six reported year-over-year declines in net operating revenue and six had declines in non-interest income. Eight reported lower net interest income for the March quarter.

Jaret Seiberg, analyst at MF Global Inc., said that the declining revenue indicates that banks are risk-averse because of regulatory uncertainty, and are keeping tight reins on lending.

Ely said that the revenue decline is troubling. He added that even though smaller community banks will likely experience further revenue problems once the Federal Reserve adopts strict limits on debit interchange fees, the per-transaction fees that retailers pay on debit-card purchases.


Only subscribers are eligible to post comments. Please subscribe or login first for digital access. Here’s why.

Use the form below to reset your password. When you've submitted your account email, we will send an email with a reset code.