Giants will continue to fall

May 27 (Bloomberg) -- U.S. “problem” banks climbed 21 percent to the highest total in 15 years in the first quarter, and provisions set aside for loan losses weighed on industry earnings, the Federal Deposit Insurance Corp. said.

The FDIC classified 305 banks with $220 billion in assets as “problem” lenders as of March 31, an increase from 252 with the $159 billion in assets in the fourth quarter. Assets at “problem” banks were the highest since 1993, the agency said today, without naming any lenders. The FDIC said its insurance fund slumped 25 percent to the lowest level since 1993.

“The first quarter results are telling us that the banking industry still faces tremendous challenges,” FDIC Chairman Sheila Bair said today at a briefing in Washington. “Going forward, asset quality remains a major concern.”

Regulators have taken over 36 lenders this year, including BankUnited Financial Corp. in Florida on May 21 and Silverton Bank of Atlanta on May 1, which combined cost the FDIC’s deposit insurance fund $6.2 billion. Twenty-one banks collapsed in the quarter, the most since late 1992, as the pace of failures accelerated amid the worst crisis since the Great Depression.

Funds set aside by banks to cover loan losses rose 64 percent to $60.9 billion in the first quarter from $37.2 billion in the year-earlier quarter. Bair said 97 percent of banks were “well-capitalized” at the end of the first quarter.

“Banks are taking prudent actions to set aside reserves and build more capital because they know they need to be prepared for problems over the next couple of quarters,” said James Chessen, chief economist for the American Bankers Association in Washington.

Insurance Fund

The deposit insurance fund, generated by fees paid by banks, fell to $13 billion from $17.3 billion in the previous quarter, and first-quarter failures cost the fund $2.2 billion, the FDIC said. The FDIC is imposing an emergency fee to raise $5.6 billion to rebuild the fund.

Banks classified as “problem” based on measures including asset quality, earnings and liquidity accounted for 1.62 percent of total assets, up from 1.14 percent in the fourth quarter. Regulators rate banks on a scale, with 1 being the highest and 5 the lowest. A bank rated 4 or 5 is classified as a “problem.”

FDIC-insured banks had net income of $7.6 billion in the first quarter compared with a $36.9 billion loss in the fourth. The FDIC said 22 percent of U.S. banks had a net loss and 59 percent reported lower net income compared with a year earlier.

Industry earnings were the highest in four quarters, the FDIC said. Citigroup Inc. reported a $1.6 billion first quarter profit on April 17 after five consecutive quarterly losses. JPMorgan Chase & Co., Goldman Sachs Group Inc., and Wells Fargo & Co. also beat analysts’ expectations with quarterly gains.

Capital Raising

Bank capital rose to $82.1 billion, the biggest three-month gain since the third quarter of 2004, with most of the increase coming from a “relatively small” number of lenders including recipients of U.S. aid, the FDIC said. “The good news is that banks have been able to raise a lot of new capital even before taking a more aggressive steps to cleanse their balance sheets,” Bair said.

The FDIC insures deposits at 8,246 institutions with $13.5 trillion in assets. The agency reimburses customers for deposits of as much as $250,000 when a bank fails.

To contact the reporters on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net; Alison Vekshin in Washington at avekshin@bloomberg.net.