Ninety-two banks failed in 2011, well below the previous two years' totals. The list of what regulators call "problem banks" is shrinking. And the latest two bank failures were the first in nearly a month — the longest failure-free period in almost three years.
So is the era of troubled banks over? Don't bet on it.
Although the numbers are improving — 140 banks failed in 2009 and 157 failed in 2010 — an analysis by The Wall Street Journal suggests that failures are down, at least in part, because troubled banks aren't failing as quickly. Weak banks are staying alive for longer periods in undercapitalized condition, and they are in weaker shape when they fail than in the past.
This and the fact that 844 institutions remain on regulators' problem-bank list suggests failures will be a part of the landscape for many months, maybe years, as weak banks take a long time to recover or fail, analysts and banking industry participants said. The weakness also underscores the industry's divide between healthier larger banks and struggling smaller banks.
"As the economy stumbles along, we are going to see more failures," said Bert Ely, an independent banking consultant. "I think we probably have another year or two."
Regulators say they aren't deliberately keeping troubled banks around longer. The improving economy, stumbling or not, means the banks are deteriorating more slowly, the regulators say, so they are getting more time before failure to raise capital and fix their problems on their own.
"If we believe there's a realistic chance...we're more willing to let them get that capital raise," said Kris Whittaker, deputy comptroller for special supervision at the Office of the Comptroller of the Currency, one of the main federal bank regulators. "This is a judgment that we have to make."
The Journal's analysis shows 66% of 2011's failed banks were "significantly undercapitalized" — regulatory threshold in which capital is far below preferred levels — for at least six months before they failed, compared with 29% of 2010's failures. The median reported Tier 1 risk-based capital ratio, a key measure of a bank's health, was 25% lower at the time of failure for 2011's failed banks than for 2010's.
One example: Decatur First Bank, a Decatur, Ga., bank with $184 million in assets, declined to significantly undercapitalized status in September 2010, but the bank wasn't seized until October 2011. The bank's attempts to raise more capital were outstripped by a wave of 12 straight quarterly losses. When Decatur First failed, its core Tier 1 capital, another indicator of a bank's health, was down to just $895,000.
Georgia Banking and Finance Commissioner Rob Braswell, whose agency shut down Decatur First, said he couldn't comment on specific banks, but that his department hasn't altered the criteria it uses in deciding when to close a bank.
Other banks have long been weak but are still alive. American Patriot Bank of Greeneville, Tenn., with $94 million in assets, has been significantly undercapitalized since March 2010. That August, the Federal Deposit Insurance Corp. ordered the bank to produce a plan to boost capital to safe levels, but American Patriot hasn't come up with a plan that satisfies regulators, the bank's holding company said in its last quarterly report.
American Patriot has said it is evaluating capital options and seeking an acquisition or merger with another bank. An American Patriot executive couldn't be reached for comment.
The Government Accountability Office said in June that regulators had been "inconsistent" and often hadn't acted quickly enough in addressing signs of banks' deterioration. Banks on regulators' watch lists that ultimately failed spent a median time of 21 months on the lists before failure, the GAO indicated.
Regulators say they don't want to seize a bank too quickly if it is potentially viable, and have to give troubled banks a fair chance to save themselves. It is only when it becomes "critically" undercapitalized — an even lower threshold than "significantly" undercapitalized, when tangible equity is less than 2% of assets — that the law requires regulators to move toward a potential seizure.
The FDIC noted that in 2011, banks' profitability reached the highest level since before the recession and said private capital is again flowing into the sector. "Banks continue to work hard to clean up their balance sheets and improve their overall condition," the FDIC said in a statement. The improved economy and resulting better profitability "can help to stabilize a troubled bank's capital — albeit at a lower level than needed — and provide additional time for the bank to raise capital or seek strategic options."
Darrell Duffie, a Stanford University finance professor, said regulators manage troubled banks to avoid or at least limit any loss to the government's deposit-insurance fund. As long as no imminent loss is likely, "they're going to let the bank ride for some time."
With an improving economy has come more interest from private-equity firms and healthy banks in recapitalizing or buying weak banks before they fail, though some say that may have ebbed recently. In 2010, Sterling Savings Bank of Spokane, Wash., was faltering, but its parent, Sterling Financial Corp., raised hundreds of millions of dollars to get out of jeopardy, in a deal led by Thomas H. Lee Partners LP and Warburg Pincus LLC.
"We've got a couple of different structures that are helping improve the economics to new capital coming in," said Michael Martin, co-head of Warburg Pincus's financial-services unit.
