WASHINGTON — For followers of bank failures, March was pretty uneventful, and that in itself was an event.
Just three banks closed, the lowest monthly amount since December 2008. Only two have been closed in April. The total number of failures in the first quarter was 26, versus 30 a quarter earlier and a quarterly average of about 40 since mid-2009.
But while a slowdown in failures is consistent with an improving economy, and the Federal Deposit Insurance Corp. has said that 2010, when 157 institutions were closed, was a peak year for the recent crisis, many said there are still plenty of failures ahead. They point to a glut of still-troubled institutions — 884 on the FDIC's "problem" list — and say first-quarter call data could reveal more capital problems at struggling banks.
"It is indicative of a slowing trend overall, but I do think there is still quite a bit of bank distress out there," said Matt Anderson, a managing director for the analytical firm Trepp LLC, which has projected there will be about 100 failures this year. "It is probably true that when the first-quarter reports come in that banks that haven't gotten better or have gotten worse during the quarter … will be at the front of the line. So there probably will be an uptick in April and May as those results come out."
Still, the recent drop-off has been startling. In the first two months of the year, 23 institutions failed. Since then, only five have been seized.
"It's too soon to tell whether this is a blip or not, but this is what we'd expect to see in an improving economy, which results in loan recoveries rather than loan chargeoffs, and increased earnings and retained earnings that start bank capital going in the other direction," said Robert DeYoung, a business professor at the University of Kansas and a fellow in the FDIC's Center for Financial Research.
Mitchell Glassman, the FDIC's former director of resolutions and receiverships, cited improved employment numbers, more sustained business profitability and better conditions for mergers and acquisitions as all helping to moderate the failure load.
The FDIC cannot "let its guard down, but when you look at all of the indicators, both the economy and the number of problem banks that actually end up in failure, the trend is looking much more positive than in the 2008-to-2010 period," said Glassman, who is now a director at Deloitte Consulting LLP.
Former regulators said that as long as the economy is recovering, the situation is improving for troubled banks. They note that failures during the savings and loan crisis started to drop as economic conditions improved. (The FDIC is expected to provide updated income and loss projections for the Deposit Insurance Fund at a board meeting Tuesday.)
"Based upon the last financial crisis 20 years ago … once the economy starts improving time is on your side," said Thomas Vartanian, a partner at Dechert LLP who was the general counsel at the former Federal Home Loan Bank Board.
"The trends at financial institutions are now reversing and becoming more positive," Vartanian said. "That's not to say there aren't serious issues, particularly where there are high concentrations of real estate lending, but one of the things you do as a regulator sometimes is you let the economy solve some of your problems."
Part of the issue is that regulators can take more time to close an institution, Vartanian said.
"When the economy is improving, every day that goes by lessens the loss potentially to the FDIC," he said. "So regulators can be a little less quick to close institutions because they're not as concerned losses are magnifying."
Others, though, see the past month as only a short breather, noting that there have been other periods of inactivity over the recent cycle.
"The pattern over the last six, seven or eight weeks has been there are gaps with a week or even two with no failures, and then some occur," Anderson said. "There won't be an exact pattern to the process for the remainder of the year, at least in terms of an orderly rate per week."
Last fall, when a stretch of three weeks in September registered just one failure, many said (and it turned out they were right) that it may have been just be break rather than an end to the run of failures. Sure enough, there were six collapses the following Friday.
"It's hard to discern a rhyme or reason," said Chip MacDonald, a partner at Jones Day in Atlanta.
While he agreed that "banks would be stabilizing along with the economy" and regulators may be more hesitant to pull the plug as conditions improve, MacDonald noted 80 banks in Georgia alone that are a cause for concern, and not enough buyers to save them in open-bank deals.
"I've got to believe there will be an uptick," he said. "In some areas, some banks are too small to raise capital and some of them may be too far gone. You've got a new class that are not quite 'zombie' banks, but they don't have a healthy long-term future that would attract capital.
"Maybe regulators gave them the benefit of the doubt. But now you've got another call report that's about to come out, and that data do set regulatory triggers under prompt corrective action. Once a bank says they're 'critically undercapitalized' in a call report, it's hard to keep them open very long."
MacDonald added that while fewer failures indicate improvements in the industry, other indicators suggest continued struggles for the industry. For example, he said, losses to the Deposit Insurance Fund on average were 24.5% of a failed bank's asset size in the first quarter, nearly 2 percentage points higher than for all of 2010.
"There are several trends," he said. "One is there are fewer failures, but the ones that do happen seem to be costing a little bit more."
Paul Miller, managing director of FBR Capital Markets, agreed. Though "banks are better" and regulators have "slowed the process down a lot … I don't think we are done with these small-bank closures one bit," he said.
An FDIC spokesman said activity this year is still projected to be higher than normal.
"Given the variety of factors that drive resolution time lines, we generally caution against drawing trends from week to week activity," the spokesman said. "That being said, we have been public with our projection that although we continue to expect elevated failures this year, activity peaked in 2010, and we expect fewer closings this year."
But some observers suggested regulators should be closing banks more quickly considering the volume of still-troubled institutions.
"I, like many others, including the FDIC, think that last year may have been the peak year on closures. But, still, a drop of this magnitude is quite significant, particularly given the fact that the problem bank list has continued to grow," said Bert Ely, an independent consultant based in Alexandria, Va. "The question is: Should it drop off that quickly?"
