The Federal Deposit Insurance Corporation (FDIC) warns that 829 of the nation's 7,800 banks were on its problem list at the end of June, up from 775 three months earlier.
So far this year, 118 banks have failed, compared to 140 closed by regulators during all of 2009.
The banks on the problem list are mostly smaller institutions, not surprising since most of them did not benefit from the massive government bail-out of Wall Street. As smaller banks set aside more money to be ready for future loan losses, it becomes harder for them to remain competitive.
Not surprisingly, the troubles on Main Street are reducing the number of banks in the U.S. The FDIC said in its regular quarterly report that there were 104 fewer banks in the second quarter of the year, compared with the first quarter. And for the first time in the 38 years that the reports have been issued, no new banks were added.
"The smaller banks are recovering, but it is at a slower rate," FDIC Chairman Sheila Bair said. "It hit the large banks first and then the community banks, so they will be lagging the larger banks in terms of coming out of this."
"Without question, the industry still faces challenges," Bair said. "Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high. But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction."
Commercial banks and savings institutions insured by the FDIC reported an aggregate profit of $21.6 billion in the second quarter, a $26 billion improvement from net loss of $4.4 billion posted by the industry in the year-ago period. This is the highest quarterly earnings total since the third quarter of 2007. Despite the improvement, earnings remain below historical norms, the FDIC noted.
The FDIC doesn't publicly identify the banks on its problem list.