If America’s bankers celebrated the end of 2009 exuberantly you could hardly blame them.

After all, new Federal Deposit Insurance Corp. data analyzed by the Investigative Reporting Workshop confirms that last year was one of the worst in memory for the industry.  The data show:

• Bank failures, rose from 26 in 2008 to 140 last year (there were three failures in 2007 and none in 2006). By the end of the year, the FDIC had 702 banks on its official troubled list, up from 252 a year ago. At the end of 2007, only 52 banks were on the FDIC list, which the agency does not make public.
• According to the analysis by the Investigative Reporting Workshop, 391 banks had a troubled asset ratio of more than 100, up from 165 a year ago. The troubled asset ratio compares bank capital and loss reserves to nonperforming loans and foreclosed property. It has proven to be a strong indicator of bank stress. Of the 140 banks that failed last year, more than 125 had a ratio over 100 just before they were closed.
• The industry continues to struggle under the weight of bad loans, primarily mortgages and loans connected to real estate development. And banks continue to accumulate foreclosed properties. Total troubled assets amounted to $367.3 billion on Dec. 31, compared with $237.2 billion a year ago.
• Perhaps more troubling, the FDIC reported nearly 10 percent of first mortgages were delinquent on Dec. 31, compared with just over 5 percent a year earlier. Nearly 16 percent of construction and development loans were not being paid on time.
• Even though profits rebounded slightly from 2008’s dismally low figure, they still were down 90 percent from 2007. As a group, the nation’s banks made $12.5 billion last year, up from just over $10 billion in 2008. In 2007 bank profits were $100 billion. And nearly all the profits were accounted for by the biggest banks.
• Lending continued its historic decline; it now has fallen for six straight quarters. At the end of the 2009, total loans stood at just over $7 trillion, more than 8 percent for the year. Real estate development and construction loans fell by 23.5 percent, and commercial and industrial loans declined by 18.5 percent.

Banks blame recession, tighter regulation for lending decline

Because of political pressures, the banking industry has become especially sensitive to the charge that the decline in lending is hurting the recovery. Instead, bankers portray the decline as resulting from a combination of lower demand because of the recession and a sensible response to the reality that many would-be borrowers simply cannot or should not take on additional debt.

Michigan banker Arthur C. Johnson, representing the American Bankers Association, told a Senate Banking Committee hearing last week, “In this severe economic environment, it is only natural for businesses and individuals to be more cautious. Businesses are reevaluating their credit needs and, as a result, loan demand has fallen dramatically since the recession began. Banks, too, are being prudent in underwriting, and our regulators demand it.”

Johnson added, “We recognize that there are some consumers and businesses in the current situation that believe they deserve credit that is not being made available. We do not turn down loan applications because we do not want to lend – lending is what banks do. In some cases, however, it makes no sense for the borrower to take on more debt. Sometimes, the best answer is to tell the customer no, so that the borrower does not end up assuming an additional obligation that would be difficult if not impossible to repay.”

Bankers also are focusing on what they consider an over-reaction by regulators to the growing loan losses – and resulting bank failures. Eric Gillette, an Ohio banker, told the Senate hearing: “Community banks confront a very tough regulatory environment. While Washington policymakers exhort community banks to lend to businesses and consumers, banking regulators, particularly field examiners, have placed very strict restrictions on banks,” he testified.

Gillette, representing the Independent Community Bankers of America, added, “In many instances, the banking agencies have moved the regulatory pendulum too far in the direction of overregulation at the expense of lending. It is important to return to a more balanced approach that promotes lending and economic recovery in addition to bank safety and soundness.”

Credit unions weather downturn better than banks

The nation’s 7,554 credit unions also had a difficult year, but as a group fared better than banks.

• Troubled assets at credit unions jumped by 37 percent. Credit unions had $12.2 billion worth of nonperforming loans and foreclosed property on their books at the end of 2009, up from $8.9 billion a year ago.
  Despite a large increase in loan losses, profits rebounded from a loss of $151 million in 2008 to a profit of $1.5 billion in 2009.
• And credit unions managed to increase their lending by 1 percent last year, in sharp contrast to the contraction in lending by commercial banks. The National Credit Union Administration, which insures credit unions, reported, “A majority of loan growth in 2009 was in used for automobile, credit card and first mortgages.”
• Consolidation continues among credit unions, an industry that is dominated by smaller institutions. At the end of 2009, there were 7,554 federally insured credit unions, down from 7,806 a year earlier.