The banking industry has been through a tumultuous three years since the financial crisis exploded in early 2008. So it’s not saying much to say that conditions improved in 2010, perhaps laying the foundation for a stronger year this year.

To be sure, the nation’s banks earned net profits of $87.5 billion, up from a net loss of $10.6 billion in 2009. A great deal of the improvement came because banks were finally able to stop adding additional money to account for possible loan losses.

The Investigative Reporting Workshop’s BankTracker project has been keeping tabs on how the financial crisis affected banks and credit unions across the nation since it was first published in March 2009.

Looking back over quarterly reports banks filed with the Federal Deposit Insurance Corp. for the past three years, a Workshop analysis shows there are fewer banks, which are, on average, bigger. The number of banks the FDIC considers “problems” continues to expand, mostly because of an historic increase in the amount of bad assets on bank books.

Bigger banks take more market share, as numbers dwindle

The number of banks has fallen from 8,542 at the end of 2007 to 7,666 at the end of 2010. While much of the 11 percent decline can be attributed to the failure and closing of 322 banks since 2008, it also is clear that the industry continues to consolidate through mergers.

The biggest declines occurred in Georgia, which now has 84 fewer banks, and Florida, where there are 70 fewer banks than three years ago. That’s hardly surprising, considering that more than a third of all bank failures since the beginning of 2008 have occurred in those two states.

In fact, even after last year’s debate over whether to limit the size of the biggest banks, they have increased their share of assets since the end of 2007. At the end of 2010:

Banks with more than $50 billion in assets accounted for 68 percent of banking assets, up from 64.5 percent at the end of 2007. Some of that increased concentration occurred because large banks, such as Bank of America and Wells Fargo, were involved in mega-mergers in 2008. Bank of America took over Countrywide and Merrill Lynch. Wells Fargo merged with Wachovia.

Lending continues to lag, but troubled assets increase

The twin effects of write-downs of bad loans and slowing demand because of the recession resulted in loan volume falling by 8.3 percent since the end of 2007.

The amount of bad assets on bank books started to decline in the second half of 2010. But bad assets still have nearly tripled since the end of 2007. The FDIC reports show that the combination of non-performing loans and foreclosed property peaked at $382.1 billion at the end of March and fell to $322.6 billion as of Dec. 31. Troubled assets totaled $109 billion at the end of 2007.

Last year’s improvements helped stabilize the number of banks facing significant stress. According to the Investigative Reporting Workshop analysis, 389 banks ended 2010 with more troubled assets than capital. That’s down slightly from 411 at the end of March.

By contrast, on Dec. 31, 2007, only 24 banks were in that group.

Meanwhile, the number of problem banks on the FDIC list keeps expanding, up to 884 at the end of the year, compared with 76 in December 2007. The FDIC doesn’t reveal which banks it considers problems, but the list generally is based on ratings assigned by bank examiners.  Part of the reason the number of problem banks keeps rising, banking industry observers generally agree, is that regulators are taking a harder edge, requiring banks to hold more capital and to act more quickly to acknowledge and write off troubled loans.

Banks still owe the government’s Troubled Asset Relief Program more than $30.8 billion out of nearly $245 billion the Treasury invested to shore up bank capital starting in October 2008.

While most of the money was originally given to the nation’s biggest banks, many of those that still have not repaid the government investments are smaller institutions. The largest outstanding capital purchase balance is $4.85 billion owed by SunTrust Banks, the 11th largest bank in the nation.