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Investigative Reporting Workshop, American University
updated 12/21/2010 2:34:37 PM ET 2010-12-21T19:34:37

The nation’s banks continued their slow return to health in the third quarter, according to reports filed with the Federal Deposit Insurance Corp.

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With loan losses continuing to moderate, the 7,760 banks posted a quarterly profit of $14.5 billion, but it would have been much higher if Bank of America hadn’t booked a $10.1 billion loss as part of a writedown of the value of its credit card business.

For the second quarter in a row, troubled assets fell as calculated by the Investigative Reporting Workshop at American University. At the end of September they stood at $345.3 billion. Troubled assets peaked in the first quarter of this year, when they hit $382.1 billion.

The only category of troubled assets still growing is "other real estate owned," which is primarily property the banks acquired through foreclosure. As of the end of September, banks had $46.9 billion worth of other real estate owned, a 21 percent increase since the first of the year.

A total of 397 banks had troubled assets greater than their capital and loan loss reserves at the end of the third quarter, the same number as June 30. That figure also peaked in the first quarter of this year, when it hit 411.

However, the FDIC said the number of banks on its troubled list, which is does not disclose to the public, rose again to 860, the most since 1993.

Lending was essentially flat in the third quarter, with total loans outstanding of $7.16 trillion.

Related: Look up any bank's record in the BankTracker

About the troubled asset ratio
The new analysis relies on information reported by banks to the FDIC as of Sept. 30. Journalists at American University calculated each bank's troubled asset ratio, which compares troubled loans against the bank's capital and loan loss reserves.

Troubled assets include loans that are 90 days or more past due, loans on which the bank is no longer collecting interest and real estate the bank already owns, usually through foreclosure. A similar measure, known as a Texas Ratio, is commonly used by bank analysts as an indicator of stress on a bank, though such ratios can't capture all the nuances of a bank's condition.

While the troubled asset ratio is not a predictor of bank failure, most of the banks that have failed do have high ratios. Still, banks with high ratios can recover, as borrowers resume making scheduled payments or the bank is able to raise more capital.

Related: All credit unions pay for the risky behavior of a few

Even when a bank does fail, no depositor has lost a dime in insured deposits since the FDIC was created in 1934. That protection has its limits. The basic limit had been $100,000 per depositor per bank but has been increased to $250,000 through Dec. 31, 2013. The FDIC has more detailed information and a calculator to help you determine your level of protection.

In short, the FDIC's advice boils down to this: If your deposits are under the FDIC limits, you're protected even if your bank should fail. If your deposits exceed those limits, the best protection is to move deposits into smaller accounts at more than one FDIC-insured bank.

Limitations of the ratio
I developed the troubled asset ratio in the early 1980s. Others do similar calculations.

The reports in most cases do not include the billions in federal money injected onto the balance sheets of bank holding companies in the form of so-called TARP funds.

The ratio does not include the value of non-loan assets that have caused so much trouble, particularly for some larger banks that moved away from traditional commercial banking. Nor does it reflect mortgage-backed securities, collateralized debt obligations, etc. In this way, the ratio may underestimate the real depth of problems.

And no ratio can get at all the detailed information — such as the individual loan files, quality of management, potential for raising other capital — that a regulator would use to evaluate a bank's safety and soundness.

Related: Other stories in our BankTracker series

Wendell Cochran is senior editor of the Investigative Reporting Workshop at American University.

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