FDIC Finds More ‘Problem Banks,’ Now at Multiyear Highs

The Federal Deposit Insurance Corp.’s roster of “problem banks” continues to grow.

The overall number of those banks — 68 as of the end of the third quarter, up two banks from the second quarter — is at a multiyear high, according to the FDIC’s latest quarterly report released last week.

Problem banks are “those institutions with financial, operational or managerial weaknesses that threaten their continued financial viability,” the report said.

Total assets held by problem banks rose $3.9 billion to $87.3 billion in the third quarter. Problem banks represent 1.5% of total banks, which the report said “is within the normal range of 1% to 2% of all banks during non-crisis periods.”

As for what might be termed the “creep” upward in the tally itself, tables included in the report indicated that the number of problem institutions was 52 in 2023, 39 in 2022 and 51 in 2019 with assets of around $46.5 billion.

Credit Trends Deteriorate

The past-due and nonaccrual (PDNA) loan ratio, across all banks, increased to 1.54%, up 0.18%, although the pre-pandemic average was 1.9%. Quarter over quarter, banks reported an increase in the PDNA ratio in credit card loan portfolios (up 0.20% to 3.36%, and up 0.77% year on year).

Estimated insured deposits were roughly flat quarter over quarter, while estimated uninsured deposits increased $197.3 billion (2.7%). More than half of all community banks (61.6%) surveyed by the FDIC reported an increase in deposit balances from the previous quarter. Community banks reported growth in estimated insured deposits (up $17.4 billion, or 1.1%) and estimated uninsured deposits (up $22.5 billion, or 3.3%).

The FDIC’s report came as new proposals would require FDIC-insured banks holding certain custodial accounts to ensure accurate records are kept determining the individual owner of the funds and to reconcile the account for each individual owner daily. The FDIC would require banks to complete an annual validation of third parties through an independent party.

In the spring and fall, various consent orders from the FDIC with several banks indicated issues with internal controls or other operational processes, although it must be noted that the FDIC’s “problem banks” list is confidential.

In April, there were consent orders against two banks, Sutton Bank and Piermont Bank, focused on third-party relationships and banking-as-a-service activities. Per the order against Piermont Bank, which is based in New York, “The FDIC considered the matter and determined, and the bank neither admits or denies, the bank engaged in unsafe and unsound banking practices relating to” internal controls and systems appropriate for “the nature, scope, complexity and risk of its third-party relationships.”