WASHINGTON -- U.S. banks are ending the year with their best profits since 2006 and fewer failures than at any time since the financial crisis struck in 2008. They're helping support an economy slowed by high unemployment, flat pay, sluggish manufacturing and anxious consumers.
As the economy heals from the worst financial crisis since the Great Depression, more people and businesses are taking out -- and repaying -- loans.
And for the first time since 2009, banks' earnings growth is being driven by higher revenue -- a healthy trend. Banks had previously managed to boost earnings by putting aside less money for possible losses.
Signs of the industry's gains: Banks are earning more. In the July-September quarter, the industry's earnings reached $37.6 billion, up from $35.3 billion a year earlier. It was the best showing since the July-September quarter of 2006, long before the financial meltdown. By contrast, at the depth of the Great Recession in the last quarter of 2008, the industry lost $32 billion. Banks are lending a bit more freely. The value of loans to consumers rose 3.2 percent in the 12 months that ended Sept. 30 compared with the previous 12 months, according to data from the Federal Deposit Insurance Corp. More lending fuels more consumer spending, which drives about 70 percent of economic activity. At the same time, overall lending remains well below levels considered healthy over the long run. Fewer banks are considered at risk of failure. In July through September, the number of banks on the FDIC's confidential "problem list" fell for a sixth straight quarter. These banks numbered 694 as of Sept. 30 -- about 9.6 percent of all federally insured banks. At its peak in the first quarter of 2011, the number of troubled banks was 888, or 11.7 percent of all federally insured institutions. Bank failures have declined. In 2009, 140 failed. In 2010, more banks failed -- 157 -- than in any year since the savings and loan crisis of the early 1990s. In 2011, regulators closed 92. This year, the number of failures has trickled to 51. That's still more than normal. In a strong economy, an average of only four or five banks close annually. But the sharply reduced pace of closings shows sustained improvement. Less threat of loan losses. The money banks had to set aside for possible losses fell 15 percent in the July-September quarter from a year earlier. Loan portfolios have strengthened as more customers have repaid on time. Losses have fallen for nine straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for 10 straight quarters.
"We are definitely on the back end of this crisis," says Josh Siegel, chief executive of Stonecastle Partners, a firm that invests in banks.
The biggest boost for banks is the gradually strengthening economy. Employers added nearly 1.7 million jobs in the first 11 months of 2012. More people employed mean more people and businesses can repay loans. And after better-than-expected economic news last week, some analysts said the economy could end up growing faster in the October-December quarter -- and next year -- than previously thought.
That assumes Congress and the White House can strike a budget deal to avert the "fiscal cliff" -- the steep tax increases and spending cuts that are set to kick in Jan. 1. If they don't reach a deal, those measures would significantly weaken the economy.
Banks have also been bolstered by higher capital, their cushion against risk. Banks boosted capital 3.8 percent in the third quarter, FDIC data show. And the industry's average ratio of capital to assets reached a record high.
On the other hand, many banks are no longer benefiting from record-low interest rates. They still pay almost nothing to depositors and on money borrowed from other banks or the government. But steadily lower rates on loans other than credit cards have reduced how much banks earn.
"This interest-rate pressure on the banks becomes very difficult to overcome," says Fred Cannon, chief equity strategist and director of research at Keefe, Bruyette & Woods. "It's a big headwind for banks."
Many banks have reported lower net interest margin -- the difference between the income they receive from loans and the interest they pay depositors and other lenders. It's a key measure of a bank's profitability.
The industry's average net interest margin fell to 3.43 percent in the third quarter from 3.56 percent a year earlier.
To see a list of Bank failures in 2012, view this interactive: http://hosted.ap.org/interactives/2012/banks/
by the numbers
The pace of U.S. bank failures has slowed sharply since peaking in 2010 with 157. Since the start of 2008, the year the financial crisis erupted, 465 banks have failed. But their depositors haven't lost any money.
Some numbers related to the bank failures: From 2008 through 2011, bank failures cost the federal deposit insurance fund an estimated $88 billion. The FDIC expects failures from 2012 through 2016 to cost about $10 billion more. The insurance fund is replenished by fees paid by banks. . There were 7,181 federally insured U.S. banks as of Sept. 30, down from 8,533 on Jan. 1, 2008. The 157 failures in 2010 were the most in any year since the height of the savings and loan crisis in 1992. The wave of collapses started in 2008 with 25. The number jumped to 140 in 2009. Ninety-two banks failed in 2011. So far this year, 51 have failed. Since mid-2010, nearly all the failed banks have been small. The five biggest banks to fail since 2008 are: Washington Mutual, based in Seattle, September 2008, $307 billion in assets; IndyMac Bank, Pasadena, July 2008, $32 billion; Colonial Bank, Montgomery, Ala., August 2009, $25 billion; Guaranty Bank, Austin, Texas, August 2009, $13 billion; and BankUnited, Coral Gables, Fla., May 2009, $12.8 billion. The states with the most bank failures from 2008 through 2012 are Georgia, 84; Florida, 66; Illinois, 55; and California, 39.