Lenders Slash Loan Loss Reserves as Credit Quality Improves

Data released by the ""FDIC"":http://www.fdic.gov Tuesday show that lenders' are seeing considerable improvement in the quality of loans and becoming more confident that fewer borrowers will default.

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The federal agency reports that first-quarter loan loss provisions among commercial banks and savings institutions it insures totaled $20.7 billion, less than half the $51.6 billion they set aside to cover bad loans a year ago.

The FDIC says asset quality continued to improve during the first three months of this year as loans and leases 90 days or more past due or in nonaccrual status fell for a fourth consecutive quarter.

Insured banks and thrifts charged off $33.3 billion in uncollectible loans during the first quarter. That's nearly $20 billion less than the charge-offs reported a year earlier.

""The process of repairing bank balance sheets is well along,"" said FDIC Chairman Sheila Bair, ""but is not yet complete.""

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Bair pointed to the residential lending business as an area of particular concern.

""[H]ousing markets remain weak, in part because of continued questions about mortgage servicing problems,"" she said, adding that borrower demand remains ""sluggish"" in terms of producing new revenue for the banking sector.

""Longer term, banks may be exposed to interest rate risk when we emerge from this prolonged stretch of unusually low rates,"" Bair continued.

While overall credit quality, and even earnings industry-wide -- an aggregate profit of $29 billion in the first quarter â€" saw notable improvements, the number of banks on the FDIC's so-called ""problem list"" is at its highest level since March 31, 1993.

The federal agency added just four new institutions to its watch list during the first three months of this year. It's the list's smallest expansion in three-and-a-half years, but still, at 888, the number of ""problem"" lenders under the FDIC's watchful eye is the most since the savings and loan (S&L) crisis.

The FDIC says 26 insured institutions failed during the first three months of 2011, the fewest in seven quarters.

Bad real estate loans have been weighing heavy on banks' balance sheets and forced many to go under since 2009, but as Bair said, balance sheet clean-up is in full swing.

The agency's latest report shows that insured lenders trimmed their single-family residential mortgage portfolios by $63.8 billion, or 3.4 percent, during the first quarter. At the same time, they shed $25.9 billion, or 8.1 percent, in real estate construction and development loans.