U.S. bank failures have slowed in 2011 from the flood of recent years, but a large reservoir of "problem" banks will keep the failure rate relatively high as regulators slog through the backlog.
In the first half of the year, there were 48 bank failures, down from 74 in the second half of 2010 and 86 in the first half of 2010, which included three large failures in Puerto Rico.
Total assets of failed banks also dropped sharply from a year earlier, down 73%, but were relatively steady compared with the second half of 2010. That is because smaller community banks are predominantly the ones still being closed.
On Friday, U.S. regulators announced the failure of two banks in Colorado and another in Illinois, pushing the country's tally this year to 51.
The first half of last year included the failure of 19 banks with more than $1 billion of assets, while there were just four such failures in the second half of 2010 and just three in the first half of this year.
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The biggest bank failures in the latest period were United Western Bank in Colorado, First Community Bank in New Mexico and Superior Bank in Alabama. But their combined assets, at $7.36 billion, still were far short of the largest failure in the year-earlier period: Westernbank Puerto Rico, with $11.94 billion of assets.
Timur Braziler, analyst and assistant vice president at Keefe, Bruyette & Woods Inc., said the country is in about "the seventh inning" of this cycle of failures, which began in 2007. He predicted that the pace of failures is stabilizing and that the second half will have a similar number of failures as the first half did.
"It's really just the regulators working through the backlog" unless the economy or commercial real estate worsen, he said. "There's not going to be a new crop of problem banks."
Still, the backlog is significant. The number of banks on the Federal Deposit Insurance Corp.'s problem list—a quarterly tally of banks in greater danger of failing—was at the highest level yet for the current cycle when it was last released in May, at 888.
Though net additions to the list have fallen to a trickle, the number has yet to decline even as banks continue to fold.
Matthew Anderson, managing director at researcher Trepp LLC, said one factor keeping that number elevated is an elongating failure process. Trepp keeps its own Watch List of banks at elevated risk of failure, and Mr. Anderson said that year to date the median length a bank spent on its list before failing was nearly six quarters, about double what it was in 2008.
That is partly a function of more time having elapsed since the financial crisis, but Mr. Anderson said the main factor is that regulators are working with weakened banks more to help them raise capital.
KBW analyst Mr. Braziler also said the imminent dissolution of the Office of Thrift Supervision—thrift regulation will shift to Office of the Comptroller of the Currency this month as part of the Dodd-Frank financial overhaul—may be slowing down the process as well.
Yet given an expectation for failures' pace to hold steady for some time, clearing through the backlog is still a daunting prospect. Greg Hernandez, a spokesman for the FDIC, said historically 19% of the banks on the agency's confidential problem list end up failing. At the first half's rate, it would take nearly two years to work through that percentage on the latest list.
Mr. Hernandez also noted that this year so far "is basically what the FDIC anticipated it would be." The agency has said it believed 2010, with its 157 total failures, would be the peak.
Luckily for the FDIC, the costliness of failures has dropped as the failure rate slowed. In the first half, the estimated cost to the FDIC's fund was 20.5 cents for every dollar in failed-bank assets, down from 24.1 cents a year earlier.
Write to Joan E. Solsman at joan.solsman@dowjones.com
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