The industry's rebound began in 2009 with the biggest U.S. banks, thanks to taxpayer bailout aid. Small and midsize banks have taken longer to rebound. They were saddled by high-risk real estate loans used to develop malls, industrial sites and apartment buildings. Many of those loans weren't repaid. As the economy has strengthened, fewer loans have soured, and many smaller banks have recovered.
Past-due rates on commercial real estate loans began to decline last year. And banks have boosted the number of commercial loans they've been able to sell to investors.
For example, net income for Regions Financial Corp., a midsize bank based in Alabama, jumped in the first quarter this year to $145 million, from $17 million a year earlier and a loss of $255 million in the first quarter of 2010. Regions issued more home and commercial loans, and its mortgage revenue jumped 35 percent.
Regions also got approval from the Fed to repay the $3.5 billion bailout money it received during the financial crisis. And the money it set aside for loan losses was the lowest in more than four years. More of its customers are paying on time.
At the same time, some small and mid-size banks remain vulnerable. That's especially true in states hit hard by the real estate bust or by slumping state economies. California, Florida, Georgia and Illinois reported the highest number of bank failures in the past four years. They're also among the states with the highest home foreclosure rates.
One reason is the fees banks have traditionally feasted on, such as overdraft fees on checking accounts, have been curbed by new regulations. Banks are now barred, for example, from automatically enrolling customers in a service that charged them up to $35 for overdrafts.
That change is cutting into revenue for community banks in particular. So are the costs of complying with some regulations imposed by the 2010 financial overhaul law.
Experts caution that government examiners have let some smaller banks make their balance sheets appear stronger than they are.
"There's a lot of stuff hidden under the hood," such as soured loans that haven't been adequately written down, warns Daniel Alpert, managing partner at the investment bank Westwood Capital Partners. Those risks could surface if the economy suffers another shock, Alpert says.
U.S. bank failures consist of both federally chartered and smaller, state-chartered banks. The federal government insures both and guarantees deposits of up to $250,000 per account.
Overhanging the banks' future is the health of the U.S. economy. That, in turn, hinges on whether employers step up hiring and sectors like manufacturing and construction improve. Europe's debt crisis poses a big threat, too.
U.S. banks have reduced their exposure to Europe. But a collapse of the 17-country euro alliance would likely weaken the U.S. banking system. Export markets for U.S. manufacturers could shrink. The U.S. economy would slow. Businesses and consumers whose loans drive banks' revenue would find it harder to repay their loans. And banks would be squeezed.
"Banks can only be as strong or weak as the economy," says Mark Williams, a finance professor at Boston University and a former bank examiner for the Federal Reserve.
AP Business Writer Pallavi Gogoi in New York contributed to this report.
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