Nov. 8--After a look at banks' third-quarter financial results, one thing is clear: The industry continues to be hobbled by bad loans.

A sampling of small and midsize financial institutions based in the Pittsburgh region shows their provision for loan losses continued to climb, signaling more struggles ahead.

Six of those seven regional banks set aside significantly more money to cover future soured loans vs. the same time last year. Four of seven upped their provision compared with the dismal second quarter.

In other words, banks are preparing for even more loans to go bad.

Some analysts think that, unlike the nation's largest institutions, loan troubles for community banks will continue to grow.

Early in the financial crisis, "All the attention was on the larger banks, which now generally seem to have their problems behind them," said Arnold Danielson, a banking consultant with Danielson Associates in Bethesda, Md. Now, "The smaller institutions seem to be struggling more."

Mr. Danielson expects that community banks in general will be plagued by loan problems through the first half of next year, and perhaps longer. In contrast, after another tough period in the fourth quarter, "We think big banks like PNC [Financial Services Group] will come out roaring, relatively speaking," in 2010, he said.

Community banks are getting hit harder by defaults in the commercial real estate sector, triggered by growing vacancies for office and retail space, said Bert Ely, a banking consultant in Alexandria, Va.

"While it looks like the problems in residential real estate have peaked ... commercial real estate has been emerging as a problem and will become more of a problem," he said.

Analysts also predict bank failures will continue to mount. So far this year, 115 federally insured institutions nationwide were seized by the Federal Deposit Insurance Corp. (That compares with 26 failures in 2008, three in 2007 and none in 2006 and 2005.)

The number of institutions on the agency's problem list swelled to 416 at the end of the second quarter, a 15-year high. The FDIC does not release the names of those troubled banks.

Mr. Danielson expects about two dozen more failures the rest of this year and possibly another 200 in 2010.

"There are still a lot of [sick] banks to work on in Florida and Georgia," he said.

Still, those are relatively low figures compared with the carnage during the savings and loan crisis in the late 1980s and early '90s when the FDIC's troubled list ballooned to more than 2,000 at one point and roughly 2,500 institutions went bust. Nearly 1,000 institutions collapsed in 1990 and 1989 alone.

This year, Georgia, Illinois, California and Florida accounted for more than half of the bank failures.

Banks in the Pittsburgh region and the state have been performing relatively well. Statewide this year Dwelling House Savings and Loan Association in Pittsburgh was the only failure.

Mr. Ely thinks failures will continue to be concentrated in a handful of states.

"I don't think we'll see many banks outside the hot markets having much survival problems," he said.

"What generally we find is rust belt areas, like Western Pennsylvania and Ohio, are actually performing fairly well" in the recession.

Patricia Sabatini can be reached at psabatini@post-gazette.com or 412-263-3066.

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