November 25, 2009 in Business

Banks earn $2.8 billion in quarter, but problems persist for industry

Daniel Wagner Associated Press
 

WASHINGTON – The apparent end of the recession and stabilizing financial markets have not cured the banking industry, as souring and past-due loans have reached the highest levels in 26 years, the Federal Deposit Insurance Corp. said Tuesday.

Banks earned $2.8 billion in the third quarter, but nearly 40 percent of that was from a one-time accounting trick. Loan balances plummeted and the fund that insures their deposits was $8.2 billion in the red.

The number of banks on the FDIC’s “problem list” rose to 552 from 416 on June 30, the highest level in 16 years. Fifty banks failed during the quarter – the largest number since the second quarter of 1990.

The FDIC’s fund that insures bank deposits fell by $18.6 billion, mostly because $21.7 billion was set aside for expected losses on future bank failures. The last similar deficit was in December 1991, when a predecessor fund was more than $7 billion in the red.

Separately, the Office of Thrift Supervision said Tuesday that thrifts eked out a $200 million profit in the third quarter. The agency called it “another break-even quarter,” after a small second-quarter profit was revised downward to a $94 million loss.

Still, it was the first profitable quarter since the same period in 2007. The nominal profit was $1.3 billion, but $1.1 billion was a one-time gain at a single institution. The thrift’s holding company, which the OTS did not identify, shifted assets to reduce future tax expenses, agency officials said.

The agency says the number of “problem thrifts” rose to 43 from 40 last quarter.

Thrifts differ from banks in that they are required, by law, to have at least 65 percent of their lending in mortgages and other consumer loans. That makes them especially vulnerable to the housing downturn and unemployment. It also means they will play a key role in an eventual economic recovery.

The FDIC voted this month to require banks to prepay three years of deposit insurance premiums by the end of next month to help replenish the dwindling deposit insurance fund, which is at its lowest point on record. That will raise about $45 billion.

But bank failures this year through 2013 are expected to cost the fund $100 billion, so the prepayments won’t provide a long-term fix for the insurance fund. It does spare ailing banks the immediate cost of paying a second emergency fee this year.

Depositors’ money – insured up to $250,000 per account – is not at risk, since the FDIC has the option of tapping a credit line with the Treasury Department.

“While bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance,” FDIC Chairman Sheila Bair said.

A 2.8 percent drop-off in loans outstanding – the largest percentage decline on record – showed that credit for consumers and businesses remained tight, she said.

“There is no question that credit availability is an important issue for the economic recovery,” Bair said. “We need to see banks making more loans to their business customers.”

There have been 124 bank failures so far this year, the most since 1992 at the height of the savings-and-loan crisis. They have cost the federal deposit insurance fund more than $28 billion. There were 25 bank failures last year and three in 2007.

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