Banks, Thrifts Endure a Brutal Q3

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation reported net income of $1.7 billion in the third quarter of 2008, a 94 percent decline from the same quarter last year, according to the FDIC’s third-quarter banking profile, released Tuesday. The third quarter marked the lowest earnings for the industry since the fourth quarter 1990 — with the exception of the fourth quarter of last year — the FDIC reported. During the quarter, 73 institutions were absorbed in mergers, and 9 institutions failed, the most quarterly failures since the third quarter of 1993, when 16 insured institutions failed. The FDIC also said its “problem list” of banks facing potential failure grew during the quarter from 117 to 171 institutions, the largest number since the end of 1995. Total assets of problem institutions increased from $78.3 billion to $115.6 billion, according to the FDIC’s profile. “We’ve had profound problems in our financial markets that are taking a rising toll on the real economy. Today’s report reflects these challenges,” said FDIC chairman Sheila Bair. More than half of all insured institutions — 58.4 percent, to be exact — reported lower net income in the third quarter, and almost one out of four — or 24.1 percent — reported a net loss, the FDIC said. Higher levels of troubled loans in both consumer and commercial portfolios led to a dramatic increase in loan loss provisions to a total $50.5 billion, from $16.8 billion in the previous-year quarter. Insured institutions charged off, or removed from their balance sheets, $27.9 billion in troubled loans in the quarter. The FDIC said this is the highest quarterly net charge-off rate for the industry since 1991, led significantly by the failure of Washington Mutual on Sept. 25. Loan-loss reserves increased by $11.7 billion — or 8.1 percent — during the quarter, the smallest quarterly growth in reserves since the third quarter of 2007. The FDIC said the “reserve growth did not keep pace with the growth in noncurrent loans, and the ‘coverage ratio’ of reserves to noncurrent loans fell from 89 cents in reserves for every $1.00 of noncurrent loans to 85 cents. This is the tenth consecutive quarter that the industry’s coverage ratio has fallen; it is now at its lowest level since the first quarter of 1993. Read the quarterly profile. The American Bankers Association released a media response insisting the banking industry has enough capital to continue despite loan losses and write-offs. “Banks are taking the necessary steps to put these losses behind them and are setting aside additional reserves to handle future losses as the economic recovery is still months away,” ABA chief economist James Chessen said. “But despite elevated levels of loan losses, the banking industry as a whole remains well-positioned to meet the credit needs of local communities.” Chessen said the banking industry held $1.3 trillion in equity capital, which he called the “core financial support” used by banks to back their loans. “More than 98 percent of banks (holding 99.3 percent of the industry’s assets) are ‘well capitalized,’ which is the highest regulatory designation possible,” he said. “Bank reserves – which are set aside to cover additional losses that may occur – now exceed $156 billion. When added with capital, this makes for a total buffer of nearly $1.5 trillion against losses.” Write to Diana Golobay at [email protected].