FDIC insurance fund falls into red

Section:

By Karey Wutkowski
Reuters
Tuesday, November 24, 2009

http://www.reuters.com/article/ousivMolt/idUSTRE5AN36P20091124

WASHINGTON -- The government fund used to safeguard U.S. bank deposits tumbled to a negative balance of $8.2 billion as the number of problem banks surged in the third quarter.

The Federal Deposit Insurance Corp's depleted insurance fund and the sharp rise in troubled institutions underscored the fragility of the U.S. banking system and the continued weight of bad commercial and residential real estate loans on their balance sheets.

Although the FDIC still has $23.3 billion of cash resources to handle bank failures, its insurance fund balance veered into the red due to an additional $21.7 billion the agency set aside in the third quarter for future bank failures. That is the first shortfall since 1992.

Meanwhile, the number of banks on the FDIC's "problem list" rose 33 percent to 552, the most since 1993.

The FDIC will soon get an infusion of $45 billion through a plan to have the banking industry prepay three years of assessments. While those extra funds will boost the cash on hand, accounting rules will stop the FDIC from including all the money immediately in the fund balance.

"While bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance," FDIC Chairman Sheila Bair told reporters in a briefing.

Noncurrent commercial real estate loans, which rose 19.2 percent during the quarter, increasingly are becoming a driver of the banking industry's woes.

The industry as a whole managed to post a profit for the quarter of $2.8 billion due to growth in operating revenues and a rebound in securities values after a $4.3 billion loss last quarter. Bair said the earnings improvement was counterbalanced by the largest decline in loan balances on record, indicating that banks are still tight-fisted with credit.

"We need to see banks making more loans to their business customers," Bair said.

Loan balances dropped by 2.8 percent or $210.4 billion -- the largest percentage drop since 1984. The tight credit comes as the Obama administration is launching programs to encourage community banks to increase lending to small businesses.

Jeff Davis, an analyst at FTN Equity Capital Markets, said the banking industry is largely off the bottom, but credit problems are going to continue to dominate the sector for a while. "There's a lot of wood to chop right now," he said about credit issues.

High loan loss provisions continued to drag on bank earnings, but banks set aside less money in the third quarter, the FDIC said. Industrywide, banks set aside $62.5 billion to cover deteriorating loans, a 7.1 percent decrease from the prior quarter.

"The credit adversity we have been discussing for some time remains with us, and we expect that it will be at least a couple more quarters before we see a meaningful improvement in that trend," Bair said.

The third-quarter data revealed that loans are continuing to deteriorate at a rapid pace. The percentage of loans that were 90 days or more past due rose to 4.94 percent of total loans, the highest in the 26 years that banks have reported the data.

Bair said she was optimistic that if the banking industry addressed its problems head-on, it would see signs of improvement in earnings and lending in 2010.

So far this year, 124 U.S. banks have failed, the highest annual level since 1992.

FDIC officials said they stood by an earlier projection that the cost of U.S. bank failures will total $100 billion from 2009 through 2013.

Another regulator, the Office of Thrift Supervision (OTS), also reported on Tuesday the results for savings and loans, which are a subset of the larger FDIC data.

The thrift industry, dominated by mortgage lenders, reported a profit of $1.3 billion -- but $1.1 billion of that amount was due to one thrift's large non-operating gain. Absent that gain, thrifts earned $200 million in the quarter, a slight improvement from the prior quarter, which was downwardly revised to a $94 million loss from a $4 million profit.

The OTS said the small profit in the third quarter was primarily due to higher net interest margins and, like banks in general, those gains were mostly offset by high amounts of money put aside to cover losses from souring loans.

"We see some encouraging signs, but we also see signs that give us pause," OTS Acting Director John Bowman said.

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