Last week, the FDIC reported the second lowest net earnings for U.S. banks since 1990. In the third quarter, banks posted earnings of $1.7 billion, a stark 94% decline from the $28.7 billion earned in the third quarter last year. FDIC Chairman, Sheila Bair stated, “We’ve had profound problems in our financial markets that are taking a rising toll in the real economy. Today’s report reflects these challenges.” The FDIC attributed the low earnings primarily to higher provisions for loan losses. In addition, nine banks failed in the third quarter 9including Washington Mutual), the FDIC “problem list” grew from 117 to 171 institutions, total assets of troubled banks grew from $78.3 billion to $115.6 billion, 58.4% of banks reported a lower net income and 24.1% of banks reported a net loss. Also, exposing the reduction in securitization income, non-interest income was down $905 million, or 1.5%, from last year, while expenses for goodwill impairment and charges to other tangible assets were substantially higher than last year.
The FDIC released the financial results of the quarter in its Quarterly Banking Profile. Significantly, the profile revealed the following:
- Loss provisions totaled $50.5 billion, absorbing a third of the industry’s net operating revenue.
- The net charge off rate for the quarter was 1.42%, the highest since 1991, with banks charging off $27.9 billion in troubled loans. The amount of noncurrent loans and leases increased by $21.4 billion with 2.31% of all loans and leases noncurrent at quarter end, the highest delinquency levels since 1993.
- While capital levels and retail deposits are higher at community banks, those banks are beginning to experience the issues facing the industry as a whole.
- The Deposit Insurance Fund (DIF) balance dropped from $45.2 billion on June 30 to $34.6 billion on September 30, the reserve ratio declined to 0.76%, and insured deposits increased by 1.8%. In the recently released DIF restoration plan, the FDIC recognized probable declines in the DIF before the scheduled higher assessments will replenish the fund. However, the FDIC is confident that the capital of the banking industry is available to support the fund.