Bank Earnings Down 87 percent, More Failures May Be Coming: FDIC

The Federal Deposit Insurance Corporation’s quarterly banking profile for the second quarter showed continuing weakness in the industry and prompted FDIC Chairperson Sheila Bair to caution that the agency might have to borrow money from the Treasury Department to see it through more bank failures.

According to the report, the agency’s “problem” list of banks at risk of failure had grown to 117 at the end of June, compared with 90 at the end of March. Just last week, the FDIC closed down The Columbian Bank and Trust Company, Topeka, Kan., the ninth such closure this year.

Under an agreement with the FDIC, the bank’s assets were assumed by Citizens Bank and Trust, Chillicothe, Mo.

The agency’s quarterly banking profile indicates that more takeovers could occur in the near future as second quarter earnings fell 87 percent from the same period last year, quarterly loss provisions exceeded $50 billion, industry assets fell in value for the first time in six years and asset quality indicators continued to deteriorate.

According to the report, the continued downturn in the credit cycle, combined with lingering weakness in financial markets and falling asset values, led to a reported net income for the industry of $5 billion during the period, the second-lowest quarterly total since 1991.

Higher loan loss provisions were the most significant factor in the decline, the report added. Those provisions offset nearly a third (31.9 percent) of the industry’s net operating revenue, the highest proportion since 1989. In the late 1980s, the first elements of the savings and loan crisis were starting to be recognized.

The American Banker’s Association, a trade group representing the banking industry, attempted to soften the blow of the FDIC’s report. In a prepared statement, ABA chief economist James Chessen said the banking industry has more than enough resources to handle the current economic downturn.

“In spite of elevated levels of loan losses, banks had $1.4 trillion in equity capital – the core financial support banks use to back loans,” Chessen said. “More than 98 percent of banks (holding 99.4 percent of the industry’s assets) are ‘well capitalized,’ which is the highest designation possible. Banks also set aside reserves to cover additional loan losses that may occur.   Reserves now exceed $144 billion and when added with capital, make for a total buffer of $1.5 trillion against losses.  Additionally, the FDIC fund is strong and the banking industry stands ready to assure its financial health.”

According to Chessen, “with $8.6 trillion in deposits, banks have plenty of resources to continue meeting the lending needs in their communities.  Banks’ loan portfolios grew by $28.2 billion in the quarter.  Not surprisingly, real estate loans declined – but all other major loan categories were up, demonstrating that the local bank continues to be the best source of business and personal loans.”