FDIC: Commercial Banks, Thrifts Net Income Down 94%

According to an FDIC report released Tuesday morning, commercial bank and thrifts earned $1.7 Billion in Q3’08, down 94% from $28.7 billion they earned in the same quarter last year. Reading through the release one certainly gets a sense of a banking industry that remains under a considerable amount of strain given the misguided investments in speculative ventures over the past several years.

The number of problem banks during the quarter increased to 171 from 117. FDIC cited higher provisions for loan losses as the primary reason for the substantial drop in industry profits.

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported net income of $1.7 billion in the third quarter of 2008, a decline of $27.0 billion (94%) from the $28.7 billion that the industry earned in the third quarter of 2007. With the exception of the fourth quarter of last year, the latest earnings were the lowest for the industry since the fourth quarter of 1990.

“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 C. Bair.

In addition to the increased provision expenses, the industry reported $7.6 billion in losses on sales of securities and other assets in the third quarter, compared to $77 million in gains a year earlier. Noninterest income was $905 million (1.5%) lower than a year earlier, reflecting reduced securitization income at a few large institutions.

Nine FDIC-insured institutions failed in the third quarter, the most since the third quarter of 1993. The failures included Washington Mutual Bank, with assets of $307 billion. The FDIC’s “problem list” 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.

In terms of charge-offs and behind schedule loans:

Provisions for loan losses continue to rise. Higher levels of troubled loans, in both consumer and commercial portfolios, led to increased provisions for loan losses in the quarter. Loss provisions totaled $50.5 billion, compared to $16.8 billion in the third quarter of 2007. The latest loss provisions absorbed a third of the industry’s net operating revenue (net interest income plus total noninterest income).

Charge-offs and noncurrent loans are still increasing. Insured institutions charged off (removed from their balance sheets because of uncollectibility) $27.9 billion in troubled loans in the third quarter. The annualized net charge-off rate of 1.42 percent was the highest quarterly average since 1991. The amount of noncurrent loans and leases (90 days or more past due or in nonaccrual status) increased by $21.4 billion (13.1 percent) during the third quarter. At the end of the quarter, 2.31 percent of all loans and leases were noncurrent, the highest level for the industry since the third quarter of 1993.

With the exception of the fourth quarter of last year, notes FDIC – the latest earnings were the lowest for the industry since the fourth quarter of 1990. The report also points out that provisions for loan losses continue to be high, but capital levels remain strong.

The complete report is available from the FDIC Web site.

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