Number of Troubled Banks Rises to 552; FDIC Fund Sinks Into the Red
JESSICA HOLZER - The Wall Street Journal

WASHINGTON -- The government insurance fund that protects more than $4.5 trillion of U.S. bank deposits slipped into the red at the end of September, after fifty banks collapsed during the third quarter.

The deposit insurance fund dropped by $18.6 billion during the third quarter of 2009 to negative $8.2 billion, as the Federal Deposit Insurance Corp. set aside $21.7 billion in provisions for additional bank failures. This is the second time in the agency's history that the balance has fallen into negative territory.

The FDIC has already called on the industry to prepay $45 billion in assessments at the end of the year that will be set aside to cover the cost of bank failures in 2010.

Fifty U.S. banks failed in the third quarter, the largest quarterly total since 55 banks went bust during the second quarter of 1990. The FDIC's list of "problem" banks swelled to 552 at the end of September, its highest level in 16 years and up from 416 in June.

Despite the turmoil in the industry, banks posted a modest $2.8 billion profit in the third quarter of 2009, as their securities portfolios recovered and banks with less than $10 billion in assets saw margins improve. Bank profits were more than triple the $879 million they earned in the third quarter of 2008 and improved from a $4.3 billion loss in the second quarter of 2009.

Loan balances plummeted by $210.4 billion or 2.8%, the largest percentage drop on record as banks yanked back credit and saw reduced loan demand. Balances declined across all major loan categories, with commercial and industrial loans falling by $89.1 billion, or 6.5%.

"There is no question that credit availability is an important issue for the economic recovery," FDIC Chairman Sheila Bair said in a press conference to announce the quarterly results. "We need to see banks making more loans to their business customers."

By clamping down on credit and shifting to less risky assets, banks continued to repair their capital cushions during the third quarter. Of the more than 8,000 banks and thrifts analyzed in the FDIC's report, 96% were well-capitalized. Meanwhile, average industry regulatory capital ratios hit their highest levels in 19 years at the end of September.

FDIC Chief Economist Richard Brown said that fatter capital cushions would position banks to boost lending in 2010, helping the economic recovery. "As those balance sheets get cleaned up in 2010, it should pave the way for a more durable expansion," he said.

Ms. Bair cautioned that the industry wasn't likely to be profitable again in the fourth quarter, partly because of a likely spike in loan charge-offs that typically occurs at year-end. "I wouldn't read too much into this quarter," she said.

Troubled loans continued to pummel U.S. banks. Loan-loss reserves topped $60 billion for the fourth quarter in a row, damping profits. Meanwhile, banks charged off a net $50.8 billion during the third quarter, an 80.5% jump from the third quarter of 2008. The industry's annualized net charge-off rate rose to 2.71%, the highest since records began in 1984.

Though noncurrent loans continued to climb during the quarter, the rate of growth of such loans slowed for the second quarter in a row. Noncurrent loans increased by 10.5% to $366.6 billion during the third quarter.

Smaller banks, particularly those with large exposures to the faltering commercial real estate sector, accounted for many of the institutions on the FDIC's problem list, said FDIC Associate Director for Large Bank Supervision John Corston. The FDIC doesn't disclose the names of banks that make the list.

FDIC Deputy Director of Financial Risk Management Diane Ellis declined to estimate the likely toll on the FDIC's deposit-insurance fund in the fourth quarter. The $45 billion in prepaid industry assessments won't affect the fund's balance, she said.