Wednesday, May 27, 2009

US Banks Report 1Q Profit,But Credit Problems Persist

By Michael R. Crittenden

U.S. banks were able to report a first-quarter profit, buoyed by revenues at a few larger companies, but overall the credit picture remained grim as the number of banks on the brink continued to rise and consumers and businesses increasingly fell behind on their loans.

The Federal Deposit Insurance Corp. said Wednesday that U.S. banks reported a net profit of $7.6 billion for the quarter ended March 31, down from the same quarter in 2008, but a sizable improvement from the $36.9 billion loss recorded by the industry in the fourth quarter of 2008.

Though banks were profitable, there were signs that the credit crisis continues to take its toll. The number of banks on the FDIC's "problem" list climbed to 305, the highest level since 1994, and the number of loans more than 90 days past due climbed across all major loan categories.

"The first quarter results are telling us that the banking industry still faces tremendous challenges," FDIC Chairman Sheila Bair said in prepared remarks. "And that going forward, asset quality remains a major concern."

Banks continued to aggressively add to their reserves during the quarter to prepare for expected losses. The FDIC said nearly two out of every three banks increased their loss provisions during the first quarter and that the industry set aside $60.9 billion in loan-loss provisions as a whole.

Despite those actions, banks are increasingly unable to build their reserves fast enough to keep up with noncurrent loans. The ratio of reserves to noncurrent loans fell to 66.5% in the first quarter, down from 74.8% in the fourth quarter and the lowest level in 17 years.

"Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry's performance," Bair said.

The FDIC said that banks responded to the rising amount of troubled loans by charging off $37.8 billion during the first three months of 2009, led by loans to commercial and industrial borrowers, credit cards and real estate construction loans.

The agency said the high-level of charge-offs did little to slow the rise in loans at least 90 days past due, which increased $59.2 billion during the quarter, as the percentage of loans and leases considered non-current hit the highest level since the second quarter of 1991. The problems were spread across all major categories, though the FDIC said that real estate loans accounted for 84% of the overall increase.

FDIC Chief Economist Richard Brown told reporters that regulators are seeing increasing issues with the commercial real estate market.

"That probably hasn't hit full-force yet," Brown said.

Additionally, the FDIC said the 21 bank failures during the first quarter was the highest quarterly total since the final three months of 1992, and it reduced the fund that protects consumers' deposits to $13 billion from $17.3 billion at the end of 2008.

The FDIC has already taken steps to address the declining fund, voting Friday to charge banks a special fee they project will raise $5.6 billion to replenish the fund. Bair, responding to a reporter's question, said the FDIC has no plans to access its $100 billion line of credit with the U.S. Treasury Department to help stabilize the fund.

"We really don't want to go to that step," she said. "For planning purposes we intend to continue to rely on our industry-funded reserves."

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