Almost 10% of FDIC-insured banks "troubled"

Agency's Deposit Insurance Fund had a $20.9 billion loss as of Dec. 31

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) -- Driven by expanding problems with commercial real estate loans, the number of distressed banks in the U.S. rose to 702 in the fourth quarter, marking the highest level in 16 years, according to a report released Tuesday by the Federal Deposit Insurance Corp.

That's up from 552 at the end of September and 416 at the end of June. This is the largest number of banks on the FDIC's "problem list" since June 30, 1993.

Based on the result, roughly one in 11 of the approximately 8,000 U.S. banks are on this list, with regulators expecting a significant expansion in the number of failures throughout 2010, boosted in large part by increased losses on commercial real estate sustained by mid-sized and smaller banks. See more on analyst expectations for 2010 bank failures.

"This year, the losses are going to be heavily driven by commercial real estate, we've known for some time and we have been projecting that," FDIC Chairwoman Sheila Bair told reporters. "The pace is probably going to pick up this year and for the total year it will exceed where we were last year. Overall, the banking system is challenged but stable, but is performing its credit extension role."

Bair said it takes longer for losses on commercial real estate to work through the system because frequently borrowers may have cash reserves and can continue to make good on payments for a while, even as a downturn expands.

"Tenants may be in longer-term leases, but those leases eventually come due and they don't renew or they renew at significantly reduced rental rates," she said.
Also Tuesday, the National Association of Realtors on Tuesday reported that it doesn't expect any meaningful recovery in commercial real estate before 2011.

A congressional watchdog group reported on Feb. 11 that it over the next few years, a wave of commercial real estate loan failures could threaten the U.S. financial system, and in the worst-case scenario, hundreds of additional community and mid-sized banks could face insolvency. Read about the report.

Banks insured by the FDIC dropped to a total quarterly profit of $914 million in the fourth quarter ended Dec. 31, compared with $2.8 billion in the third quarter. The result, however, was significantly better than the $37.8 billion loss for insured institutions seen during the fourth quarter of 2008, but well below historical norms.

Insured deposits reported full-year net income of $12.5 billion.

"Consistent with a recovering economy, we saw signs of improvement in industry performance," said Bair. "But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets."

Further into negative territory

According to the FDIC, the value of what are deemed problem assets at institutions stood at $402.8 billion at the end of 2009, compared with $345.9 billion at the end of the third quarter.

The FDIC also reported that its Deposit Insurance Fund, used to protect depositors, dropped further into negative territory, reporting a $20.9 billion loss for its fund balance in the fourth quarter, worse than the $8.2 billion loss in the third quarter -- and its lowest number on record.

The agency also collected three years of assessments on banks in advance at the end of 2009, along with banks' fourth-quarter assessments, a total of 13 quarters of assessments, which brought in roughly $46 billion of capital to help dismantle failed institutions.

With those funds, the Deposit Insurance Fund's cash resources stood at $66 billion as of Dec. 31. The agency's fund reserves are a positive $23.1 billion, including its contingent loss reserve of $44 billion at the end of December.

As institutions take a charge, quarterly on their books, for their pre-payments for the deposit insurance fund, the deposit insurance will recognize corresponding revenue.

Bair said she believes the fund's cash balance should be enough to weather the rest of the economic downturn, adding that the FDIC estimates that much of the losses anticipated by the contingent loss reserve can be attributed to losses expected in commercial real estate.

She also pointed out that 95% of the 8,000-plus U.S. banks exceed regulatory standards for being well capitalized.

"We don't anticipate needing more special funds for the fund," Bair said. "We'll be in good shape this year."

The FDIC hasn't accessed a temporary $500 billion fund of capital, available to it from the Treasury Department, for the insurance fund.

The FDIC estimates that bank failures will cost the agency as much as $100 billion over the five years running through 2013, with the majority of the losses likely to take place in 2009 and 2010. The agency made that estimate in September and as of February it still stands, agency staffers said.

Big banks urged to lend more

The agency may require payment of additional assessments to cover losses to the fund if bank failures expand in greater numbers than the FDIC's currently anticipating.

Bair also took issue with larger banks, saying they need to be out lending more.

"We'd like to see more of credit extensions, within the framework of prudent risk management, particularly with the larger institutions," she said. "Their declines on loan balances, their cutbacks on credit lines have been significant, and hopefully we'll see some churning of that this year."