More bad news: more trouble ahead for numerous banks means increased worries for homeowners

FDIC Says At-Risk Banks at 5-Year High



WASHINGTON – U.S. banking industry profits plunged by 86 percent in the second quarter and the number of troubled banks jumped to the highest level in about five years, as slumps in the housing and credit markets continued.

Federal Deposit Insurance Corp. data released Tuesday show federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.

The FDIC said 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

“By any yardstick, it was another rough quarter for bank earnings,” FDIC Chairman Sheila Bair said in a statement. However, the results were not surprising “as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle,” she added.

Total assets of troubled banks jumped from $26 billion to $78 billion in the second quarter, the FDIC said, with $32 billion of the increase coming from IndyMac Bank, which failed in July — the biggest regulated thrift to fail in the United States.

The $50.2 billion set aside to cover loan losses in the April-June period was four times the $11.4 billion the banking industry salted away a year earlier. Nearly a third of the industry’s net operating revenue went into building up reserves against losses in the latest quarter, according to the FDIC.

Except for the fourth quarter of 2007, the earnings reported Tuesday were the lowest for the banking industry since the final quarter of 1991, the agency said.

Concern has been growing over the solvency of some banks amid the housing slump and the steep slide in the mortgage market. The pressures of tighter credit, tumbling home prices and rising foreclosures have been battering banks of all sizes nationwide.

The FDIC has been keeping an especially close eye on banks and thrifts with high levels of exposure to the riskiest borrowers and markets, agency officials say, including subprime mortgages and construction loans in overbuilt areas.

Troubled assets — loans that are 90 or more days past due — continued to rise in the second quarter, jumping by $26.7 billion, or 19.6 percent, over the first quarter. It was the first time since 1993 that the percentage of total loans that were troubled broke 2 percent, at 2.04 percent.

The FDIC doesn’t disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail.

Nine FDIC-insured banks have failed so far this year, compared with three in all of 2007. More banks are in danger of collapsing this year, agency officials say, and they expect turbulence in the banking industry to continue well into next year.

“More banks will come on the (troubled) list as credit problems worsen,” Bair said. “Assets of problem institutions also will continue to rise.”

Pasadena, Calif.-based IndyMac was taken over by the FDIC on July 11 with about $32 billion in assets and deposits of $19 billion. It was the second-largest financial institution to close in U.S. history, after Continental Illinois National Bank in 1984.

Its failure is expected to cost the federal deposit insurance fund, currently at $53 billion, between $4 billion and $8 billion.

Last week, the FDIC announced a program under which thousands of troubled home borrowers with loans from IndyMac will be able to switch into 30-year, fixed-rate mortgages with interest rates capped at around 6.5 percent, in what could be an important test case for future bank resolutions.

FDIC officials have said the agency expects to raise insurance premiums paid by banks and thrifts to replenish its reserve fund after the payout to depositors at IndyMac.

Copyright 2008 The Associated Press.