Friday, August 29, 2008

U.S. Says Banks on `Problem List' Rose 30% in Quarter

U.S. Says Banks on ‘Problem List' Rose 30% in Quarter

By Alison Vekshin

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The U.S. Federal Deposit Insurance Corp. said its ‘‘problem list'' of banks increased 30 percent in the second quarter to the highest total in five years as more commercial real-estate loans were overdue.

The list had 117 banks as of June 30, up from 90 in the first quarter and the highest since mid-2003, the agency said today in its quarterly report without naming any institutions. FDIC-insured lenders reported net income of $4.96 billion, down 87 percent from $36.8 billion in the same quarter a year ago.

‘‘More banks will come on the list as credit problems worsen,'' FDIC Chairman Sheila Bair said at a news conference in Washington.

Regulators are adding to the list as bank assets, liquidity and other fiscal measures weaken. Nine banks have failed this year, including California-based mortgage lender IndyMac Bancorp Inc., which the FDIC is running as a successor institution, IndyMac Federal Bank FSB.

IndyMac's failure will cost the U.S. deposit insurance fund about $8.9 billion, exceeding a $4 billion to $8 billion estimate, said Diane Ellis, the associate director of financial- risk management. The FDIC discovered additional insured deposits and had time to value the assets, Ellis said.

Second-Lowest Earnings

Second-quarter earnings fell from $19.3 billion in the previous quarter, driven by higher provisions for loan losses, the FDIC said. It was the second-lowest net income reported since the fourth quarter of 1991 behind the $600 million reported in the fourth quarter of 2007, the agency said.

‘‘The results were pretty dismal, and we don't see a return to the high earnings levels of previous years any time soon,'' Bair said.

Funds set aside by banks to cover loan losses more than quadrupled to $50.2 billion from $11.4 billion in the year- earlier quarter.

Loans 90 days or more overdue, deemed troubled by the FDIC, jumped 20 percent to $162 billion from $136 billion in the first quarter, the FDIC said. Real-estate loans accounted for almost 90 percent of the rise in the past three quarters, the agency said.

The deposit insurance fund fell 14 percent to $45.2 billion and the reserve ratio, or balance divided by insured deposits, was 1.01 percent. The FDIC is required to shore up the fund when the ratio falls below 1.15 percent.

Higher Premiums

The agency in October will consider a plan to replenish the account that will likely include an increase in the premiums charged banks, Bair said.

A greater share of the increase will be shifted to ‘‘riskier institutions so that safer institutions won't be unduly burdened,'' she said.

Lenders on the ‘‘problem list'' had assets of $78.3 billion at the end of the second quarter, triple the $26.3 billion in the first quarter, the agency said. The FDIC said IndyMac's assets represented $32 billion of the increase.

Many banks on the list have high levels of commercial real- estate loans, especially in construction and development loans, said John Corston, the FDIC's associate director of large bank supervision. The number of problem institutions will continue to rise, he said.

‘‘Problem institutions continue to be scattered across the country,'' Corston said. ‘‘However, we expect to see some migration to areas experiencing the greatest stress.''

Regulators rate banks based on their asset quality, earnings, liquidity and other fiscal measures. Banks are ranked on a numerical scale, with 1 being the highest and 5 the lowest. A rating of 4 or 5 places a bank on the ‘‘problem'' list.

The FDIC is a Washington-based bank regulator that insures deposits at 8,451 institutions with $13.3 trillion in assets.

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