The apparent end of the recession and stabilizing financial markets have not cured the banking industry, as souring and past-due loans have reached the highest levels in 26 years, the Federal Deposit Insurance Corp. said Tuesday.
Banks earned $2.8 billion in the third quarter, but nearly 40 percent of that was from a one-time accounting trick. Loan balances plummeted and the fund that insures their deposits was $8.2 billion in the red.
The number of banks on the FDIC's "problem list" rose to 552 from 416 on June 30, the highest level in 16 years. Fifty banks failed during the quarter — the largest number since the second quarter of 1990.
The FDIC's fund that insures bank deposits fell by $18.6 billion, mostly because $21.7 billion was set aside for expected losses on future bank failures. The last similar deficit was in Dec. 1991, when a predecessor fund was more than $7 billion in the red.
Separately, the Office of Thrift Supervision said Tuesday that thrifts eked out a $200 million profit in the third quarter. The agency called it "another break-even quarter," after a small second-quarter profit was revised downward to a $94 million loss.
Still, it was the first profitable quarter since the same period in 2007. The nominal profit was $1.3 billion, but $1.1 billion was a one-time gain at a single institution. The thrift's holding company, which the OTS did not identify, shifted assets to reduce future tax expenses, agency officials said.
The agency says the number of "problem thrifts" rose to 43 from 40 last quarter.
Thrifts differ from banks in that they are required, by law, to have at least 65 percent of their lending in mortgages and other consumer loans. That makes them especially vulnerable to the housing downturn and unemployment. It also means they will play a key role in an eventual economic recovery.
The FDIC voted this month to require banks to prepay three years of deposit insurance premiums by the end of next month to help replenish the dwindling deposit insurance fund, which is at its lowest point on record. That will raise about $45 billion.
But bank failures this year through 2013 are expected to cost the fund $100 billion, so the prepayments won't provide a long-term fix for the insurance fund. It does spare ailing banks the immediate cost of paying a second emergency fee this year.
Depositors' money — insured up to $250,000 per account — is not at risk, since the FDIC has the option of tapping a credit line with the Treasury Department.
"While bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance," FDIC Chairman Sheila Bair said.
A 2.8 percent drop-off in loans outstanding — the largest percentage decline on record — showed that credit for consumers and businesses remained tight, she said.
"There is no question that credit availability is an important issue for the economic recovery," Bair said. "We need to see banks making more loans to their business customers."
That's especially important for small businesses which get more than 60 percent of their credit from banks the FDIC insures, she said.
Bank profits returned in the third quarter after a $4.3 billion loss in the previous quarter and $879 million in earnings last year. But analysts warned not to read much into the better earnings.
"A few very large banks are making a pile of money, and the rest of the industry is hurting," said Daniel Alpert, managing director of the New York investment bank Westwood Capital LLC.
The largest Wall Street firms are benefiting from a host of government subsidies — such as capital injections, asset guarantees, low-cost borrowing — that cost taxpayers without improving the economy, Alpert said.
"We're creating riskless profits for the big banks," he said.
Still, banking analyst Bert Ely said the Federal Reserve's low-interest rate policy is helping the whole industry. Net interest margin — the difference between what it costs banks to borrow and what they pay to depositors — reached a four-year high. It was a rare bright spot in the FDIC report.
That bright spot comes at the expense of consumers, who are earning historically low interest rates on their deposits.
"Americans are getting nothing in terms of interest on their savings so that the banks can make money," Alpert said.
High unemployment and slow spending are making it harder for banks to collect from consumers. Loans 90 or more days past due reached 4.9 percent — the highest in 26 years.
Banks gave up on collecting $50.8 billion in loans during the quarter, an 80.5 percent increase from a year ago. It was the 11th straight quarterly increase and — at 2.7 percent — another 26-year high.
OTS Acting Director John Bowman cast a cautious tone, saying thrift profits were hurt by money being set aside as they prepare for more loan losses.
"We know that we have not seen the last thrift failure of this crisis," Bowman said.
Some smaller banks have protested the early insurance assessments that are being charged to replenish the deposit insurance fund. They complain that they had nothing to do with the excesses of big Wall Street banks, reckless mortgage lending and risky investments that precipitated the financial crisis, but are being forced to pay to help clean up the mess.
There have been 124 bank failures so far this year, the most since 1992 at the height of the savings-and-loan crisis. They have cost the federal deposit insurance fund more than $28 billion. There were 25 bank failures last year and three in 2007.
Bair said "there are no quick fixes" for the banking industry's troubles — "only careful, hard work" to oversee banks as they continue writing off bad loans and attempt to ride out the downturn.
"It really is all about the economy at this point," she said.