Banking


   The Deposit Insurance Fund (DIF) balance decreased by $18.6 billion (180%) to negative $8.2 billion during the third quarter, the FDIC said in its Third Quarter 2009 CFO Report to the Board. The decrease was primarily due to a $21.7 billion increase in the provision for insurance losses, which was partially offset by a $3 billion increase in assessment revenue.

 

Deposits at FDIC-insured institutions are insured up to at least $250,000 per depositor through Dec. 31, 2013. The DIF is the fund through which depositors’ claims are paid if an insured institution fails.

 

As part of its plan to restore the reserve ratio (DIF fund balance as a percent of insured deposits) to 1.15% within eight years and to meet the DIF’s liquidity needs, the FDIC in November approved a rule requiring all insured institutions to prepay, on Dec. 30, 2009, their estimated risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the prepaid assessments will total approximately $45 billion. This will significantly enhance the DIF’s liquidity but will not initially affect the fund balance. The assessments also will not immediately affect bank earnings. Banks will recognize a portion of the prepaid assessments at the end of each quarter when they normally would have come due.

 

The FDIC projects the DIF will remain negative over the next several years because approximately $75 billion in failure costs are expected to be incurred from the end of the third quarter of 2009 through the end of 2013.

 

During the third quarter of 2009, the FDIC also reported it was named receiver for 50 failed institutions. The combined assets of these institutions was approximately $70.2 billion with an estimated loss of $14.3 billion. The corporate cash outlay during the third quarter for these failures was $16.5 billion. Overall for 2009, 140 insured depository institutions failed.

 

The complete report is available at tinyurl.com/yeaoh5b.

 

  As efforts to keep borrowers in their homes continued to escalate, a report from major bank regulators said more than half of all mortgages modified in the first quarter of 2009 were in re-default in the third quarter—56.2% were 30 or more days delinquent, and 42.7% were 60 or more days delinquent. The overall rate of current and performing loans also worsened, sliding to 87.2% by the end of the third quarter, down from 88.6% in the second quarter and 91.5% a year earlier.

 

The OCC and OTS Mortgage Metrics Report, Third Quarter 2009 includes data from reporting institutions servicing about 34 million first-lien mortgage loans, totaling approximately $6 trillion. The data account for about 65% of all first-lien mortgages outstanding in the U.S. The report is compiled by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, both departments of the U.S. Treasury.

 

The efforts to help borrowers—including loan modifications, trial period plans and payment plans that allow borrowers to retain ownership and occupancy of their homes while attempting to return the loans to current and performing status—are known as home retention actions.

 

Newly initiated home retention actions rose 68.7% in the third quarter to 680,153 (153.2% increase from a year ago). More than one-third of those actions were under the Home Affordable Mortgage Program (HAMP) that the Obama administration launched earlier in 2009. Loan servicers initiated almost 274,000 HAMP trial period plans in the third quarter, a 240% increase from the second quarter. Other trial period plans increased 100% to 121,314; payment plans increased 28% to 153,499. Loan modifications were down slightly (7.7%) in the third quarter, as servicers emphasized the initiation of HAMP trial periods.

 

Principal and interest payments were reduced on 80% of all modified loans—almost half of those reductions lowered monthly payments by 20% or more. While re-default rates were lower when payments were reduced by 20% or more, more than one-quarter (26.7%) of those modifications were 60 or more days delinquent within six months; one-third (33.6%) were 60 or more days delinquent after nine months. Where modified payments were reduced by less than 10%, the corresponding rates of re-default were 39.7% and 49.8%, respectively.

 

Corresponding with the spike in retention actions, newly initiated foreclosures remained flat for the second straight quarter after rising 41% in the first quarter.

 

The Mortgage Metrics Report is available at tinyurl.com/y94x6nv.

 

  The FDIC’s Quarterly Banking Profile said commercial banking and savings institutions reported net profits of $2.8 billion in the third quarter of 2009, an improvement from a $4.3 billion loss in the second quarter and the $879 million in profits reported in the prior-year period. The positive movement in earnings was tempered by a $210 billion (2.8%) quarterly decline in total loan and lease balances, the largest drop since record keeping began in 1984.

 

Growth in net interest income, lower realized losses on securities and other assets, higher noninterest income and lower noninterest expenses all contributed to the year-over-year increase in net income. Only 43% of all institutions reported higher quarterly earnings compared with a year ago, but this is the highest proportion reporting improved earnings in the past six quarters. More than one in four institutions (26.4%) were unprofitable in the third quarter, up slightly from 24.6% a year ago.

 

Banks continued to put aside vast loan-loss reserves. Provisions for loan and lease losses totaled $62.5 billion, the fourth consecutive quarter that industry provisions have exceeded $60 billion. While the rate of increase in reserves (up $9.2 billion or 4.4%) was the slowest in eight quarters, the ratio of reserves to total loans grew to 2.97% from 2.77% the prior quarter.

 

The FDIC’s “Problem List” (institutions at risk of failure) rose to its highest level in16 years. At the end of September, 552 insured institutions were on the list, up from 416 on June 30. At the end of 1993, 575 institutions were on the list. Total assets of problem institutions increased during the quarter from $299.8 billion to $345.9 billion, also the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

 

The Quarterly Banking Profile: Third Quarter 2009 is available at tinyurl.com/y8v2pvq.

 

  The U.S. thrift industry managed to record a small profit for the second consecutive quarter in the third quarter of 2009, the Office of Thrift Supervision (OTS) said. But without a large one-time gain reported by a single institution, the industry would have barely broken even.

 

The industry made a profit of $1.3 billion, or 0.49% of average assets—a significant improvement from the losses of 2008 and early 2009. However, $1.1 billion of the third quarter profit resulted from a nonoperating gain at one thrift. Without that gain, the industry’s net income would have been $200 million.

 

Earnings were aided by higher net interest margins and other factors, but an additional $4.9 billion in loan-loss provisions continued to drag down earnings. The increase in loan-loss provisions, which remained at near-record levels, reflected increases in delinquent loans and other problem assets—a direct result of the continued housing market downturn and rising unemployment.

 

In other highlights:

  • Troubled assets (noncurrent loans and repossessed assets) were 3.63% of assets at the end of the third quarter, up from 3.5% at the end of the previous quarter and from 2.4% in the prior-year period.
  • The number of problem thrifts—with composite examination ratings of 4 or 5, on a scale of 1 through 5 with 1 being the best rating—was 43, up from 40 in the previous quarter and 23 a year ago.

 

More details, as well as charts and selected indicators, are available at www.ots.treas.gov.

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