Banking


  FDIC-insured institutions reported a $914 million profit in the fourth quarter of 2009, a sharp improvement from the $37.8 billion loss the industry logged in the fourth quarter of 2008, but the improvement in earnings was accompanied by continued deterioration in asset quality, declining lease and loan balances, and a sharp increase in the number of institutions on the regulator’s “Problem List.” Full-year net income was $12.5 billion, up from $4.5 billion in 2008.

 

Slightly more than half of all institutions (50.3%) reported year-over-year improvements in quarterly net income. Almost one-third (32.7%) reported net losses for the quarter, compared with 34.6% a year earlier.

 

Insured banks and thrifts charged off $53 billion in uncollectible loans during the quarter, up from $38.6 billion a year earlier, and noncurrent loans and leases increased by $24.3 billion during the fourth quarter. By year-end, noncurrent loans and leases totaled $391.3 billion, or 5.37% of the industry’s total loans and leases.

 

Total loans and leases declined by $128.8 billion (1.7%)—the sixth consecutive quarterly drop. Loans to commercial and industrial borrowers declined by $54.5 billion (4.3%), and real estate construction and development loans declined by $41.5 billion (8.4%).

 

On Dec. 31, 702 insured institutions were on the Problem List, up from 552 on Sept. 30. Total assets of problem institutions increased from $345.9 billion to $402.8 billion. For all of 2009, 140 institutions failed, the most since 1992. Institutions on the Problem List are those considered at risk of failure. The FDIC Quarterly Banking Profile: Fourth Quarter 2009 is available at tinyurl.com/yb4xw5x.

 

  The nation’s thrifts eked out a $29 million profit in 2009, the industry’s first year in the black since 2006. The Office of Thrift Supervision (OTS) said a $505 million profit in the fourth quarter pushed the industry into positive territory for the full year. The nation’s thrifts lost $15.9 billion in 2008 and $649 million in 2007.

 

The industry continued to build up provisions for loan losses in the fourth quarter of 2009, adding $3.9 billion, or 1.65% of average assets. That was the eighth highest level on record, though down from higher levels in 2008 and earlier in 2009. The industry also increased its capital cushion, with equity capital of 10.7% of assets at the end of 2009, up from 8.9% a year earlier.

 

The OTS also reported:

  • At the end of the fourth quarter, 96.9% of thrifts exceeded “well-capitalized” regulatory standards, and 19 thrifts were less than adequately capitalized.
  • Troubled assets (noncurrent loans and repossessed assets) fell to 3.25% of assets in the fourth quarter from 3.65% in the previous quarter, but up from 2.54% a year earlier.
  • The number of problem thrifts—with composite examination ratings of 4 or 5 (the worst ratings on a scale of 1 to 5)—was 43, unchanged from the previous quarter and up from 26 one year earlier.

 

More charts and indicators are available at ots.gov.

 

  The Office of the Comptroller of the Currency (OCC) issued a policy statement directed at national banks involved in providing tax refund-related products, including refund anticipation loans (RAL).

 

The OCC’s policy statement updates prior guidance to examiners of banks offering tax refund anticipation loans and related products and specifies additional requirements relating to consumer disclosures, contract terms and compliance verification procedures. The OCC issued previous guidance regarding RAL lending because the associated products present consumer protection and safety and soundness risks due to their unique repayment and cost structures, and banks’ reliance on third-party tax return preparers to offer the products. The OCC’s latest policy enhances, clarifies and increases awareness of the agency’s expectations for national banks involved with RAL products.

 

The OCC expects implementation of the guidance to the extent practicable in 2010. For the enhanced consumer disclosures that may necessitate revisions to current forms, implementation is expected for tax refund-related products offered in 2011. National banks are expected to incorporate these terms into any new, renewed or revised contracts, as appropriate.

 

The policy statement is available at tinyurl.com/yacacfh.

 

  The federal financial institutions’ regulatory agencies and the Conference of State Bank Supervisors issued a statement that reiterates and elaborates their supervisory views on prudent lending to creditworthy small business borrowers, noting a concern that the economic downturn may be making lenders overly cautious.

 

The Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers (available at tinyurl.com/yjbhkan) notes that between June 30, 2008, and June 30, 2009, loans outstanding to small businesses and farms, as defined in the Consolidated Report of Condition (Call Report), declined 1.8% or almost $14 billion. The agencies attributed the drop to a 4% decline in lending to small businesses by institutions with more than $100 billion in assets. This category of lending increased at institutions with less than $1 billion in assets.

 

The FDIC, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration are the federal agencies that joined in the report.

 

The statement said that financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for loans made on that basis. The regulators say institutions should consider a borrower’s credit history and financial strength, including credit score, and the strength of management. The loan structure should be appropriate for meeting the funding needs of the borrower given the type of credit and expected timing of the business’s cash flow. The report also encourages institutions to gain an understanding of the competition and local market conditions affecting borrowers’ businesses and not to base lending decisions solely on national market trends when local conditions may be more favorable and not to automatically refuse credit to sound borrowers because of a borrower’s particular industry or geographic location.

 

The regulators emphasized the importance of maintaining robust risk management practices to identify, measure, monitor and control credit risk in lending activities. Examiners expect institutions to employ sound underwriting and risk management practices, maintain adequate loan-loss reserves and capital, and take appropriate charge-offs when warranted. But, as a general principle, examiners will not adversely classify loans solely due to a decline in the collateral value below the loan balance, provided the borrower has the willingness and ability to repay the loan according to reasonable terms.

 

The statement builds upon principles in existing guidance, including the Interagency Statement on Meeting the Needs of Creditworthy Borrowers (tinyurl.com/6lsyk7) issued in November 2008 and the Policy Statement on Prudent Commercial Real Estate Loan Workouts (tinyurl.com/ydvhmju) issued in October 2009.

 

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