Professor Cole's Finance Blog

Yesterday, the FDIC released its report on the condition of the U.S. banking industry based upon data from December 31, 2009. This report paints a dismal picture that bodes poorly for the future performance on the U.S. economy.

Forty-five banks failed during the fourth quarter of 2009, raising the total for the year to 140—the largest annual total since 1992. The number of “problem banks”—those that bank regulators consider to be in danger of failing—rose to 702 at the end of December 2009, up from 552 at the end of September 2009, and from 252 at the end of December 2008. The assets of problem banks rose to $403 billion at the end of December 2009 up from $346 billion at the end of September 2009 and from $159 billion at the end of December 2008.  Both the number and assets of problem banks are at the highest levels since 1993. Clearly, these numbers don’t include any of the four largest banks, in spite of stress tests indicating that these banks are insolvent. Too-Big-To-Fail is alive and well at the FDIC and other bank regulatory agencies.

Asset quality continued to deteriorate, as measured by loan losses, past-due and nonperforming loans and foreclosed real estate. Loan losses rose for the twelfth consecutive quarter to a 2.89 percent annual rate of net charge-offs, up from 1.95 percent from a year earlier. The 2.89 figure is the highest rate on record during the 26 years banks have reported this item.

Non-current loans and leases (past due 90+ days or in nonaccrual status) rose to $391 billion, or 5.36% of all loans and leases—the highest percentage in the 26 years that banks have reported these data. This includes the banking crisis years of 1985 – 1992, when more than 1,000 banks failed, which gives us an indication of the number of bank failures to expect during the coming years. Noncurrent loans were concentrated in the real estate sector, both residential and commercial: 9.3 percent of residential mortgages were non-current and 15.9 percent of construction & development loans were non-current. Surprisingly, only 1.8 percent of home equity loans were non-current, indicating that homeowners are staying current on second liens while defaulting on first liens. In total, banks hold $1.92 trillion in residential mortgages, $661 billion in home equity lines and $451 billion in construction & development loans. They also hold an additional $1.09 trillion in commercial real estate loans.

An additional $140 billion in loans and leases were past due by 30 – 89 days, so that the combined value of past due and nonaccrual loans is $531 billion, or 7.28 percent of total loans and leases. By sector, 3.2 percent of residential mortgages and 2.6 percent of construction & development loans were past due 30 – 89 days.

Other real estate owned (OREO), which consists primarily of real estate seized through foreclosure on previously delinquent loans, rose to $41.4 billion in December from $37.2 billion in the September. When combined with the $531 billion in bad loans, the total book value of nonperforming assets was $572 billion or 7.85% of total loans and leases. Banks hold reserves against loan losses of 3.12 percent of total loans and leases—the highest level in the history of the FDIC.

Total assets declined for the fourth consecutive quarter to $13.1 trillion, down 5.3% from a year earlier. Total loans and leases declined for the sixth consecutive quarter to $7.29 trillion down from $7.88 trillion a year earlier—a 7.5 percent year-over year decline that is the largest since the 1940s.

Earnings during the fourth quarter of 2009 were $914 million, which translates into a miserable return on assets of only 0.01 percent, but a dramatic improvement over the $37 billion loss recorde during the fourth quarter of 2008. The percentage of banks that were losing money rose to 29.5% in December, up from 24.8 percent in December 2008 and 12.1 percent in December 2007.