The headlines in the banking industry in recent weeks have focused on the recovery that has permitted the nation’s biggest banks to repay the federal financial assistance they received late last year and early this year through the Troubled Asset Relief Program.

But an analysis of the third quarter reports banks filed with the Federal Deposit Insurance Corp. shows that many banks still are swamped with a large – and still growing – collection of loans that are not being repaid on time and repossessed properties. As a result, 369 of the nation’s 8,108 banks had more troubled loans on their books than capital and loan loss reserves on Sept. 30, according to the Investigative Reporting Workshop analysis.

Banks as a group, which lost money in the second quarter of this year, returned to marginal profitability in the third quarter. Much of that profit was recorded by the nation’s biggest banks, which have large securities trading businesses that have done well as the stock market has bounced back strongly from its lows in March. For the first nine months of 2009, banks made $9.6 billion, a 70 percent decline from the $32.5 billion in profits recorded in the first three quarters of 2008.

Historic lending decline continues

Meanwhile, despite the numbers that have many economists proclaiming the recession has ended, lending continues to slump. Lending often falls off during economic downturns, as consumers reduce debts and businesses need less money to finance inventories and operations. But the decline in outstanding loans during the past year is especially notable. In fact, the FDIC, in its quarterly review of banking performance, said that the 2.8 percent decline during the third quarter is “the largest percentage decline in loan balances in any quarter since…1984.” Overall, the nation’s banks had $7.19 billion in loans on their books on Sept. 30, an 8.15 percent decline over the past year.

The sluggishness in loan demand and generation prompted President Obama to meet on Monday with top executives of some of the nation's major banks to urge them to find ways to put more money in the hands of businesses and consumers.

"No one wants banks making the kinds of risky loans that got us into this situation in the first place," the president said after the meeting.  "But given the difficulty businesspeople are having as lending has declined, and given the exceptional assistance banks received to get them through a difficult time, we expect them to explore every responsible way to help get our economy moving again."

Bad loans eroding bank capital and reserves

Considering the carnage in their loan portfolios, it might not be surprising that banks are less than eager to open their lending windows wide. At the end of September, banks held more than $348 billion in badly past due loans and foreclosed properties. A year ago, troubled assets amounted to $195 billion, a 70 percent increase.

The result is that 369 banks had more troubled assets on their books than capital and reserves at the end of September. A year ago, 100 banks had more troubled assets than capital and reserves. At the end of June, 298 banks had TAR of more than 100. The FDIC said it was carrying 552 banks on its “problem list” at the end of September, the most since 1993. The agency does not release its list of troubled banks.

The troubled asset ratio calculated by the Investigative Reporting Workshop has proven to be a strong indication of stress. Of the 38 banks the FDIC has closed since Sept. 30, 32 had a troubled asset ratio of greater than 100. Of the 133 that have failed this year, 117 reported a TAR of greater than 100 on the last report before they failed.

Credit unions see loan gains

At the nation’s 8,000-plus credit unions, conditions are, perhaps, slightly better.

Loan volume has expanded by $30 billion in the past year. But profits are down and troubled assets are on the rise.
Credit unions made $1.7 billion in the first nine months of this year, compared to $3.0 billion a year ago.

Total troubled assets at credit unions amounted to $11.3 billion on Sept. 30, compared with $7.3 billion a year ago. Fifty-five credit unions had TAR greater than 100, although the numbers are not strictly comparable because the way credit unions report data on past due loans is not the same as bank reporting.

The National Credit Union Administration, the federal agency that supervises and insures credit unions, has closed 18 institutions this year.