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Previous report: Banks rebound slightly in first quarter, but mortgage delinquencies rise

June 14, 2010 |

The nation's banks keep looking for signs that they've turned the proverbial corner toward prosperity, and there may have been a few faint indicators in the first quarter that the worst days are behind them. But after more than two years of stress, it's probably still too early for many to relax, according to quarterly financial reports compiled by the Federal Deposit Insurance Corp and analyzed by the Investigative Reporting Workshop.

Even though profits increased sharply, troubled assets continued to grow. One especially troubling fact:  the FDIC reported that mortgage delinquencies hit an astounding 10.8 percent in the first quarter. A year ago, about 6.4 percent of first mortgages were past due and three years ago, just 1.2 percent.

Credit union loans decline

The first quarter also was difficult for the nation's 7,900 credit unions. In a news release, National Credit Union Chairman Debbie Matz said, "We have been cautioning credit unions that 2010 will be a difficult year. Early indications show this to be the case. As long as serious economic issues persist, credit unions will be challenged. NCUA is taking administrative actions wherever necessary to uphold safety and soundness standards." NCUA insures credit union deposits up to $250,000 per account.

The NCUA reported that the credit unions as a group made about $1.1 billion in the first three months of this year.

Lending at credit unions, which had been stronger than at banks during much of the downturn, dropped 4.76 percent in the first quarter.

Troubled assets at credit unions declined in the first three months of this year. At the end of March, the credit unions had about $11.8 billion in delinquent loans and foreclosed properties, compared with $12.1 billion on Dec. 31. Forty-one credit unions had troubled asset ratios of more than 100 on March 31, compared with 59 on Dec. 31.

Eight credit unions have failed so far this year, most of them tiny institutions, relatively speaking. For example, on May 17 the government took over Convent Federal Credit Union in New York. Convent, founded in 1960,  had just $173,000 credit union in assets; it served 213 members of the Convent Avenue Baptist Church in New York City.

The largest credit union to fail so far this year was the St. Paul's Croatian Federal Credit Union of Eastlake, Ohio, which failed on April 23. It had about $238 million in assets when it closed.

The government took over 15 credit unions in 2009.

--Wendell Cochran

Those numbers may portend even more defaults and foreclosures over the next several months. The increasing delinquency rates are evidence of continuing stress in the nation's job market, as extended periods of unemployment make it more difficult for many to stay current with their house payments. In addition, some "under water" homeowners are walking away from houses that are worth far less than the mortgage.

According to the Workshop analysis, 301 banks had more than 15 percent of their single family mortgages past due more than 30 days.

Across the whole loan portfolio,  most of the growth in bad assets was in loans past due more than 90 days, and many of those loans often deteriorate, causing more trouble for banks as time goes on. That means it is possible that the troubles that have plagued the industry for more than two years are going to continue a while longer.

And even while it was reporting strong performance among banks as a group, the FDIC was adding banks to its "troubled list." At the end of March, 775 -- nearly one bank in10 -- was considered troubled by the FDIC, even though the agency does not define what that designation means and will not name the banks it includes on that list. That's a jump of 73 just since the end of December and the highest number since the end of 1992, when the banking industry was emerging from the savings and loan crisis and a recession.

According to the Workshop's analysis, 411 banks have a "troubled asset ratio" of more than 100. In other words, they had more problem loans and foreclosed properties on their books than capital and loan loss reserves. While it is not an official FDIC statistic, the troubled asset ratio has proven to be a strong indicator of bank stress. Of the 82 banks that failed between Jan. 1 and June 11, nearly all had troubled asset ratios of greater than 100 according to their latest FDIC reports.

As a group, the 7,941 banks insured by the FDIC earned a respectable $18 billion profit in the first three months of 2010, more than double the same period a year ago and more than the $12.5 billion they made all of last year. Of that amount, however, more than $13 billion was recorded by the 36 biggest banks, even though some big banks saw major losses on their credit card operations. Nearly 1,500 banks took losses in the quarter.

Loans also increased in the first quarter, but much of the gain came because of accounting changes, the FDIC said.The new accounting rules require banks to include more of their credit cards and other securitized assets in their loan portfolios instead of their securities portfolios.

Outside those paper gains, there still is considerable softness in the heart of bank lending operations, a combination of weak demand and tighter lending standards.

Commercial and industrial loans, home mortgages and real estate development loans all declined again in the quarter, as banks put more of their cash into U.S. Treasury securities and other safe investments.

One reason why profits rose in the first quarter is because banks took smaller provisions for possible loan losses. But they still reduced earnings by more than $50 billion to account for loan losses, down from $61 billion a year ago. 

Despite that, banks still are accumulating troubled assets, even though the pace has slowed down somewhat from the depths of the recession. At the end of March, banks had more than $382 billion in badly nonperforming loans and foreclosed properties on their books, up from $367 billion at the end of December. A year ago, troubled assets amounted to $285 billion. 


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